International Journal of Physical Distribution & Logistics Management

Determining warehouse number and location in Spain by cluster analysis

David de la Fuente Jess Lozano

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David de la Fuente Jess Lozano, (1998),"Determining warehouse number and location in Spain by cluster analysis",
International Journal of Physical Distribution & Logistics Management, Vol. 28 Iss 1 pp. 68 - 79
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N. Faber, M.B.M. de Koster, A. Smidts, (2013),"Organizing warehouse management", International Journal of Operations
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68
Received June 1996
Revised March 1997,
November 1997

International Journal of Physical

Distribution & Logistics
Management, Vol. 28 No. 1, 1998,
pp. 68-79. MCB University Press,
0960-0035

Determining warehouse
number and location in Spain
by cluster analysis
David de la Fuente and Jess Lozano
University of Oviedo, Spain
Introduction
Gross production in the food industry in Spain, which has a workforce of
400,000, was estimated in 1994 at 6,372 billion pesetas, an increase of 1 per cent
over 1993. Because of stiff competition in the European market, the problem of
the best locations for distribution centers in the year 2000 may be the key to the
consolidation of dairy companies. The solution will be to find the ideal number,
geographic position, capacity and size of warehouses to be set up so that their
contribution to profits is maximum. In order to do this, the price of each product
for each market, the products and the quantities that should be supplied from
the factory, the ideal size of each distribution center, as well as the products and
quantities that should be delivered from each warehouse, all need to be
established. The key as regards deciding warehouse locations in this sector
should not only depend on criteria for minimizing costs but also for offering the
best service to the client. In this article we shall consider the former.
Methods for locating factories and distribution centers
Some of the techniques used for global analysis of location are the following:
factor qualification systems (Eilon, 1982), gravitational methods (Douglas and
Moses, 1996), and lineal programming techniques with exact (Sweersey and
Thakur, 1995) or heuristic (Hansen et al., 1994) calculations.
This article assumes that the best way to solve the location problem is by
cluster analysis because we consider the question of assigning a particular
warehouse to a group of towns less important than the question of deciding
precisely which towns should be grouped in a particular zone. The most
important problem solved is that of zoning. Only then are warehouses located
by zone. Thus this is not, nor is intended to be, a comparative study of methods.
A method was formulated that adapted itself satisfactorily to realistic data
(train, road, irregular zones and demand, subcontracting).
Therefore, the analysis does not explicitly include multi-criteria (Pliskin and
Dori, 1982) and market competition (Mateus and Bomstein, 1991)
considerations which may be desirable so as to throw light on short-term
management policy or to help in deciding the sequence to new warehouse
construction (Hansen et al., 1991).

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Study of present distribution network

Data from the present distribution network give the starting point from which
cluster analysis determines the ideal number and location of future warehouses
for the year 2000. Determining factors in the study and the information
available is next described:
It is assumed that the total demand for one month for the whole of Spain
should be met. We also assume that the total product weight ordered by
retailers in the year 2000 will be T=35,000 tons.
Co-ordinates X and Y for the 204 Spanish towns of over 25,000
inhabitants are known (Madrid being the reference of origin), as is their
percentage consumer capacity between 1988 and 1995 (this latter data
was used to forecast the percentage consumer capacity for the year 2000
or the demand of the same 204 cities using moving average methods).
A conversion factor for linear distances into real distances for road and
rail of 1.24 is taken into account, because of curves and gradients.
Linear distances between the factory (Oviedo, capital of Asturias in the
north of Spain) and the above main cities are known.
The maximum distance in kilometers that each future warehouse will
deliver retail to is 124 kilometers. If this distance is exceeded, the
program will warn that the warehouse has a distant client-town.
Transport costs from the factory in Oviedo to future warehouses are
calculated according to road transport prices (and rail freight prices if
there is a freight-handling station in the warehouses province). The
lower of the two is taken as transport cost.
The cost of storage in future warehouses is calculated according to the
number of days that the merchandise is stored.
Present storage cost is 600 pesetas per pallet per month.
Handling costs and delivery to retailers from warehouses are calculated
according to transport rates if points of departure and destination are
not in the same province; otherwise, the present retail delivery cost is 19
pesetas per ton per kilometer. Generally this latter figure of 19 pesetas
will be the one used.
Cluster method
As Kan and Gong have already noted and as they applied to layout problems
(Yan Tam and Gong, 1991), considering fixed size zones for assigning resources
spatially is a restriction that can be overcome by using hierarchical cluster
analysis, as a kind of divide-and-conquer strategy so as to include minor
problems with known solutions into the more complex, overall problem. There
seems to be no known model to totally resolve the problem of locating in a
particular geographic area an indeterminate number of warehouses with an
unspecified capacity and an unspecified area to be covered, since food

