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A dependent demand occurs when the demand and production level of one item, known as the parent item, determines the demand for another item, known as the child item. For example, because the need for a given product's packaging material 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 that produce a product with a dependent demand typically 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 a demand based on the production levels of only a few parent items. As the demand for a parent items increases, the demand for a child item might either increase or decrease in response. To calculate the necessary production level and required materials for a child item, the manufacturer must determine the nature of its relationship with the parent item. As the need for the parent item changes, the manufacturer must use the relationship between the two products to alter production and the purchasing of materials for the child item in a process called material requirements planning.
Before the development of material requirements planning, manufacturers didn't base production and purchasing on the demand of a given product. Instead, manufacturers used the order point method, which was a method of purchasing that required the manufacturer to keep a minimum supply of a given material on hand at all times. Whenever the quantity of available material reached its low point, the manufacturer would place an order for more. This method didn't account for the changing needs of consumers, however, 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, that manufacturer might waste materials, time and money on the production of a product that consumers won't purchase. On the other hand, if the manufacturer underestimates the need for a child item, that manufacturer not produce enough of the child item to meet consumer needs. Furthermore, because some parent items can't function without a child item, the underproduction of a child item might inhibit the production or distribution of the parent item.