ISM 2025 Introduction to Business Administration, Procurement & Production Lecture Notes

Introduction to Business Administration, Procurement & Production

Agenda

• Introduction to Business Administration (BA)

  • The Scientific Object of Business Administration

  • Business Administration as a Science

  • Operational Modelling

  • History of Business Administration

• Procurement

  • Classification of Demand

  • Forecasting

  • Inventory Management

  • Warehousing Systems

  • Order Processing

  • Transport Logistics

• Production

  • Production Functions

  • Production Factors

  • Organizing Production

What Studying Means

• Understand economic concepts in theory and practice.

• Apply scientific models for these concepts.

• Independently learn new facts and critically apply models and theories.

• Express yourself verbally and in writing.

• Present yourself and your work competently and self-confidently.

• Solid basic maths skills are essential in all economics subjects.

• Keep up to date with current matters by reading books, journals, and the daily press.

• Continuously expand your general vocabulary and writing through reading any other literature.

Objectives of the Lecture

• Become familiar with the various business administration subsections and the tools used there.

• Create a foundation for later deepening lectures.

• Level the business administration knowledge regardless of prior education.

• Get to know the various relationships between the business administration subsections.

• Get familiar with the business administration terms.

• Get an overview: Width instead of depth!

• Level knowledge!

• Get to know interconnections!

• Obtain "wording"!

Code of Conduct

• Concentrated, disciplined, and active participation.

• Ask questions; the event lives from dialogue.

• Discuss; ideas and suggestions are welcome.

• Brief exercises with solution presentations during the lecture help to understand the subject matter.

• Exercise sheets for work at home provide more information about the contents and are used for advance and subsequent learning.

• Questions & Answers.

• Discussion.

• Teamwork.

• Homework.

Readings

• Compulsory readings

  • Heizer, J.; Render, B.: Operations Management. 11th ed., Pearson Prentice Hall, Upper Saddle River, 2014

  • Handfield, R.B.; Monczka, R.M.; Giunipero, L.C.; Patterson, J.L.: Sourcing and Supply Chain Management, 5th edition, Cengage Learning, 2011

• Further readings

  • Coyle, J.J.; Langley, C.J.Jr.; Novack, R.A.; Gibson, B.J.: Managing Supply Chains – A Logistics Approach, 9th edition, Cengage Learning, 2013

  • Morris, P.W.G. and Pinto, J.K., The Wiley guide to project technology, supply chain, & procurement management, The Wiley guides to the management of projects, J. Wiley, Hoboken, 2007

  • Russell, R.S.; Taylor, B.W.: Operations Management: Creating Value Along the Supply Chain. 7th ed., John Wiley & Sons, Hoboken, 2011

  • Vahs, D.; Schäfer-Kunz, J.: Einführung in die Betriebswirtschaftslehre, Schäffer-Poeschel, Stuttgart, current edition

  • van Weele, A.J.: Purchasing and Supply Chain Management, 5th edition, Thomson Learning, London, 2010

  • Wisner, J.D.; Tan, K.-C.; Leong, G.K.: Supply Chain Management – A Balanced Approach, 3rd edition, Cengage Learning, 2012

The Scientific Object of Business Administration

Needs, Wants, & Demand

• The basics of doing business are the existence of the needs of man.

• A want expresses the wish to rectify or at least improve a condition sensed to be a lack, which finds its expression in the desire for goods.

• Needs – state of felt deprivation including physical, social and individual needs (i.e., hunger).

• Wants – form that a human need takes as shaped by culture and individual personality (i.e., bread).

• The desire to fulfill wants leads to market demand.

• Demand – human wants backed by buying power (i.e., money).

• The purchase of goods and services rectify or improve the state of deprivation.

Needs pyramid in accordance with Maslow

• Primary needs: Physiological needs (e.g., sleep, food, urges) and Security needs (e.g., striving for stability, protection, order, law, and authority).

