Independent demand is the demand for a finished product, which is being ordered by an outside party. It is difficult to predict independent demand, since it is subject to the vagaries of customer needs, which in turn may be influenced by such factors as general economic conditions, changes in fashion, and even the weather. Thus, the predicted arrival of thunderstorms may trigger a spike in the demand for umbrellas, while a decline in economic conditions might drive people to buy low-cost ramen noodles in higher volumes.

Dependent demand is the demand for component parts, raw materials, or sub-assemblies. This demand does not occur until there is demand for a parent item, which is typically a product. For example, when a manufacturing company is producing electric golf carts, dependent demand consists of the production processes to construct the tires, motor, seats, steering wheel, controls, and chassis of however many golf carts are scheduled for production. Thus, if 100 golf carts are scheduled for production, the associated dependent demand includes 400 tires and 100 motors. In this case, the dependent demand for electric motors is based on a known factor, which is the number of golf carts to be manufactured. This allows the procurement department to reliably place orders with suppliers for 400 tires and 100 motors.

Another way to understand inventory is to separate it into two broad categories: dependent and independent demand. Understanding this difference is important as the entire inventory policy for an item is based on this. Independent demand is demand for a finished product, such as a computer, a bicycle, or a pizza. Dependent demand, on the other hand, is demand for component parts or subassemblies. For example, this would be the microchips in the computer, the wheels on the bicycle, or the cheese on the pizza.

The two inventory systems we discussed are used to determine order quantities for independent demand. But how do we compute quantities for dependent demand? Quantities for dependent demand are derived from independent demand, which we call the “parent.” For example, we can forecast the number of automobiles we expect to sell, then we can derive the quantities needed of wheels, tires, braking systems, and other component parts. For example, if a company plans to produce 200 cars in a day, it would need 800 wheels, 400 windshield wipers, and 200 braking systems. The number of wheels, windshield wipers, braking systems, and other component parts is dependent upon the quantity of the independent demand item from which it is derived.

The relationship between independent and dependent demand is depicted in a bill of materials (BOM), a type of visual diagram that shows the relationship between quantities. An example is shown in fig.. Item A is the independent demand item. All the other items are dependent on demand. The quantities that go into the final item are shown in parentheses. Notice that two units of C are combined with one unit of B to make the final product. Similarly, two units of D and one unit of E are combined to make one unit of B.

Dependent demand order quantities are computed using a system called material requirements planning (MRP), which considers not only the quantities of each of the component parts needed but also the lead times needed to produce and receive the items. For example, 20 units of A means that 20 units of B are needed, as are 40 units of C; similarly, 40 units of D and 20 units of E are needed. However, the system must also take into account differences in lead times, as receiving D may have a different lead-time than receiving E. This means that the orders should be placed at different times. This system can also be tied to costs of goods and can link internal and external members of the supply chain.

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