Hub and spoke?

The hub and spoke rental concept has resurfaced among some leading rental companies, a trend largely echoed throughout the rental industry. Are we, though, looking at the latest fashion in rental management or just a reminder of a model developed some years ago?

It may be worthwhile for crane owners to watch what is happening in the general rental industry because some of the trends and developments in rental management issues could very well apply to the crane sector.

It could be argued that both activities are very different in nature: crane rental is essentially conditioned by logistical considerations, transportation regulations and operator management. First, however, look at the general rental sector and try to identify similarities.

Years ago in North America

Rental companies in North America developed the hub and spoke concept in the late 1970s. Its main purpose then was to realise efficiencies in equipment utilisation and in costs by centralising some activities such as inventory management and equipment maintenance.

In the mid and late 90s, some rental companies were trying to develop profitable chains of general rental outlets on a national scale. Because of the particular pressures of reaching a critical size in stand-alone outlets in this type of rental, these companies had to refine the concept considerably. To lower the break-even point at each outlet, the approach was to develop several locations in a given geographic area that were responsible for making equipment deliveries, sharing inventory, equipment maintenance and repair activities.

This was the case with several companies, including HSS, which used Florida as a pilot area for developing the concept; Jewson Hire Point, with its 72-store Rent X chain (now owned by HSS); and Stephenson's Rent-All in Canada, which organised its Ontario locations within the orbit of its Toronto maintenance facility.

Marketing considerations were also pushing for a hub and spoke strategy in North America. It is generally recognised that in a fairly dense populated area if customers have to travel for longer than 30 minutes to reach a rental yard they may choose an alternative supplier.

In large metropolitan areas it usually takes two or three strategically located stores to adequately serve the entire market, with the smaller branches (the spokes) supported by a larger central operation (the hub).

Equipment allocation can be varied from one model to another, from a baseline inventory in each store to a pooling approach; but, typically, the “hub” store will carry surplus inventory in some product categories, which the “spokes” will draw from as needed. The density of store numbers may also allow competitive services, for example, picking up at one location and dropping off at another, to be offered.

At the same time, the hub and spoke concept was also fashionable with construction equipment rental companies, according to a statement in 2000 from the president of Rental Service Corporation in the US: “We've opened 87 new stores this year, adhering to RSC's hub and spoke concept, and we plan to continue our growth.”

“In large metropolitan areas it usually takes two or three strategically located stores to adequately serve the entire market, with the smaller branches (the spokes) supported by a larger central operation (the hub).”

Today in Europe

Market conditions have been difficult for rental companies since the early 2000s in several countries, including the UK, France and Germany. These rental markets suffered and are still suffering from over-capacity, leading to downward pressure on rental rates, despite booming construction activity, for example, in the UK.

As a result, rationalisation is underway to optimise operating costs in addition to increasing revenues, and the hub and spoke concept is again at work, but this time with some new characteristics listed below.

In sales activities, thanks to better customer databases, the concept may include:

&Squf; centralisation of sales activities at a selected number of outlets, applied by Lavendon in the UK and Germany

&Squf; the distinction of depot-based local businesses and international projects businesses as is the case for Aggreko in Europe and North America, allowing the introduction of a hub and spoke strategy for local businesses

&Squf; the establishment of a national sales centre by A-Plant, including a centralised telemarketing operation using a new, powerful and in-house developed customer database

&Squf; experiments with central repair shops and newly designed, very low costs outlets, primarily for the sale of small equipment and tools, as developed by HKL in Germany.

&Squf; with administration the hub and spoke concept can translate into combining the back office functions from various independent rental business units, as recently with Hewden Stewart in the UK. In this case it also included the combination of the back office functions of Hewden and its sister company Finning UK.

In fashion or here to stay?

The hub and spoke strategy is just one management technique available to develop and adapt rental networks to changing market conditions and to the evolution of the rental industry itself.

As stated earlier, hub and spoke was applied and refined some ten years ago in North America by general rental pioneers (from the UK and Canada) who were looking for an economical solution to develop national networks, and is being used today in Europe by new rental conglomerates that are trying to adjust to market segmentation as well as market globalisation, and who are further refining the concept by exploiting the latest information technology tools (mobile devices, intranets, etc.).

“The hub and spoke strategy is here to stay, and will continue to evolve, dependent on one side on the rental markets and the rental industry, and on the other, on the type of equipment and the opportunities presented by IT systems.”

A hub and spoke strategy is just part of the management techniques available that allow rental networks to develop and adjust according to market conditions and to the evolution of the general rental industry.

The future is still on the drawing board but some things are already clear. Freestanding rental outlets may not remain the only, or the dominant, model for long:

&Squf; rental networks encouraged by manufacturers whose rental activity in combination with their distribution channel is still under experimentation and has much room for improvement.

&Squf; home improvement and building supply chains are rapidly developing their in-house rental activities.

Depending on geography and the market segments, a general rental business may either remain a local operation or develop into a global one. Operating procedures will then have to be adjusted in each business case and numerous formats may be adopted.

The hub and spoke strategy, used as a means to increase revenues and reduce costs, is not a fashion. It is here to stay, and will continue to evolve, dependent on one side on the rental markets and the rental industry, and on the other, on the type of equipment and the opportunities presented by IT systems.

As stated in the introduction, crane rental activity is much less about managing a network of branches with a multitude of diverse equipment than operating large and sometimes huge machinery on a project basis.

The hub and spoke concept in its old form – trying to improve equipment utilisation, inventory management and equipment maintenance – may be of limited value here. Nevertheless, thanks to constant advances in information technology, developments centred on the centralisation of sales activities, as well as administrative activities through the combination of back offices duties, may prove very relevant for crane businesses.