• Secondary needs: Social needs (e.g., need for love, affection, and belonging), Need for appreciation (e.g., striving for high appreciation of the own person, Self-respect and respect from others), and Need for self-fulfillment.

• Strength of the need influence on the age.

Definition of business administration

• The subject and scientific object of business administration is the administration in and of businesses.

Commercial units: households and businesses

• Households: Consumption management, covering own needs.

  • One-, multiple-person households.

  • Collective needs.

• Businesses: Production management, covering third-party needs.

  • Companies.

  • Public businesses.

    • Federation, states, municipalities.

    • Finance.

    • Hospitals, prisons, old-age pensioner home.

    • Principle of public ownership.

    • Organ principle.

    • Principle of common public interest.

  • Private businesses.

    • Principle of private ownership.

    • Autonomy principle.

    • Market economy principle.

• Households are commercial units in which to cover own needs goods are consumed.

• Businesses are commercial units in which to cover third-party needs goods are produced and sold.

Companies – definition and delimitation

• Companies are businesses in predominantly private ownership, which act autonomously and as a rule in accordance with the market economy principle.

• Major (small, medium-sized, and major enterprises).

• SMEs: small and medium-sized enterprises.

• Medium-sized businesses $\Rightarrow$ qualitative component.

• MNEs: multinational enterprises.

Size dimensions § 267 HGB

Companies - definition and delimitation

• Company types = ordering and class terms developed for the detailed researching of the company and for the closer analysis of functions in companies.

• Differentiation features:

  • Size

  • Legal form

  • Locations: local, regional, national, international, multinational, or global company

  • Production factors: staff, material, plant, energy, information, or technology intensive

  • Sector relation: primary (primary production), secondary (further processing), or tertiary (service and commerce)

  • Industry

  • Ownership structure and management

Doing businesses – transformation process

• Doing business means the planned disposal of rare goods to fulfill the needs in accordance with the economic principle.

The economic principle

• The economic principle determines the actions of economic entities.

• Economics is the science that examines human behavior as a relationship between targets and rare means, which can be used in different ways.

• Shortage restriction is the key condition of economic analysis (shortage of the factors for optimum need fulfillment).

• One model for analyzing human shortage problems is the Homo Economicus : perspective of man as an

  • economically acting individual, who always tries to maximize personal benefit

  • on the basis of rational considerations

  • based on the full availability of all (market) information

  • Who as an opportunist, accepts damage to others if that is conducive to personal benefit.

Characteristics of the economic principle

• Operation: Combination of production factors to manufacture goods (production).

• Household: Needs of man Consumption of goods and services.

• Economic principle

  • Maximum principle: Output Max! Input const.

  • Minimum principle: output const. Input Min!

  • Optimisation from maximum and minimum principle.

Productivity and profitability

• Economic principle = maximisation of profitability in the sense of the biggest possible relation of expenses (= assessed use of economic goods) and earnings (= assessed benefit of economic goods).

• $Profitability = \frac{Valued \, output \, quantity}{Valued \, input \, quantity}$

• $Productivity = \frac{Output \, quantity}{Input \, quantity}$

Subject of Business Administration

• BA examines in general terms the motives, conditions and consequences of doing business in the individual commercial units.

• Doing business can be described as disposing of rare goods, which are or can be subject to market processes as objects.

• Characteristics of rare goods:

  • suitability to satisfy human needs

  • Availability and transferability

• Goods that have these attributes are also referred to as economic goods.

Criteria of breaking down goods

Digression: Definition of stakeholders

• The stakeholder groups or just stakeholders of a business are all commercial units that have a relation to the business and therefore influence the actions of the business and/or are affected by the actions of the business.

Group work stakeholders overview

• Outside creditors.

• Suppliers.

• Competitors.

• Customers.

• Society.

• State.

• Managers.

• Employees.

• Owners.

Business Administration as a Science

Business administration as a pragmatic science

• Science: Findings process, whose aim it is to find answers to the question of the truth.

• Business administration as a pragmatic science

  • Description of real facts (description).