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location
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70

distribution depends on inhabitants and these are irregularly distributed in

Spain. For this reason, it was decided that several coherent solutions should be
generated and then evaluated.
The evaluation model chosen was that of cost minimization, which is both
stable and easily up-dated as input data. The method of evaluation by
maximum benefit was rejected because of the forecasting difficulties involved in
calculating future prices or competitive situations. There were highly
unpredictable competitive conditions that varied according to regions. Thus,
the efficiency of a distribution network was evaluated according to distribution
costs, since a quantity might generate more profit when sold in one area
compared to another.
The method chosen to generate the above-mentioned solutions was the
hierarchical method of grouping data, that is, hierarchical cluster analysis,
which is especially suited to generating solutions for grouping data (towns) so
that groups (warehouse) are both internally homogenous (towns near to the
warehouses) and heterogeneous (distances between warehouses).
Once cluster analysis has assigned client units to a distribution area it is
relatively easy to decide on the location of a warehouse within this area using
the center of gravity algorithm and consumer capacity percentages and coordinates for this calculation.
With the ascendant hierarchical grouping cluster model, towns and cities
between which distances are minimum are progressively grouped. The
warehouse to supply towns thus grouped will be located at their center of
gravity. The resulting warehouse should have sufficient capacity to meet the
demands of the group of towns and cities that it supplies. The grouping method
(or zone search) consists of calculating distances between different towns and
cities of Spain on a square distance matrix (as a function of its co-ordinates and
the road factor) and reducing the order of the matrix. Since calculating
distances is relatively fast, specific functions can be created to calculate
distance and avoid taking up a lot of memory. Data could be accessed as if there
were a matrix. Data seems to be managed more quickly through the matrix,
although without taking into account the initial calculating cost and excess
memory required. By using functions one incurs a time penalty spread out over
the whole calculation, and different types of distance can be used more
efficiently without multiplying set up cost. Thus, the algorithm begins with 204
towns. When two of them join the first warehouse occurs, and so on. The order
of the square matrix is reduced according to one of the following three criteria:
(1) If there was a minimum distance between two towns still not assigned to
a warehouse, both towns would be substituted by their new warehouse
(similar to a centroid in cluster analysis terminology), using co-ordinates
for both towns, weighted according to consumption capacity
(percentage). The warehouse thus calculated would have the sum
capacity of the towns and cities it groups as its consumer capacity.

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(2) If there is a minimum distance between a warehouse Ci (which groups i

