Athe Uptown Kiln Is An Importer Of Ceramics From Over 417741

Athe Uptown Kiln Is An Importer Of Ceramics From Overseas It Hasarra

A.The Uptown Kiln is an importer of ceramics from overseas. It has arranged to purchase a particular type of ceramic pottery from a Korean artisan. The artisan makes the pottery in 120-unit batches and will ship only that exact amount. The transportation and handling cost of a shipment is $7,600 (not including the unit cost). The uptown Kiln estimates its annual demand to be 900 units. What storage and handling cost per unit does it need to achieve in order to minimize its inventory cost?

Paper For Above instruction

Introduction

Effective inventory management plays a critical role in minimizing costs and optimizing operations for importers like The Uptown Kiln, which sources ceramics from overseas artisans. The primary concern in such supply chains involves balancing order size, transportation costs, storage costs, and demand rates. This paper aims to determine the necessary storage and handling cost per unit that The Uptown Kiln must achieve to minimize its total inventory costs, considering the specific procurement and shipment details provided.

Understanding the Scenario

The Uptown Kiln plans to purchase ceramic batches from a Korean artisan. Each batch consists of 120 units, and orders are only made in these fixed sizes. The transportation and handling cost per shipment amounts to $7,600, regardless of the batch size. The annual demand for these ceramics is 900 units. This scenario resembles an Economic Order Quantity (EOQ) model, an essential tool in inventory management that helps determine the optimal order quantity minimizing total inventory costs — which include ordering, storage, and handling costs.

Analyzing the Cost Components

The EOQ model requires understanding two primary cost components:

1. Ordering Cost (S): The fixed cost incurred each time an order is placed, regardless of the order size. Here, it is $7,600 per shipment.

2. Holding or Storage Cost (H): The cost to hold one unit in inventory per year, which includes storage, handling, insurance, and depreciation.

Given the specific batch size of 120 units, and the demand of 900 units annually, the number of orders per year (N) and the average inventory level can be determined to find the EOQ. To minimize costs, the company must balance the ordering frequency with the storage costs.

Applying the EOQ Formula

The EOQ formula is expressed as:

\[ EOQ = \sqrt{\frac{2 \times D \times S}{H}} \]

where:

- D = Annual demand (900 units)

- S = Setup or ordering cost per order ($7,600)

- H = Storage and handling cost per unit per year (unknown, to be determined)

Given that orders must be in multiples of 120 units, the chosen order quantity should approximate the EOQ for minimizing total costs.

Determining the Storage and Handling Cost per Unit (H)

Assuming that the company wants to find the per-unit storage and handling cost (H) that makes the 120-unit batch size optimal, we set the batch size equal to EOQ:

\[ 120 = \sqrt{\frac{2 \times 900 \times 7,600}{H}} \]

Squaring both sides:

\[ 120^2 = \frac{2 \times 900 \times 7,600}{H} \]

\[ 14,400 = \frac{13,680,000}{H} \]

Solving for H:

\[ H = \frac{13,680,000}{14,400} \]

\[ H = 950 \]

This indicates that the storage and handling cost per unit per year must be approximately $950 for the batch size of 120 units to be optimal.

Implications and Practicality

In real-world scenarios, a storage and handling cost of $950 per unit per year is exceedingly high, suggesting that either the demand, order size, or costs need to be re-evaluated. Alternatively, this high cost reflects that, at this rate, ordering in bulk is less favorable unless storage costs are substantial. The actual goal for The Uptown Kiln is to manage these costs effectively through negotiating lower handling fees, optimizing storage solutions, or adjusting order quantities to balance costs better.

Conclusion

To minimize inventory costs with the given order size and demand, The Uptown Kiln needs to ensure that its storage and handling cost per unit per year is approximately $950. Achieving or reducing this cost requires effective inventory management, negotiation for lower handling fees, and strategic planning of batch sizes. This analysis highlights the critical balance between order quantities and storage costs in supply chain management to optimize cost efficiency.

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