Independent demand inventory
Inventory items whose demand levels are beyond a company’s complete control.
Dependent demand inventory
Inventory items whose demand levels are tied directly to a company’s planned production of another item.
In general, independent demand inventory refers to inventory items whose demand levels are beyond a company’s complete control. Dependent demand inventory, on the other hand, refers to inventory items whose demand levels are tied directly to the company’s planned production of another item. Because the required quantities and timing of dependent demand inventory items can be predicted with great accuracy, they are under a company’s complete control.
A simple example of an independent demand inventory item is a kitchen table. While a furniture manufacturer may use forecasting models to predict the demand for kitchen tables and may try to use pricing and promotions to manipulate demand, the actual demand for kitchen tables is unpredictable. The fact is that customers determine the demand for these items, so fin-ished tables clearly fit the definition of independent demand inventory.
But what about the components that are used to make the tables, such as legs? Suppose that a manufacturer has decided to produce 500 tables five weeks from now. With this informa-tion, a manager can quickly calculate exactly how many legs will be needed:
500 * 4 legs per table = 2,000 legs
Furthermore, the manager can determine exactly when the legs will be needed, based on the company’s production schedule. Because the timing and quantity of the demand for table legs are completely predictable and under the manager’s total control, the legs fit the definition of dependent demand items. Dependent demand items require an entirely different approach to managing than do independent demand items. We discuss ways of managing dependent demand items in more depth in Chapter 12.
Three basic approaches are used to manage independent demand inventory items: periodic review systems, continuous review systems, and single-period inventory systems. We examine all three approaches in the following sections.