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Independent Versus Dependent Demand

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 amount 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 Figure 1-8. 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 1-8

Figure 1-8 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.

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