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MPPSC
DAILY
CLASS NOTES
Management
Lecture – 06
Business-Concept and Significance,
Scope Part 2, Material management and
Purchase management
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Business-Concept and Significance, Scope Part 2, Material
management and Purchase management
Nature of Business
❖ Deals in Goods and Services: Business involves the production and distribution of
goods and services.
❖ Sale or Exchange of Goods and Services: Regular transactions for mutual benefit.
❖ Regular Exchange of Goods and Services: Continuous and repetitive transactions.
❖ Requires Investment: Capital is essential for operations and growth.
❖ Aims at Earning Profit: Profit generation is a key motive.
❖ Involves Risk and Uncertainty: Unpredictable outcomes and exposure to various risks.
Scope of Business
❖ Improved Standard of Living: Businesses provide goods and services that enhance the
quality of life.
❖ Social Responsibility: Businesses have a duty to contribute positively to society.
❖ Wealth Creation and Distribution: Businesses generate wealth and distribute it
through wages, dividends, and reinvestments.
Industrial Activities
❖ Primary Industry: Involves extraction and production of raw materials, e.g.,
agriculture, mining.
❖ Secondary Industry: Involves manufacturing and construction, e.g., factories
producing consumer goods.
❖ Commercial Activities: Includes trade and services, e.g., retail stores, transportation,
and banking.
Significance of Business
Economic Development
❖ Businesses play a crucial role in fostering economic growth and development within a
country or region. They contribute by generating revenue, paying taxes, and
stimulating other sectors of the economy through demand for goods and services.
❖ Example: A tech startup develops a new software platform, attracting investments
and creating a local economic boost through new businesses and services.
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Employment Generation
❖ Businesses are major contributors to employment, providing job opportunities across
various sectors and skill levels. They contribute to reducing unemployment rates and
improving living standards by offering stable incomes and opportunities for career
advancement.
❖ Example: A new factory in a rural area provides hundreds of jobs, boosting local
incomes and community development.
Innovation and Technology
❖ Businesses are key drivers of innovation and technological advancements. They invest
in research and development (R&D), creating new products, services, and processes
that enhance productivity, efficiency, and competitiveness in the global market.
❖ Example:A pharmaceutical company's R&D efforts lead to new medications,
improving health outcomes globally and driving economic growth through innovation.
Material Management
❖ Material management involves planning, organizing, and controlling all activities
related to the flow of materials from the point of origin to the point of consumption.
The goal is to ensure the right materials are available in the right quantities, at the
right time, and at the right cost to meet production and customer requirements
while minimizing waste and maximizing efficiency.
Key Points
❖ Right Quantities: Ensuring that the correct amount of material is available to meet
production demands without excessive surplus, which can lead to high holding costs
or obsolescence.
❖ Minimize Waste: Implementing processes to reduce waste through efficient use of
materials, recycling, and proper handling and storage.
❖ Customer Satisfaction: Ensuring timely delivery of high-quality products to
customers, which relies on efficient material management.
❖ Material Planning: Forecasting demand and planning for the acquisition of materials
needed for production.
❖ Procurement: Sourcing and purchasing materials from suppliers, ensuring the best
quality at the most cost-effective price.
❖ Inventory Control and Distribution: Managing inventory levels to balance supply and
demand, ensuring efficient storage, and timely distribution of materials.
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Types of Material Management
❖ Inventory Management: Ensuring that materials are available when needed while
keeping inventory costs low. Techniques include ABC analysis, safety stock, and
economic order quantity (EOQ).
➢ Example: A manufacturing company uses ABC analysis to categorize inventory
into three classes: A (high value), B (moderate value), and C (low value) to
prioritize management efforts.
❖ Purchasing Management: The process of acquiring materials and services from
suppliers. It involves supplier selection, negotiation, and contract management.
➢ Example: A retail chain negotiates bulk purchase agreements with multiple
suppliers to secure better pricing and terms.
❖ Warehouse Management: Overseeing the storage, handling, and movement of
materials within a warehouse. It includes inventory tracking, space utilization, and
warehouse layout.
➢ Example: An e-commerce company uses a warehouse management system
(WMS) to optimize storage and streamline order fulfilment.
❖ Material Requirement Planning (MRP): A system for calculating the materials and
components needed to manufacture a product. It helps in scheduling production and
purchasing activities.
➢ Example: An automotive manufacturer uses MRP to determine the quantities of
parts needed for assembly and schedule their delivery.
❖ Transportation Management: Coordinating the movement of materials from suppliers
to manufacturing sites and finished goods to customers. It includes logistics, freight
management, and route optimization.