towns) and a new city not yet assigned to a warehouse, then the centroid
and town would be substituted for a new warehouse, Ci+1 .
(3) When there is a minimum distance between two centroids Ci (which
groups i towns) and C j ( which groups j towns different to those of
centroid Ci), then these centroids will be substituted by a new centroid Ck,
the center of gravity for the previous i+j towns. This is calculated in the
same way as (1) and (2).
In case (1) both the number of warehouses and the cover they provide increase.
In case (2) the number of warehouses remains the same but cover increases. In
case (3) the number of warehouses goes down and cover remains the same.
There is no limit to the iterative method, although a quantity is included to draw
attention to the appearance of a zone with a large distribution route, following
the standard restriction that it ought to be feasible to go from warehouses to
clients, distribute and return in a working day. Transport cost remains linear.
The appearance of long routes with these characteristics is infrequent, and the
problem would be solved paying overtime at a rate only slightly higher than
linear cost.
Estimating demand
Exact calculation of demand for a dairy product in the year 2000 is quite a
difficult problem to solve since it depends on the number of new shopping
centers opened, the age of the population and so on. Thus, as regards estimating
demand the following criteria was opted for: having taken the 204 towns and
villages of over 25,000 inhabitants as towns and villages that determine global
demand in the peninsula, a consumer capacity coefficient is assigned to each
one, which is a function of the buying power and the number of its inhabitants.
In order to estimate demand for the year 2000, a forecast was made using a
double moving average of the order 6, which is the model that best fits with the
data collected between 1988 and 1995. The option of calculating demand by
distributing according to the gross turnover of the companys warehouses in the
Spanish Peninsula was rejected because of the practical impossibility of
extrapolating data from these warehouses (there are 20 at present) to new
locations. Moreover, such criteria would fail to capture potential demand in new
areas for the company to expand into.
Numerical example of applying the cluster algorithm
As a simplified example, let us assume 4 points a,b,c and d with their coordinates, and equal demand weighting (see Table I). First the distance matrix
(see Table I) is calculated. In the first iteration one can see that the shortest
distance is 5.01 units (in heavy type); these points a and b join and form a new
point called ab with co-ordinates (7.5, 5.5) with double the demand weighting.
The distance matrix between ab,c and d is next calculated. The shortest
distance is 9.849, corresponding to points c and d. These join to form cd with

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72

1a Itera.

|
|

Distance
matrix

10

5.01

10.198

15.033

12.53

14.866

9.849

2 Itera.

|
|

Distance
matrix
0

ab

7.5

5.5

ab

12.59

13.51

9.849

|
|

Distance
matrix

3 Itera.

Table I.
Numerical example of
applying the cluster
algorithm

ab

7.5

5.5

ab

cd

0.5

cd

12.093

|
|

Distance
matrix

4 Itera.
abcd

2.25

2.50

co-ordinates (3 ,0.5). The process is repeated until only one point, in this case
abcd, remains. In this way, costs for different numbers of warehouses with
irregular sizes and zones are calculated.
We have proposed various measurements (for example using Manhattan
distances as opposed to rectilinear distances etc.) of individual differences and
differences between groups, (e.g. furthest neighbors or average distances) as
well as considering the possibility of moving the point that results from the
fusion towards a terminal.
Complements to the cluster analysis
Further considerations that were introduced as research developed to improve
the result of the solution are next commented on; the parameters and specific
(present day) data for entry to the program are also considered in order to
analyze the sensitivity of the result. Since distances are weighted by demand,

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and since cost evaluation also needs to be taken into account, some of the
required adaptations do not permit the use of a standard cluster analysis
package.

Determining
warehouse
location

Type of distances used to calculate grouping

This parameter can be varied by the program user and is the calculation of
distances between original towns, towns and centroids, or between centroids. It
could be chosen from among the following distances: linear, quadratic, absolute
or Manhattan; or by a ranking of the monetary cost of transport.