  • Explanation of cause-effect interconnections (causalities).

  • Recommendations for action.

Classification of BA in the sciences

• Sciences

  • Non-metaphysical sciences

    • Real sciences

      • Natural sciences

        • Physics, chemistry, biology, medicine, etc.

      • Social sciences

        • Economics

          • Microeconomics and macroeconomics

          • Economics and business administration

    • Idea sciences

      • Maths, logics, etc.

      • Humanities

        • Philosophy

        • Sociology, law economics

  • Metaphysical sciences

Breakdown of BA into sub-disciplines

• General business administration

  • …deals with comprehensive functional aspects of doing business, in particular the operational basic functions.

    • Procurement

    • Production

    • Sales

    • Investment and finance

    • Operational accounting

• Specific business administration

  • …deals with the institutional characteristics of doing business, e.g.

    • banking; retailing

    • public business administration

    • industrial administration

    • trust management

    • cooperative management

    • tourism, transport management

• Natural phenomena

  • Microeconomic aspects

  • Macroeconomic aspects

  • Geographical aspects

  • Historic aspects

  • Technical aspects

  • Psychological aspects

  • Medical aspects

  • Legal aspects

• Economic consideration

  • Business administration

  • Economics

  • Economic geography

  • Economic history

  • Economic engineering

  • Operational sociology/psychology

  • Occupational medicine

  • Business law

Operational Modelling

The model term in economic sciences

• Definition: A model is a simplified, abstract image of the reality in scientific disciplines.

• Definition: Modelling describes the process of mapping parts of reality in order to better understand (diagnose) them and make statements on the future (forecast).

• Definition: The objective of modelling is, in general, to reduce the complexity of the model compared to the reality.

A scientific approach requires thinking in models

• Recognition/Descriptive models

  • Descriptive recognition of real objects by selectively mapping economic processes, e.g., supply chain, business accounting

  • With the use of certain calculation operations, additional findings can be found (e.g., price floor of a product)

• Explanation models

  • By applying theories, facts are interpreted, e.g., a model for individual service provision willingness with determinants like remuneration, career, conduct of seniors

  • Suitability for forecasting purposes (forecast model).

  • Simulation models as special design

• Design models

  • Ideas of the aim by the user are included in the model, maximum target achievement is the objective

  • Process:

    • mathematical decision finding (linear programming)

    • heuristic procedure, e.g., decision tree procedure

• Recognition function: Observe and detect business administration in its real heterogeneous characterizations.

• Description function: Distinguish and map basic forms and variations of business administration.

• Explanation function: Identify interrelations (laws), in particular cause-effect relations between the elements of business administration (conditions, activities, influence factors, etc.) and given reasons for business administration.

• Design function: Develop suitable tools for the implementation of set operational targets and derive statements on the use of the tools for the optimum target achievement.

Decision- and function-guided overall model of a company

• Real goods and Nominal goods flow to and from:

  • Procurement market, Performance range, Sales market, Financial sector.

• In the middle there is the company where the next units work:

  • Procurement, Production, Accounting, Sales, Finance.

• In the top there are the following managements, which impact all the internal units:

  • Corporate policy, Controlling, Organisation, Staff, Investment policy, Financing policy.

• The company is surrounded by:

  • National economy, Suppliers, Customers, Corporate strategy.

Value chain model

• Supporting secondary activities:

  • Corporate infrastructure, Human resources management, Technology development, Procurement.

• Primary activities:

  • Inbound logistics, Production, Marketing and Sales, Outbound logistics, Customer service.

