Dependent demand occurs when the demand for one item determines the demand for another. Manufacturers must understand this relationship to efficiently produce and purchase materials, unlike the order point method. Overestimating or underestimating demand can lead to wasted resources and hinder production.
A dependent demand occurs when the demand and production level for one item, known as the parent item, determines the demand for another item, known as the child item. For example, as the need for packaging material for a given product depends on the production level of the product itself, the packaging material is a child item with a dependent demand and the product itself is a parent item with an independent demand. Manufacturers who produce a product with a dependent demand often base production levels and material purchases on the anticipated demand or production level of the parent item.
Most products in the manufacturing industry are child items, with demand based on production levels of just a few parent items. As demand for parent items increases, demand for a child item can increase or decrease in response. To calculate the required production level and required materials for a child item, the manufacturer must determine the nature of its relationship to the parent item. As the need for the parent item changes, the manufacturer must use the relationship between the two products to change the production and purchase of materials for the child item in a process called material requirements planning.
Prior to the development of material requirements planning, manufacturers did not base production and purchasing on demand for a particular product. Instead, manufacturers used the order point method, which was a purchasing method that required the manufacturer to keep a minimum supply of a certain material on hand at all times. Whenever the amount of available material reached its low point, the manufacturer would order more. However, this method was not responsible for changing consumer needs, so it rarely resulted in accurate purchasing or production practices.
Understanding dependent demand is essential for efficient production and maximum profit. If a manufacturer overestimates the demand for a child item, it could waste materials, time, and money producing a product that consumers won’t buy. On the other hand, if the manufacturer underestimates the need for a child item, that manufacturer will not produce enough of the child item to meet the consumer’s needs. Also, because some parent items cannot function without a child item, underproduction of a child item can inhibit production or distribution of the parent item.
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