Administration 1

Introduction to Business Administration, Procurement & Production

Agenda

• 01 Introduction to Business Administration (BA)
  • 1.1 The Scientific Object of Business Administration
  • 1.2 Business Administration as a Science
  • 1.3 Operational Modelling
  • 1.4 History of Business Administration
• 02 Procurement
  • 2.1 Classification of Demand
  • 2.2 Forecasting
  • 2.3 Inventory Management
  • 2.4 Warehousing Systems
  • 2.5 Order Processing
  • 2.6 Transport Logistics
• 03 Production
  • 3.1 Production Functions
  • 3.2 Production Factors
  • 3.3 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 needed 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 problems and 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 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

1. Introduction to Business Administration

1.1 The Scientific Object of Business Administration

Wants, Needs & Goods

• 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 that originate from a state of deprivation
  • Sum of all objective needs that can be measured and expressed in figures

• to dispose of suitable goods

• § A good is everything conducive to rectifying or improving the condition considered to be a situation of lack

  • Wants arise in the sense of a situation of lack, goods are rated as a means of fulfilling wants

• Wants

• Goods

• Needs

• Means to satisfy wants, which are characterized by the fact that the quantities available are not sufficient to fulfill the wants of all

Needs pyramid in accordance with Maslow

• Primary needs: Physiological needs
• Secondary needs: Need for self-fulfillment, Need for appreciation, Need for a sense of belonging (social needs), Need for security

Maslow's model of the needs hierarchy over time

• Strength of the need influence
  • Physiological needs, e.g. sleep, food, urges
  • Security needs, e.g. striving for stability, protection, order, law and authority
  • Social needs, e.g. need for love, affection and belonging
  • Appreciation, e.g. striving for high appreciation of the own person,
    Self-respect and respect from others (deserves respect of others)
  • Self-fulfilment

Definition of business administration

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

Commercial units: households and businesses

• Businesses
  • Production management, covering third-party needs
  • Principle of private ownership
  • Autonomy principle
  • Market economy principle
• Households
  • Consumption management, covering own needs
  • Principle of public ownership
  • Organ principle
  • Principle of common public interest
• • 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.

Commercial units types

• Private households: One, multiple-person households
• Public households: Collective needs, Federation, states, municipalities, Finance, Hospitals, prisons, old-age pensioner home

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.

Companies Size dimensions

• SMEs: small and medium-sized enterprises, Medium-sized businessesè qualitative component

• MNEs: multinational enterprises

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

• Definition Types I Size dimensions § 267 HGB

  • Small:
  • Total assets $(\leq 4,84 m. Euro)$, Revenue $(\leq 9,68 m. Euro)$, Employees $(\leq 50$
  • Medium-sized:
  • Total assets $(\leq 19,25 m. Euro)$, Revenue $(\leq 38,5 m. Euro)$, Employees $(\leq 250$
  • Large:
  • Total assets (> 19,25 m. Euro), Revenue (> 38,5 m. Euro), Employees (>250

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 fulfil 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 needs fulfilment).
• The procedure for analyzing human shortage problems is the model of the Homo Economicus : perspective of man as an economically acting and thinking individual, which with the use of all information available tries to maximize his personal benefit on the basis of rational considerations. As an opportunist, he accepts damage to others if that is conducive to his personal benefit.

Characteristics of the economic principle

Operation

• Combination of production factors to manufacture goods (production)
• Needs of man
• Consumption of goods and services
• Economic principle
• Household

1. Maximum principle
   • Output Max!
   • Input const.
2. Minimum principle
   • output const.
   • Input Min!
3. Optimisation from (1) and (2)

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.
• Requirement for the goods character of a rare good:
  • suitability to satisfy human needs
  • Availability and transferability
• Goods that have these properties are also referred to as economic goods.

Criteria of breaking down goods

• Position in the market process
• Classification in the production process
• Usage type
• Physical substance
• Economic system
• Availability

Goods:

• Output goods (cars, tyres, petrol, food)
• Input goods (commodities, machines, labour)
• Investment good (tools, machines, advice)
• Consumer goods (bicycle, shoes, travel)
• Consumer durable / potential factor (cars, clothes)
• Consumer item / repetition factor (commodities, energy)
• Tangible items (physical items)
• Intangible items (services, rights)
• Nominal goods (money)
• Real goods (products)
• Rare goods (economic goods)
• Free goods (air)

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

1.2 Business Administration as a science

Business administration as a pragmatic science

• Science
• Business administration as a pragmatic science
• Findings process, whose aim it is to find answers to the question of the truth
  • Description of real facts (description)
  • Explanation of cause-effect interconnections (causalities)
  • recommendations for action

Classification of BA in the sciences

• Humanities
  • Philosophy
  • Maths, logics, etc.
• Social sciences
  • Sociology, law economics
  • Economics and business administration
• Economics
  • Microeconomics and macroeconomics
  • Idea sciences
• Real sciences
  • Physics, chemistry, biology, medicine, etc.
  • Natural sciences
• Non-metaphysical sciences
• 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

1.3 Operational Modelling

The model term in economic sciences

• A model is a simplified, abstract image of the reality in scientific disciplines
• Modelling describes the process of mapping parts of reality in order to better understand (diagnose) them and make statements on the future (forecast). As such, the aim is to identify, describe and forecast the environment and reality in structure and processes
• 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 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