History of Business Administration

• Luca Pacioli (1445-1509) closed illustration of double entry accounting

  • Personal accounts and real accounts

  • Inventory

  • Double posting rate

  • Balancing of the settlement periods

• Jacques Savary (1622-1690) The complete clerk and trader, Paris

  • Rules and guidelines for clerks

  • Ethically normative basic orientation

• Adam Smith (1723-1790) The Wealth of Nations $\Rightarrow$ Mass production and foreign trade

• In the 19th century economic liberalism with a strong upsurge of the national economy (economics)

• 1898: Establishment of commercial colleges (Leipzig, St. Gallen, Aachen, Vienna)

• Until 20s: Change of trade sciences to BA

• F. Taylor (1863-1947) $\Rightarrow$ Mass Production at Ford

• E. Gutenberg (1897-1984) Foundations of BA (1951) Productivity relationship between factor use and income (production/sales/finances)

• E. Heinen (1919-1996) $\Rightarrow$ decision theory approach

• Adam Smith, The Wealth of Nations (1776):

  • Instead of one, 4,800 pins

  • One supplier pulls the wire, the other stretches it, a third one cuts it, a fourth one makes it pointed, a fifth one grinds the top end so that the head can be applied. As such, to produce a pin some 18 different work processes are required.

• Henry Ford I.

  • Cars for everyone

  • The assembly of a T model initially took 728 minutes, the matter was completed in after 93 minutes on the production line

  • Between 1909 and 1926, the price of the car was subsequently reduced from USD 980 to USD 290, although the workers at one stage were earning twice as much as competitors were paying.

Procurement

The operational functional areas and the sales process

• State, Capital market, Procurement market, Sales market, Financial sector are external factors to the company.

• Company

  • Performance range: Procurement, Production, Sales.

  • Financial range: Accounting, Finance.

• There are material - product and money flows.

Procurement terminology classification

• Material management

  • All processes within a company that serve to make materials economically available with the objective to achieve an economic material optimum

  • Classical material management: Stock-keeping and transport

  • Integrated material management: Material planning und scheduling

• Procurement

  • All activities related to the company and the market that are geared to provide all objects required in a company that are, however, not produced by the company

• Logistics

  • Logistics is defined as all management activities in and between companies regarding the organization of the entire material and information flow from the suppliers into a company, within a company and from the company to the buyers

Procurement objects

• Procurement objects:

  • Feedstocks, Raw and auxiliary materials and consumables.

  • Bought-in parts, Trade goods.

  • Services.

  • Information.

  • Investment goods, Rights, Capital, Manpower.

• Requirement:

  • Periodic and on-going requirement.

  • Aperiodic and one-time requirement.

  • Both periodic/on-going as well as aperiodic/one-time requirement.

Procurement – bought-in parts

• Parts: Bought-in parts made from one material without assembly content (e.g., screws, seals).

• Assembly units, components: Bought-in parts that can or cannot be disassembled (e.g., clutch disc, oil filter).

• Systems: Bought-in parts that are made up of several assembly units/components and/or parts and fulfill a basic function (e.g., seat, dashboard).

• Modules: Bought-in parts, which represent ready for installation units that are aligned with the assembly sequence of the manufacturer (e.g., cooling module, front-end).

  • Modules can be identical to systems; however, completely different systems can form module as well since they must be installed at the same time.

  • Suppliers must coordinate this in such cases without having had points of contact beforehand!

Production factors and their operational effect on profit

Industry-dependent significance of material types

Two main procurement processes

• Strategic Sourcing

  • Procurement market research.

  • Price and value analysis.

  • Inviting and evaluating offers.

  • Supplier selection.

  • Price negotiations.

  • Purchase agreements.

  • Procurement administration.

• Operational procurement

  • Assessment of demand and scheduling.

  • Ordering.

  • Acceptance of goods and inspection.

  • Stock-keeping.

  • Warehouse management.

  • In-company transport.

• Procurement management: Planning, managing, and supervising the material and information flow.

Tools of the make-or-buy decision

• Considerations are made within the company or external for:

  • Low, Medium, High Market Availability

  • Low, Medium, High Strategic significance

• Make-or-buy portfolio.

• Break even analysis:

  • Total costs of external or own production can be calculated.

  • The formulas:

    • Total costs of own production.

    • Total costs of external production.

    • savings through own production.

    • proportional costs of own production.

    • fixed costs of own production.