73

Minimum distance filter

As new towns are incorporated, the program checks whether the original towns
belong to the nearest centroids zone. The centroid may also move. The zones
are rounded and the size of the centroids is also balanced. A check should be
made at each step as to whether points belong to the nearest centroid.
Consideration of furthest neighbors or neighbors linked by average distances
Another option to consider as a grouping criterion is the distance between
neighbors furthest from the centroids or the average distances between already
formed zones. This ensures that zone fusion does not create zones that are
diametrically too wide in one single step. Although much more smaller
centroids are generated, considerably penalizing fusion between them, the final
result with few warehouses for total cover for Spain is very similar (see Asoo
and Wemmerlov, 1995, for a comparison).
Moving centroids towards rail freight terminals
When there is a rail freight terminal it may be of interest to locate the warehouse
nearer to this terminal and deliver the product from the factory in Oviedo. If this
warehouse has lower cost through the rail freight terminal, and if the terminal
is within the zone corresponding to the influence of the centroid, the centroid is
allowed to move step-by-step towards the terminal. The new co-ordinates x or y
are equal to the distance that the centroid gets closer to the terminal multiplied
by the cosine or sine, respectively, of the arc tangent of the slope between the coordinates of the existing warehouse and the rail terminal. Cost is recalculated to
see if there is overall saving in distribution costs. There will be lower long
distance transport costs but higher retail distribution costs within the zone.
Costs to be considered
For each iteration different costs will be calculated. These are:
(1) Long distance road transport costs. This cost will be calculated as a
product of the distance between the factory and the point of destination,
the tariff coefficient between the factory and the province of the town of
destination and the demand at the point of destination.

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74

(2) Long distance rail freight costs. If there happens to be a freight handling
terminal within a centroids area of influence, the cost of sending the
merchandise that corresponds to that warehouse by train will be
calculated, to compare it with the cost of road transport calculated in the
previous section (provided that the distance between the freight handling
station and the centroid is less than the maximum distance between the
warehouse and its client towns). This cost will be calculated as the sum
of two terms: the first will be the product of the freight tariff for that
terminal multiplied by the centroids consumption, and the second will
be the freight charges for this consumption from the freight handling
terminal to the warehouse. Whenever rail freight handling transport
costs can be evaluated they will be compared with road transport costs,
and whichever of the two is lower will be opted for.
(3) Storage costs. The total storage cost of a product in a centroid depends
on several factors. First, on the number of days in storage; second, on the
quantity of the product to be distributed from the warehouse (this will be
the total distribution capacity for the whole peninsula weighted
according to the consumption percentage that the warehouse covers; this
percentage will be the sum of the consumption capacity of all the client
towns that depend on that warehouse). Third, on a fixed amount,
showing the pesetas per ton per month cost of storing the merchandise.
Storage costs are thus calculated as the product of these three factors. If
a town has not been assigned to any centroid it is assumed that there will
also be a storage cost charged by an agent working on commission in the
town; in this case, demand assigned to the calculation will simply be the
consumption capacity of the town. Storage costs will be divided into two
parts: distribution to retailer and handling.
Cost of distribution to retailer. The process followed consists of
iteratively calculating the delivery costs between the centroid and the
client towns dependent on it (a correction factor of 1.24 to change
over from linear distances to road distances is applied, as are the
corresponding tariff coefficients). If the nearest town to the centroid
and a client town are in the same province, the provincial transport
tariff will apply. Average storage costs is at present 600 pesetas per
pallet per month.
Handling costs. Handling cost will be the product of the tonnage
associated to the warehouse multiplied by the tariff for handling costs:
2,500 pesetas per pallet (1 pallet = 0.864 tons).
(4) Structural costs. These are costs produced by the size of future
warehouses (connected with the amount of demand for a particular area)
and the number of warehouses considered in the temporary solution
proposed (the partial solution of an iteration). To estimate these costs, the
logical structure of relevant present-day costs in relation to the volume of

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sales in litres was studied (amortization was excluded from these costs).
Although initially the adjustment of total costs (mainly staff-generated
and general expenses) was in general of little significance, once
warehouses of lower activity were eliminated results were quite precise.
In this case, 97.32 per cent of variations in expenses between warehouses
and sales volume were explained by a simple linear regression. To
eliminate the problem of linear estimation assigning a very low cost to
smaller warehouses the opportunity of cutting off the estimation
function based on two parameters should be allowed. The first of them
measures the minimum number of sales above which cost estimation by
function, expressed in units per year, will apply. The second is which cost
should be assigned as a fixed minimum when a warehouse fails to reach
a volume of activity (this can be considered as an amount equal to the
amount results from applying the function to the minimum number of
sales, which would mean cutting horizontally the ascending straight line
of costs as a function of sales).
The sum of all these costs for all the warehouses of each iteration will give us
the total cost of that iteration.