A scientific approach requires thinking in models (Model examples)

• Recognition/description models
  • Descriptive recognition of real objects by selectively mapping economic processes, e.g. national and 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

Decision- and function-guided overall model of a company

• Constituent decisions
  • Location
  • Legal form
  • Cooperation
• Operation
  • Service creation
  • Research and development
• Logistics
  • Suppliers
  • Production
  • Customers
• Company management
  • Controlling
  • Organisation
  • Staff
• National economy
  • Real goods
  • Nominal goods
• Procurement
• Marketing
• Accounting and finances

Value chain model

• Corporate infrastructure
• Human resources management
• Technology development
• Procurement
• Customer service
• Primary activities
  • Inbound logistics
  • Production
  • Marketing and Sales
  • Outbound logistics
• Profit margin

1.4 History of Business Administration

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 -> 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
• F. Taylor (1863-1947) -> 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) -> decision theory approach

History of Business Administration- Instead of one, 4,800 pins

• Adam Smith on division of labor:
• A worker who has never made pins and is also not trained to do so could, even if he is very hard working, produce a maximum of one per day and certainly not 20.

History of Business Administration- Cars for everyone

• US engineer Frederick Winslow Taylor pointed out that serial products can be produced cheapest if the work is broken down into partial tasks that are as small as possible.
• If the assembly of a T model (Tin Lizzy) initially took 728 minutes, the matter was completed in after 93 minutes on the production line, which was a good two kilometers long.
• 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.

2. Procurement

2.1 Classification of Demand

The operational functional areas and the sales process

• Procurement
  • Material
  • Procurement market
• Production
  • Performance range
  • Company
• Accounting
  • Money
  • Financial sector
• Sales
  • Product
  • Sales market
• Finance
  • Capital market
• State

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

• Aperiodic and one-time requirement
• Feedstocks
• Services
• Information
• Investment goods
• Rights
• Capital
• Periodic and on-going requirement
• Bought-in parts
• Trade goods
• Raw and auxiliary materials and consumables
• Manpower

Procurement – bought-in parts

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 fulfil 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.) This technical differentiation is important since the suppliers must coordinate this in such cases without having had points of contact beforehand!

Production factors and their operational effect on profit

• Production factors
  • Work: Human Resource Management
  • Machines: Investment management
  • Material: Procurement and purchasing
  • Information: Gathering information, Procurement of services

Importance in different industry

• Important factor
  • Industrial production (e.g. automotive industry, beverages industry)
• Medium factor
  • Utility industry (e.g. power, water)
  • Material extraction industry (e.g. mining, farming
• Unimportant factor
  • Commerce (e.g. food retailing)
  • Service industry (e.g. transport business, hospitals)

Industry-dependent significance of material types

Material types

• Raw material
  • Oil, coal, timber, metals, cotton, etc.
• Semi- finished products
  • Semiconductor parts (chips), modules (car seat),systems (brake system)
• Finished products
  • Trade products, private label products
• Auxiliary materials
  • Pallets, containers, packing materials, nails, Examples glue
• Consumables (MRO)
  • Spare parts, office supplies, power, cleaning agents

Industry-dependent significance

• MRO: Maintenance, Repair, Operating
• Industrial production (e.g. automotive industry, beverages industry)
  • Auxiliary materials
  • Raw materials
  • Semi- finished products
• Commerce (e.g. food retailing)
  • Finished products
  • Consumables (MRO)
  • Raw materials
• Service industry (e.g. transport business, hospitals)
  • Auxiliary materials
  • Consumables (MRO)
• Utility industry (e.g. power, water)
  • Auxiliary materials
  • Consumables (MRO)
  • Semi- finished products
• Material extraction industry (e.g. mining, farming
  • Consumables (MRO)

Two main procurement processes

Procurement management

• 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
• Planning, managing and supervising the material and information flow

Tools of the make-or-buy decision

• Selective decision, Own production, External procurement
• Make-or-buy portfolio
• Market availability, Strategic significance

Pros and cons of make-or-buy decisions: "We only do what we can do better than the rest"

Arguments “Make”

• Protection against loss of know-how
• Higher security of supply
• Own quality assurance
• Higher ability to react
• Branding of components
• Social responsibility -> Image
• Own research
• Independence of suppliers
• Protection from forward integration
• Utilisation of capacities

Arguments “Buy”

• Reduction of fixed cost risk
• No own development costs
• Special know-how
• Being independent from demand fluctuations
• Increased flexibility
• Avoidance of "business myopia"
• Economies of Scale (volume digression)

The intra- and inter-organizational procurement process

• Flow of goods
• Information + capital flow
• Production, Raw materials and supplies, waste, Goods
• Supplier warehouse->Receiving warehouse->Dispatch->Customer
• Just-in-Time (JIT)

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 relevant from what is not 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.

Procedure when applying an ABC analysis

• A items: Controllers
• B items: Gears
• C items: mirrors, U-Profiles, Adhesive
  $Aitems$: 37, 5% (2 goods, 71,4% volume)
  $Bitems$, (3 goods, 19,2% volume)
  $Citems$ (5 goods, 9,4% volume)