Why Zaragoza is a better location than Madrid to place a Distribution Center
If your firm is looking for a location to place a distribution center in Spain, Madrid looks like a natural choice. It is on the centroid of Spain, and is very well communicated by truck with all the Spanish regions, given the radial structure of the Spanish route network. Indeed, Madrid can be considered as the center of gravity of the Spanish GDP. When compared to Zaragoza, Madrid is closer to the average customer (as weighted by GDP) by 56 km (own calculation).
- Source: own calculation
However, average distance should not be the key criterion when making such a decision, total cost should be used instead. Total cost can be split into three main portions: inbound logistics (from suppliers to the DC,) warehousing (cost of running the DC,) and outbound logistics (from DC to customers.)
As for inbound logistics, the actual cost for each alternative will depend on the transportation mode. If goods come by ship, Zaragoza is closer than Madrid to Bilbao, Barcelona, and Valencia ports, and moving containers to the DC by either truck or train will be in general cheaper. If goods come by truck from Europe, distance to Zaragoza will be shorter by roughly 300 km., what represents about 300 € per truck.
As for outbound logistics, Zaragoza is more expensive as noted, but not that much; 56 additional kilometers may represent around 50 € per truck, according to the CEO of a well-known transportation company in Spain.
Although these two portions may seem important at first sight, they become almost irrelevant when compared to the cost of running the DC. Running a DC implies paying workers payroll and space rental. Salaries in Zaragoza are, on average, 17% cheaper than in Madrid (source: INE 2011); Logistics space in Madrid strongly depends on the distance to the city center (there are up to four rings in Madrid with large price differences,) but specialists who give data of both Madrid and Zaragoza show that the latter is clearly cheaper than the former (by an average of almost 50%)
Considering the cost break-down presented, a basic analysis for a standard DC yields the following graph
where it can be noted that Zaragoza is always a better option than Madrid.
Finally, a sensitivity analysis shows that only labor and rent costs are relevant, with the number of workers and rent unit cost being the main drivers, and equally important (both in favor of Zaragoza.)
In sum, cheaper labor and space rental clearly outweighs the longer average distance from Zaragoza to customers, which makes Zaragoza, by and large, a more appropriate location than Madrid area for setting a distribution center.
Learn more about Supply Chain Management at www.zlc.edu.es