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?
For example, if a company plans to produce cars in a day, it would need wheels, windshield wipers, and 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 Figure Item A is the independent demand item. All the other items are dependent 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. Figure A bill of materials BOM. 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. I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.
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Inventories for items under independent demand are managed through supply chain management and sales order processes, while the demand for raw materials to manufacture the finished goods is managed through Material Planning Process, or Enterprise Resource Planning systems.
It is very complicated to manage Inventories of raw materials compared to managing inventories of finished goods because managing Raw Materials Inventories involves coordinating lead times, delivery schedules of raw material supplies, delivery times and managing complex logistics.
Transporting and warehousing raw materials before they are needed for production is also challenging, as are periodic reviews and audit of inventory levels, as analyses of reports are important for management decisions. The relationship between dependent and independent demand is usually illustrated through a Bill of Materials. Raw material management also involves periodic review of the inventory holding, inventory counting and audits, followed by detailed analysis of the reports leading to financial and management decisions.
Inventory planners who are responsible for planning, managing and controlling Raw Material inventories have to answer two fundamental questions, which can also be termed as two basic inventory decisions. Answering the above two questions will call for a lot of back end work and analysis involving inventory classifications and EOQ determination coupled with Cost analysis.
These decisions are always taken in co ordination with procurement, logistics and finance departments. View All Articles. Similar Articles Under - Inventory Management. To Know more, click on About Us.
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