Determining
warehouse
location
75

Cost evaluation
Once made, the program provides solutions to cost evaluation for: (a) each
iteration, (b) each distribution area of the iteration. By way of example, for the
costs previously considered see Table II.
As can be seen in Table II, the iteration and the number of warehouses for the
solution are first shown. The second line, (b), shows the number of towns taken
into account and those still pending assignment (in this case none, since all of
them belong to a warehouse), as well as those considered distant, that is, those
outside a radius considered optimum for distribution from the warehouse (124
kilometers). The following line, (c), shows the merchandise ordered in a month
for the whole peninsula; (d) is the percentage cover of all the original towns in

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)

Iteration 190 warehouses 14 File ITER 190

Towns 204, Assigned 204, Pending 0, Distant 17
Load transported to warehouses: 35,000 tons.
Cover by warehouses 100%
Maximum distance: 180.4007 km
Average distance to town: 58.24619
Average distance to inhabitant: 45.20055
Cost-free delivery, lorry
0
Cost-free delivery freight
0
Costs of commission agents
0
Structural costs
158,869,332
Road transport to reg. offices
87,058,604
Rail costs to warehouses
27,348,019
Cost of stock holding
3,060,131
Cost of area distribution
22,991,765
Total cost
299,327, 851

Table II.
Solutions to cost
evaluation

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76

the proposed solution, and (e) is the maximum distance, that is, the furthest
distance from a town to its warehouse. The average distances to towns and
clients then follow (the latter indicates the average distance to a client
supposing the whole population of Spain were concentrated at a single point).
(f) (g) and (h) costs are zero in this solution because no towns are pending
assignment to a warehouse Finally, in (i) structural costs, transport costs (j)
road and/or (k) rail, (i) stock, and (m) delivery to retailers are specified for all
warehouses. (the first three lines of costs would include the costs of towns not
assigned to a warehouse). One can also see the location of warehouses for each
solution in detail in Figure 1. Table III is given as an example.
30.000 t.

COST (mill of pts.)

315
310
305
300
295
290
285

310.7
306.1
298.5

298.7

299.3

301.2

295.7

17

16

15

No of warehouses

Figure 1.
Location of warehouses
for each solution

300.4

15*

14

13

12

11

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In Table III, towns grouped under a warehouse and their distance away (in
brackets) are shown (1). Then, in (2), the warehouse co-ordinates are given; then
(3), the load to be transported each month to the warehouse in question is
shown, along with the amount of cover in relation to overall demand given by
the warehouse. Costs corresponding to the particular warehouse, and whether a
rail freight terminal is advisable or not are both shown in (5),(6) and (7). Finally,
(8) and (9) show delivery costs to retailers and total costs respectively.

Determining
warehouse
location
77

Conclusions to be drawn from the above application

For data from the control file which were taken by default (costs, co-ordinates,
volume ordered, etc.) in the final iterations the results shown in Table IV were
obtained:
Cover (%): indicates the percentage of original towns assigned to one of the
warehouses created.
Towns pending: this number shows the number of original towns not
assigned to a warehouse network for a particular solution.
Distant towns: this number shows the number of towns which, while
assigned to one of the warehouses created, is nevertheless beyond the optimum
delivery radius (124 kilometers. by default).
To measure the sensitivity of this result, in Table V we describe costs
distribution for different numbers of warehouses, from 17 to 11.

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)

Members (distance): City 1 (120.4042), City 2 (87.6431), City 3 (60.27063), etc.

