Dependent Demand (Secondary Requirements)
Dependent demand is the requirement for raw materials, individual parts and assemblies that is calculated from the primary demand for finished, sellable products. The ERP or MRP system determines it by exploding the bill of materials – answering which components are needed in what quantity to build the planned end products.
Dependent demand is the requirement for raw materials, individual parts and assemblies that a company needs in order to produce its primary demand – the planned quantity of finished, sellable products. Unlike primary demand, dependent demand is not planned directly or dictated by the market but calculated from it. To do so, the ERP or MRP system explodes the bill of materials of each end product and multiplies the component quantities stored there by the planned product quantity. "Produce 100 bicycles" thus becomes, among other things, "200 wheels, 100 frames, 100 handlebars" – that is the dependent demand.
This puts dependent demand at the heart of material requirements planning. It answers the question of which intermediate products must be available in what quantity and at what date so that production can run without missing parts. It is the starting point for procurement and in-house manufacturing: only once the dependent demand has been determined and adjusted for existing stock and open orders do concrete purchase requisitions and production orders arise from it.
At a glance
- Requirement for raw materials, parts and assemblies for production
- Derived from primary demand via the bill of materials
- Calculation: product quantity × component quantity per BOM
- Basis for purchase requisitions and production orders
- Core concept of material requirements planning (MRP/PPS)
What is dependent demand? Distinction from primary and tertiary demand
Requirements planning distinguishes three types of demand by their origin. Primary demand covers the sellable end products, spare parts and merchandise – that is, everything the company actually wants to sell on the market. It is the starting point and is derived from customer orders and sales forecasts. Dependent demand covers all intermediate products required to manufacture this primary demand: raw materials, individual parts and assemblies. It is not estimated but calculated deterministically from the primary demand.
Tertiary demand, finally, refers to auxiliary and operating materials that go into production but are not a direct part of the product or hardly count in terms of quantity – lubricants, adhesive tape, welding wire, cleaning agents. Exact BOM calculation usually is not worthwhile for them; they are managed on a consumption-driven basis. The rule of thumb: primary demand is what you sell, dependent demand is what goes directly into it, tertiary demand is what you consume while manufacturing.
How dependent demand is determined
Dependent demand is calculated by exploding the bill of materials, also known as gross dependent-demand calculation. For each end product there is a manufacturing bill of materials listing which components go into one unit of the product and in what quantity. Multiplying these quantities by the primary demand yields the gross dependent demand per component. For multi-level products this process continues across several levels: an assembly is itself composed of parts whose requirement results from the assembly quantity.
The gross requirement determined in this way is not yet a procurement quantity. In the next step the system subtracts existing stock on hand, safety stock and quantities already ordered or in production. What remains is the net dependent demand – the quantity that actually still needs to be procured or manufactured. This net calculation is the true core of any material requirements planning and prevents material that is already in stock from being ordered twice.
Deterministic versus stochastic determination
Dependent demand can be determined in two ways. Deterministic (program-driven) determination derives it exactly from the primary demand and the bill of materials – the precise but data-intensive standard method for high-value A parts. Stochastic (consumption-driven) determination, by contrast, estimates the requirement from historical values and consumption statistics without exploding the bill of materials. It is used for low-value C parts with high volumes where the computational effort of exact explosion does not justify the benefit. Many companies combine both methods depending on the item.
Why dependent demand matters for procurement
Dependent demand is the link between sales planning and procurement. Without it, purchasing would not know which input materials are needed in what quantity and at what date to service the production orders. Correctly determined dependent demand ensures that parts are available on time without unnecessarily tying up capital in excessive stock. It is thus the prerequisite for lean but supply-capable materials management.
Incorrect dependent demand has an immediate impact on production. If it is set too low or determined too late, missing parts and line stoppages occur; if it is too high, stock and warehousing costs grow. Because dependent demand is also scheduled – each component must be available at the right time – it is also the basis of scheduling: using replenishment and throughput times, the system calculates backwards from the requirement date to the order and production start dates.
Dependent demand in the ERP and MRP system
In the ERP system, determining dependent demand is at the core of the MRP run (Material Requirements Planning). The MRP run pulls the primary demand from customer orders and forecasts, explodes the bills of materials, offsets stock and open orders and generates purchase requisitions for externally sourced parts as well as production orders for in-house manufactured parts. The prerequisite is a clean data basis: well-maintained bills of materials, correct stock levels and up-to-date replenishment times in the material master. Errors in this master data propagate directly into the dependent demand.
In simpler inventory management systems without full production control, dependent demand is often only resolved implicitly when a production order is confirmed or when set items are sold. Full-fledged PPS and MRP II systems, by contrast, plan dependent demand across several planning levels and also integrate capacity planning. For trading companies without in-house manufacturing, classic dependent demand plays hardly any role – here, consumption-driven replenishment of merchandise dominates.
Role of lot sizes and safety stock
Ordering or manufacturing does not necessarily happen one-to-one from the net dependent demand. The system applies lot-sizing methods: it groups requirements into economic order or production lots, takes minimum order quantities into account and rounds up to packaging sizes. In addition, a safety stock holds a buffer for demand fluctuations and delivery delays. Dependent demand thus supplies the required quantity, while lot-size and stock parameters determine which quantity is actually procured or manufactured from it.
Gross and net dependent demand at a glance
In practice, the distinction between gross and net dependent demand is decisive. Gross dependent demand is the pure calculation result of the BOM explosion – the theoretically required total quantity of a component for the planned primary demand, regardless of existing stock. It answers the question: "How much material in total goes into what we want to produce?"
Net dependent demand subtracts the available stock, reserved quantities, safety stock and open receipts from this. It answers the actually action-relevant question: "How much of it do we still need to procure or manufacture in addition?" Only the net requirement leads to purchase requisitions and production orders. Anyone who confuses the two terms either plans too much – because existing stock is ignored – or loses track of the actual material content of their production planning.
Example
Example: manufacturer of office chairs
A medium-sized furniture manufacturer plans a primary demand of 500 office chairs of a particular model for the coming month. The manufacturing bill of materials records that each chair needs, among other things, 1 seat shell, 5 castors, 1 gas spring and 1 base. During the MRP run the ERP system explodes this bill of materials and calculates the gross dependent demand: 500 seat shells, 2,500 castors, 500 gas springs and 500 bases.
The system then offsets the stock levels. Of the castors, 800 units are still in stock and 400 are already on order, resulting in a net dependent demand of 1,300 castors. Because the supplier only delivers in packs of 500 units, the system rounds up and generates a purchase requisition for 1,500 castors – scheduled for an order day that accounts for the replenishment time of ten days, so that the castors are available in time for the start of assembly. For the seat shells, which the company manufactures itself, a production order is created instead.
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