# Market-Oriented Procurement Planning Leading to a Higher Service Level and Cost Optimization
## 3 Design of the Conceptual and Simulation Models  
### Conceptual Model Development Based on System Theory and Statistics  
The conceptual model developed is based on:  
* [PERSON] [36]: \"The quantitative study of the operation is made by statistical analysis of operational data to predict the outcome of similar conditions\". Therefore, random data series are created for demand based on the demand values of past periods by reproducing \"similar conditions\". Then, based on this generated demand, a prediction of the future forecast uncertainty or error is obtained for various forecast proposals. The forecast proposals are calculated using different forecasting methods. Finally, based on criteria, such as the forecast uncertainty, the conceptual model decides whether to change to another forecasting method in order to reduce risk due to the existing or future uncertainty. * System theory and cybernetics: from the historical development point of view, cybernetics can be considered as part of the system theory. Both sciences deal essentially with the same subject, so they can be difficult to separate from each other. However, the focus of system theory is on the development of systems, whereas cybernetics explores the control and operation of systems [37]. In this context, cybernetics is used as a basis for the conceptual model, as shown in Figure 1. In the beginning, based on a set of goals defined by the observer as an interactive agent, a forecasting method is selected. Then, the forecast of future demand is the input for the inventory and procurement planning. Later, the results are obtained, and, by comparing them with the goals, a self-optimization is performed by deciding to maintain or change the forecasting method, the inventory safety factors, and the order release point as well as the procurement policy to be applied. Finally, by doing so, the system converges to a defined set of goals with a feedback control loop each period or planning period. * System dynamics (SD): This is a natural modeling tool for inventory planning due to its nature that focuses on stocks and flows [3]. It is applied to simulating the conceptual model. SD is a rigorous method for the qualitative description of exploring supply chains. It facilitates modeling and qualitative simulation analysis to design and control the supply chain structure [22]. SD can, should, and will be further used to improve supply chain management practice [28]. The market-oriented procurement planning model was named based on market-oriented organizations that have the following characteristics [39]:  
1. Put the customer first. 2. Generate, analyze, and respond to market changes. 3. The capability to use resources efficiently to produce premium customer value. This approach requires transparency and data sharing between actors in the supply chain to improve the customer service level while minimizing inventory management costs. The conceptual model is based on the following Figure 2. Demand planning depends on historical data and on the forecasting methods available and the one selected to be used. With the difference between real and forecast values, the forecast error is obtained. Based on the forecast values and the forecast error, the safety factor, k and the order release date for procurement orders are set for a defined service level. The procurement policy is determined based on the inputs from demand planning and inventory planning when considering the current delivery backlogs and the selected procurement policy. The procurement policy is selected as influenced by the type of product and the type and stage of the product lifecycle. Finally, procurement planning using a defined policy initiates the procurement of products by placing procurement orders. When the products arrive, the inventory management conceptual model finishes and repeats continuously. Figure 1: Cybernetics model for a market-oriented procurement (own elaboration based on [38] (p. 751)).