Co-ordinates 0.19 201.92; centroid near to City 45
Load transported 512.3577 tons
Cover 1.707859%
Maximum distance from centroid
120.4042 km
Structural costs of warehouses
1,976,450
Transport costs from factory
1,231,267
Transport cost by rail freight terminal
393,547 rail freight terminal: City 45
Cost of stocks or commission agent
47,441
Cost of delivery to retailers
532,038
Total cost
4,180,743

No. of
warehouses

Cover
(%)

Towns
pending

Distant
towns

Total cost
(millions of Ptas)

17
16
15
15
14
13
12
11

99.27
99.27
99.27
100
100
100
100
100

1 (City 27)
1 (City 27)
1 (City 27)
0
0
0
0
0

8
11
14
15
17
22
31
34

295,7
298,5
298,7
300,4
299,3
301,2
306,1
310,7

Table III.
Costs relating to
warehouse location

Table IV.
Total costs calculated
from control data

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78

Table V.
Costs distribution
for different numbers
of warehouses

The asterisks (*) that figure in Table V indicate that in these particular
solutions there are towns pending assignation to a warehouse, so total cost is
not only the sum of what is shown in the table but rather would have to consider
three other extra costs: road or rail direct delivery to the retailer that is not
carried out by the company, and costs of storage by agents working on
commission.
As can be seen in Table V, the optimum solution is 14 warehouses. In view of
the data from the previous table, any solution with a lower cost than the one
proposed might seem advisable for example, the case of 15 warehouses with
towns pending shown in Table V, the cost of which is 298.7 million pesetas.
However, when the final decision is made, the importance of there not being any
towns pending assignment should be underlined (they would function via
agents working on commission). Thus, the above two solutions are qualitatively
different. Moreover, one of the original criteria was to achieve total distribution
through the companys own warehouse network.
In fact, in iterations previous to the ones shown in Table V, total costs are
very much lower, and the basic cause of this is the incompatibility between both
types of structure, one with and the other without total cover.
Another important aspect to consider is the number of distant towns (beyond
the optimum retail distribution radius) that solutions suggest. The lower the
number, the better the solution. Thus, if one solution shows lower costs than
another one, the lower cost one will be better, unless there are more distant
towns, in which case decisions should be taken on the basis of the importance
of demand in the distant towns and the number of them in each solution.
A further important factor lies in the decision to opt for distribution by road
or by rail. To see the recommendations for each solution in the program, an
analysis of the warehouses proposed for the optimum solution (14 warehouses)
should be carried out. It is advisable to analyze final solutions near to the
optimum (between 17 and 11 warehouses), since the final location decision
should be based on rational rather than methodological criteria. We should also
remember that to specify the definitive locations, local legislation, industrial

In-built cost
C.Road T.
C. Rail T.
C. Stock
C. Distr.
Extra C.(*)
Total cost
(Mill. Ptas)

17(*)

16(*)

No. of warehouses
15(*)
15
14

157,2
86,1
26,9
3.0
21,3
1,2

158,4
86,5
27,0
3,0
22,4
1,2

158,4
86,3
27,2
3,0
22,6
1,2

159,8
87,2
27,3
3,1
23,0

295,7

298,5

298,7

300,4

13

12

11

158,9
87,0
27,3
3,1
23,0

159,4
88,1
27,2
3,1
23,4

161,9
85,0
29,8
3,1
26,3

164,5
84,7
30,4
2,9
28,2

299,3

301,2

306,1

310,7

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estates, local taxes and so on should all be analyzed. Moreover, a solution with
a larger number of warehouses might provide the customer with a better
service, despite cost increases, and this most certainly provides a major
advantage over competition.
Conclusion
As a result of research using cluster analysis and cost evaluation applied to a
business context in the north of Spain, a method for generating and evaluating
locations for future distribution warehouses is developed. This particular
application is relevant in a wider sense, in that it shows that cluster analysis can
be successfully applied to problems of this general nature.
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