Dependent demand refers to the demand for an item that is directly linked to the demand for another item or items. This usually occurs in a production environment where the demand for raw materials depends on the demand for the final product.
For instance, the demand for tires (dependent demand) on a car assembly line is directly linked to the demand for the finished cars (independent demand). If consumers demand 100 cars, and each car requires four tires, then there will be a dependent demand for 400 tires.
Similarly, in a restaurant, the demand for ingredients is dependent on the demand for the dishes on the menu. If a particular dish becomes more popular and its sales increase, the restaurant will need to purchase more of the ingredients needed for that dish.
Dependent demand contrasts with independent demand, where the demand for a product doesn’t depend on the demand for another product but is influenced by market conditions, customer preferences, and other external factors. Independent demand items are usually finished goods or service items sold to external customers.
Understanding the difference between dependent and independent demand is critical in inventory management and production planning. Products with dependent demand are often managed through a materials requirements planning (MRP) system, which schedules production based on the demand for final products. Products with independent demand, on the other hand, often require forecasting methods to predict future demand and determine inventory levels.
Example of Dependent Demand
Let’s consider a bicycle manufacturing company.
The company produces bicycles, and each bicycle requires:
- 1 frame
- 2 tires
- 2 pedals
- 1 seat
- 1 handlebar
Let’s say the demand for bicycles (independent demand) in the next month is projected to be 100 units. This independent demand for bicycles creates a dependent demand for the components needed to assemble them.
Given the requirements listed above for each bicycle, the dependent demand for each component would be:
- Frames: 100 (1 frame per bicycle x 100 bicycles)
- Tires: 200 (2 tires per bicycle x 100 bicycles)
- Pedals: 200 (2 pedals per bicycle x 100 bicycles)
- Seats: 100 (1 seat per bicycle x 100 bicycles)
- Handlebars: 100 (1 handlebar per bicycle x 100 bicycles)
So, the bicycle manufacturing company would need to plan for this dependent demand in their production and procurement processes to ensure they have enough components on hand to meet the demand for bicycles.
This dependent demand is typically managed through a process called Material Requirements Planning (MRP), which helps determine what materials are needed, how many are needed, and when they are needed in order to fulfill the projected demand for finished goods.