# Market-Oriented Procurement Planning Leading to a Higher Service Level and Cost Optimization
## 3 Design of the Conceptual and Simulation Models
### Procurement Planning  
Procurement planning takes care of the procurement initiation and the selection of the order quantity and lot size. In the different procurement policies, the two parameters, order quantity and order frequency, can be variable or constant [47] as shown in Table 5. If the four characteristics of the two parameters, order size and order frequency, are combined, there are four different procurement ordering strategies [48]. In the reorder-point-method, the inventory level is checked after each stock movement to control if the remaining inventory is below the reorder-point, s. If this is the case, then an order is placed [41]. \begin{table}
\begin{tabular}{c c c} \hline \hline
**No.** & **Replenishment Method** & **Stock for Procurement Order Release** \\ \hline \multirow{2}{*}{1} & \multirow{2}{*}{Reorder point} & \(s_{(t)}=\overline{RT}\times\overline{F_{(t)}}+k\times\sqrt{\overline{RT} \times o_{(D,t)}^{2}+F_{(t)}^{2}\times o_{(RT,t)}^{2}}\ +\) \\  & & _Backlogs_ \\ \hline \multirow{2}{*}{2} & \multirow{2}{*}{EOQ} & Stock level at t, when weeks between last \\  & & order release \\ \cline{1-1}  & & equals weeks between the last procurement order \\ \hline \hline \end{tabular}
\end{table} 
Table 4: Stock for procurement order release (own elaboration). \begin{table}
\begin{tabular}{c c c} \hline \hline
**No.** & **Replenishment Method** & **Formula for Safety Stock** \\ \hline \multirow{4}{*}{1} & \multirow{4}{*}{Reorder point} & \(SS_{(t)}=f\ (RT,SL,\ forecast\ failure)\) \\  & & \(=k\times\sqrt{\overline{RT}\times o_{(D,t)}^{2}+F_{(t)}^{2}\times o_{(RT,t)}^{ 2}}\) \\  & & \(+Backlogs\) \\ \hline
2 & EOQ & \(SS_{(t)}=0\) \\ \hline \hline \end{tabular}
\end{table} 
Table 3: Safety stock calculation (own elaboration). S = Target stockA third method called control-rhythm comes from another combination of the parameters. These are (t, s, q)- and (t, s, S)-policies [43] in which the stock is periodically controlled, each t periods, and if the stock level is below the reorder-point, s, then a new order is placed. A fourth procurement initiation method is a demand-related-method when the future demand is known based on real orders. In the conceptual model, it is assumed that real orders are not known, or the uncertainty about them is high; thereby, the model is based on the stochastic analysis. In inventory planning, the inventory replenishment times and size are often revised depending on the real demand leading to changes for the rest of the planning horizon as a planning instability or so-called system nervousness [7]. The (s, S)-policy was shown to be cost-optimal in both stationary and non-stationary demand cases [7] although other authors, such as [PERSON] and [PERSON] [49] questioned the performance of this policy in the stationary demand case based on a third criterion, with regard to a defined service level, which is the level of planning stability [7]. The calculation of the procurement order quantity pursues the goal of defining a cost-optimized procurement quantity considering the demand forecast [42]. As a basis, we considered two main types of procurement order quantities, constant, q, and variable, depending on the target level, S, as shown in Table 6:  
* Constant order quantity (q): The most used, in practice, is the classical economic order quantity (EOQ) with the Andler-Harris formula for the optimal batch size. The optimal batch size is always calculated for a certain period, in this case, for a year [46]. The economic order quantity (EOQ) that has been considered also takes care of the back-ordered units, finding the optimal quantity to order between four components: the cost per unit, the procurement cost per order, the inventory holding cost, and the backlog penalty cost [50]. This order quantity strategy can be applied with a dynamic calculation each period or with a discrete calculation valid for a period, such as a year.