INDEPENDENT VS DEPENDENT DEMAND INVENTORY SYSTEMS – An EXAMPLE: Inventory Management Models : A Tutorial
An Example of Independent vs Dependent Demand Inventory Systems
Inventory items can be divided into two main types: Independent demand and dependent demand items. The systems for managing these two types if inventory differ significantly.
A pharmaceutical firm offers a new drug:
|The firm can try to predict demand for the drug, or even try to manipulate demand through pricing incentives and other marketing efforts, BUT…|
…ultimately, demand is determined by the marketplace.
- An item whose demand is:
- Tied directly to the demand or production level of another item
Dependent demand items, and the systems for managing them, are usually most relevant to manufacturers
- Suppose the pharmaceutical firm decides to manufacture 15,000 bottles of the new drug every other week based on a forecast of the independent demand.
- Based on this, the firm knows exactly how many bottles and caps are needed and when because the demand for these items is dependent on the production schedule of 15,000 bottles every other week.
- The bottles and caps are dependent demand items because
- 1) the firm controls their demand through the production schedule, and
- 2) their demand is tied to the production of finished bottles.
- An item has independent demand when we can’t control it or tie it directly to another item’s demand
- An item has dependent demand when the demand for an item is controlled directly, or tied to the production of something else.
- Independent demand and dependent demand items require very different solutions.
In the remainder of this section, we will discuss two classic independent demand systems.