Pros and cons of make-or-buy decisions

The intra- and inter-organizational procurement process

• Supplier warehouse, Receiving warehouse, Dispatch, Customer warehouse.

• Goods, Raw materials and supplies, product, Waste, Money flows, Information flow.

• Just-in-Time (JIT) production

Materials management – tasks and terms

• The task of materials management is, on the basis of the adopted production program, to provide

  • the material types required

  • the material qualities required

  • in the required quantities

  • at the right time

  • at the right place

  • in the right sequence.

• The objective of materials management is to minimize all costs, which are associated with the procurement and provision of materials. This includes:

  • the direct procurement costs (materials purchase prices)

  • the indirect procurement costs (e.g., transport costs)

  • the warehousing costs

ABC analysis in materials planning

• To meet the materials management targets, a most comprehensive and precise planning is required.

• The activities associated generate costs, which means that the planning must be limited to those areas in which the resulting benefit justifies the costs.

• Intensive materials management therefore only pays off for such goods that are key in the company.

• To this end, selection criteria and methods need to be established in order to single out those goods that require precise and comprehensive planning

• Such a tool is the ABC analysis, which helps to

  • distinguish what is more relevant and what is less relevant,

  • direct the activities as a focus towards the area of high commercial significance and to simultaneously reduce the expenses for the other areas by applying simplification measures,

  • increase the efficiency of management measures with the option of a targeted use of the resources.

Classification of the ABC items

Procedure when applying an ABC analysis

1. Initially, on the basis of the consumption data of the past, the period consumption of all goods is established in quantity units.

2. Then, these quantity units are multiplied with their prices in order to determine the value consumption of the individual goods type.

3. Then every goods type is classified in accordance with this value consumption.

4. Finally, the accumulated consumption values and percentages of the type- and value- related consumption are calculated and the goods classified by the value-based consumption in A, B and C categories.

ABC analysis – Lorenz curve for ABC result display

• Quantity/Value share distribution.

• 20 percent of A items make up 80 percent of value share.

• 60 percent of B items make up 15 percent of value share.

• 80 percent of C items make up 5 percent of value share.

Background: the Pareto principle

• Background: Vilfredo Pareto (1848–1923) examined the distribution of national wealth in Italy and found out that about 20% of families own about 80% of the wealth.

• Therefore, banks should predominantly cater to these 20% and a major part of their business would be secured.

• The Pareto principle can be observed in many - including everyday - questions:

  • 20% of the time used provides 80% of the results

  • In an average household, 20% of cost items cause 80% of costs.

  • In a flat, 20% of the carpet has 80% of wear and tear.

  • In a company, 80% of sales are generated from 20% of customers.

  • 80% of a text is written with 20% of the words

XYZ analysis: expansion of the ABC analysis

Provision principles

Treatment of AX and of CZ parts

Types of material requirement

• Primary requirement: Required saleable products (market requirement)

• Secondary requirement: Required raw materials, parts, and groups to produce the primary requirement.

• Tertiary requirement: Required auxiliary materials and consumables

• Gross requirement: Primary, secondary, or tertiary requirement of the period

• Determination according to origin and product level

• Net requirement: Gross requirements less available stocks

Forecasting

What is Forecasting?

• Process of predicting a future event

• Underlying basis of many business decisions

  • Human Resources – Hiring, training, laying off workers

  • Capacity – Shortages result in loss of customers, loss of market share

  • Supply Chain Management – Good supplier relations and price advantages ??

The Effect of Inaccurate Forecasting

• Producer: Over-production/Excess inventory (Over-forecast), Inventory shortages (Under-forecast).

• Distributor, Demand, Retailer: Late deliveries, stock out and shortage costs, high shipping costs.

• Spoilage, waste, obsolescence, high inventory costs.

Forecasting Time Horizons

• Short-range forecast:

  • Up to 1 year, generally less than 3 months

  • Purchasing, job scheduling, workforce levels, job assignments, production levels

• Medium-range forecast:

  • 3 months to 3 years

  • Sales and production planning,