➢ Example: A logistics company uses a transportation management system (TMS)
to plan and execute the shipment of goods efficiently.
Objectives of Material Management
❖ Right Material: Ensuring that the materials used in production meet quality
standards and specifications.
➢ Example: A pharmaceutical company ensures that raw materials meet stringent
quality standards to maintain product efficacy.
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❖ Right Time: Ensuring materials are available when needed to avoid production delays.
➢ Example: A construction company schedules deliveries of building materials to
align with project timelines.
❖ Right Amount: Procuring the correct quantity of materials to meet production needs
without overstocking.
➢ Example: A food processing company orders ingredients based on weekly
production forecasts to avoid spoilage.
❖ Right Price: Acquiring materials at the most cost-effective price while maintaining
quality.
➢ Example: An electronics manufacturer negotiates bulk discounts with suppliers to
reduce costs.
❖ Right Source: Selecting reliable suppliers who provide quality materials and timely
deliveries.
➢ Example: A fashion retailer sources fabrics from reputable suppliers known for
their quality and reliability.
Importance of Material Management
❖ Cost Reduction: Effective material management reduces costs by minimizing waste,
optimizing inventory levels, and negotiating better prices with suppliers.
➢ Example: Implementing just-in-time (JIT) inventory reduces holding costs and
waste.
❖ Improved Quality: Ensuring the right materials are used in production enhances
product quality and reduces defects.
➢ Example: Using high-quality raw materials in manufacturing leads to superior
finished products.
❖ Timely Delivery: Efficient material management ensures that materials are available
when needed, preventing production delays and ensuring timely delivery to
customers.
➢ Example: Coordinating with suppliers to ensure on-time delivery of components
for assembly.
❖ Inventory Optimization: Balancing inventory levels to meet production demands
without overstocking or stockouts.
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➢ Example: Using inventory management software to track stock levels and
automate reorder points.
❖ Efficient Supply Chain: Streamlining the flow of materials from suppliers to
production to customers, improving overall supply chain efficiency.
➢ Example: Implementing a supply chain management system to coordinate
activities and improve communication across the supply chain.
Purchase Management
❖ Purchasing encompasses the actions involved in acquiring goods or services, which
include understanding the needs, identifying suitable suppliers, and negotiating
prices.
❖ Purchasing management involves the strategic planning and oversight of acquiring
goods and resources from suppliers to meet the organization's administrative and
strategic goals.
Purchasing Cycle
❖ Identification of the requirement- The business has to identify the items or services
they need. These could be the items that are required for the production cycle, goods
for resale, office supplies, maintenance supplies, or articles for any other requirement.
When a need is identified, the purchase cycle begins
❖ Verification and requirements- After the need for a service or item is identified, the
specifications or details must be listed. This may need discussion with the various
related departments to determine the detailed specification and quantity of the
requirement.
❖ Purchase requisition: This is a formal document detailing the items required,
specifications, purpose, and quantity. This may be a document that is manually filled
out or a software form that is submitted as a purchase requisition
❖ Purchase approval: If all the purchase requisitions that are made are converted into
orders, the company would have no control over its expenditure.
➢ A company usually has a system of checks and balances whereby a designated
person, usually in management, has the authority to scrutinize purchase
requisitions and decide whether they are approved.
➢ Sometimes, if the person considers that the company can do without the
requested item, the purchase requisition may be rejected. If approved, the
purchase order moves further in the purchase cycle
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Key Objectives of Purchasing
❖ Supplier identification: Most companies maintain a list of pre-approved suppliers,
who they regularly place orders with.
➢ If there is no such supplier, identifying the best supplier for that purchase order
starts.
❖ Supply: The purchased items are supplied as per the terms that were agreed upon.
❖ Payment: After cross-verifying the purchase order, the supplier invoice, and the
goods delivered, the payment is made to the supplier.
❖ Record keeping: The company's records are updated with the accounting and
inventory information.
❖ Cost Efficiency:
➢ Cost Control: Obtaining materials and services at the lowest possible cost without
compromising on quality.
➢ Negotiating Prices: Effectively negotiating prices, terms, and conditions with
suppliers to achieve cost savings.
❖ Quality Assurance:
➢ High-Quality Standards: Ensuring that the materials and services purchased
meet the required quality standards and specifications.
➢ Supplier Quality Management: Working closely with suppliers to maintain and
improve the quality of their products and services.
❖ Risk Management:
➢ Identifying Risks: Recognizing potential risks in the supply chain, such as supplier
reliability, geopolitical issues, or market volatility.
➢ Mitigating Risks: Developing strategies to minimize the impact of these risks, such
as diversifying the supplier base or maintaining safety stock.
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