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Inventory Management requires balancing of inventory levels. Inventory can be categorised into two types based on the demand pattern, Independent Demand and Dependent Demand (Juneja, 2019).
Independent demand is demand for a finished product, e.g. computer, a bicycle or a pizza.
Dependent demand is demand for components or sub-assemblies, e.g. microchips in the computer, the wheels on the bicycle, or the cheese on the pizza.
Both independent demand and dependent demand are important as for forecasting the quantities of items required. For example, if we can forecast the amount of automobiles we expect to sell, then we can derive the quantities of wheels, tyres, braking systems and other component parts that we need (InformIT, n.d.).
Therefore, we can also say that dependent demand quantity is dependent on the independent demand quantity. Managing a Raw Material Inventory is more complicated than managing a Finished Goods Inventory (Juneja, 2019).
An example of a company making tables from a top and four legs will be given in Figure 9B below, for the explanation of calculations:
Each top is made from a wood kit and hardware; the wood kit has four oak planks, side panels, and so on. Every item has a ‘level’ number where it fits into the process, and figures in brackets show the numbers needed to make each unit. The finished product is level 0; level 1 items are used directly to make the level 0 item, level 2 items are used to make the level 1 items, and so on.
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