Independent vs. dependent demand: Learn the differences

The differences between independent and dependent demand

Independent demand is demand for a product that is not influenced by demand for other items.

An example of independent demand is a smartphone. A smartphone is built from other, smaller products and fully assembled into one finished product. The demand for a smartphone comes from a customer’s desire and ability to purchase it. It is not dependent on the demand for other products.

Meanwhile, dependent demand is the demand for a product that’s directly related to the demand for another product.

Examples of dependent demand are the demand for central processing units, semiconductors and RAM. These products are all used to build a larger finished product, such as a computer, smartphone or video game console. The demand for each item depends on the demand for the finished product.

Here are some of the differences between independent vs. dependent demand:

• Independent demand is more difficult to predict and forecast because it is driven by external factors, such as customer needs, economic conditions and market fluctuations. Dependent demand is more predictable because it is driven by internal factors, such as production plans.
• Independent demand is usually related to finished or completely assembled products, while dependent demand is usually related to raw materials and components.
• Independent demand is typically managed with broader forecasting techniques and predictive analytics, while dependent demand is usually managed with more granular tools, such as material requirements planning (MRP) systems.

Here’s a closer look at each type of demand.

What is independent demand?

Independent demand typically stems from direct orders from customers or forecasts that predict demand.

Independent demand forecasting is typically based on historical sales data, market surveys and pattern analyses, and it uses techniques like time-series forecasting, qualitative demand forecasting, predictive analytics and machine learning algorithms, and simulation modeling, among other techniques.

Independent demand can be influenced by a variety of external factors, such as seasonality and competitive factors, including customer preferences for one product over another. Other elements, such as economic and social conditions, can affect the demand for a finished product. These forces are often more difficult to control or predict.

Independent demand planning might lead to the ordering of safety stock, which can help mitigate risk and avoid stockouts, as well as the implementation of automatic stock replenishment. Regular market analysis, monitoring of customer purchasing trends and advanced forecasting methods can also help.

What is dependent demand?

Another example of dependent demand is the demand for a medicine bottle. This type of demand relies on the demand for the finished drug.

A bill of materials for the parent product -- in this case the medicine -- establishes the product structure and the dependent relationships between components such as the bottle cap and the finished product. An order coming in for the parent product will trigger an order for all the components needed to assemble the finished product.

The bill of materials is often integrated with and managed by MRP or ERP systems. These systems help manage dependent demand planning by ensuring that procurement of materials matches up with manufacturing timelines and production schedules.

Dependent demand is usually calculated using a bill of materials instead of historical data or market surveys. Forecasting is based on the demand for the finished product. Continuously tracking and monitoring raw materials stock might help minimize inventory costs.

Jacob Roundy is a freelance writer and editor specializing in a variety of technology topics, including data centers and sustainability.