Independent and Dependent Demand

Independent and Dependent Demand: A Comprehensive Guide for CPIM Exam Success

Introduction

Understanding the distinction between independent and dependent demand is one of the most foundational concepts in supply chain and production management. It serves as the backbone of demand planning, inventory management, and materials requirements planning (MRP). For anyone preparing for the CPIM (Certified in Planning and Inventory Management) exam, mastering this concept is absolutely essential, as it connects to numerous other topics throughout the certification body of knowledge.

Why Is This Concept Important?

The distinction between independent and dependent demand determines how organizations plan, forecast, and replenish inventory. Choosing the wrong planning approach for a given type of demand leads to either excess inventory (driving up carrying costs) or stockouts (resulting in lost sales or production delays). Here is why this matters:

1. Drives the correct planning methodology: Independent demand items are managed through forecasting and reorder point systems, while dependent demand items are managed through MRP. Using the wrong method leads to poor performance.

2. Impacts inventory investment: Independent demand items typically require safety stock because demand is uncertain. Dependent demand items, when properly planned through MRP, can theoretically operate with little to no safety stock because their demand is calculated, not forecasted.

3. Affects customer service levels: Proper classification ensures the right items are available at the right time, whether for end customers or for internal production processes.

4. Foundation for MRP logic: The entire MRP system is built on the principle that once you know the independent demand (from forecasts or customer orders), you can calculate the dependent demand for all lower-level components.

5. Connects to master production scheduling (MPS): The MPS deals with independent demand items, while MRP explodes that schedule into dependent demand requirements for components and raw materials.

What Is Independent Demand?

Independent demand is demand for an item that is not related to or derived from the demand for another item. It originates from external sources, primarily from customers in the marketplace. Because it comes from outside the organization, independent demand must be forecasted.

Key characteristics of independent demand:

• Driven by market forces, customer preferences, seasonality, economic conditions, and other external factors
• Uncertain and variable in nature
• Typically applies to finished goods and service parts
• Managed using forecasting techniques (qualitative and quantitative)
• Replenished using statistical inventory methods such as reorder point (ROP), periodic review systems, and min-max systems
• Requires safety stock to buffer against forecast error and demand variability
• Planned at the Master Production Schedule (MPS) level

Examples of independent demand items:

• A finished bicycle sold to consumers
• Replacement brake pads sold as service/spare parts
• A laptop computer sold through retail channels
• Any end item or product sold directly to an external customer

What Is Dependent Demand?

Dependent demand is demand for an item that is directly derived from or linked to the demand for another item, typically a parent item or finished good. Because it is derived, dependent demand can be calculated rather than forecasted.

Key characteristics of dependent demand:

• Derived from the demand for a parent item through the bill of materials (BOM)
• Can be calculated precisely once the parent item's demand is known
• Typically applies to components, subassemblies, raw materials, and work-in-process items
• Managed using Material Requirements Planning (MRP)
• Demand is lumpy (intermittent) rather than smooth, because it is driven by production lot sizes and schedules
• Theoretically requires less or no safety stock because demand is calculated (though in practice, some safety stock or safety lead time may be used to account for supply uncertainties)
• Timing of need is determined by lead time offsetting in MRP

Examples of dependent demand items:

• Tires needed to assemble a bicycle (dependent on bicycle production schedule)
• A motherboard required to build a laptop computer
• Flour needed to produce a batch of bread
• Screws, bolts, and other fasteners used in an assembly

How Does It Work? The Relationship Between Independent and Dependent Demand

The relationship flows in a top-down manner through the product structure (bill of materials):

1. Forecasting independent demand: The organization forecasts demand for its finished goods (independent demand items). This forecast, combined with actual customer orders, feeds into the demand plan.

2. Master Production Scheduling (MPS): The demand plan is translated into a master production schedule, which specifies what finished goods to produce, how many, and when.

3. BOM explosion: MRP takes the MPS and explodes it through the bill of materials to determine the dependent demand for every component, subassembly, and raw material.

4. Netting: MRP nets out existing inventory and scheduled receipts from the gross dependent demand requirements to calculate net requirements.

5. Lead time offsetting: MRP offsets the net requirements by the lead time to determine when orders need to be placed (planned order releases).

6. Lot sizing: Planned orders are adjusted according to lot-sizing rules (lot-for-lot, EOQ, POQ, etc.).

Example Walkthrough:

Imagine a company produces wooden tables. Each table requires 1 tabletop and 4 legs.

• The demand for tables is independent — it comes from customers and must be forecasted. Suppose the forecast is 100 tables per week.
• The demand for tabletops is dependent — it is calculated: 100 tables × 1 tabletop = 100 tabletops needed.
• The demand for legs is dependent — it is calculated: 100 tables × 4 legs = 400 legs needed.
• MRP will determine when to order the tabletops and legs based on their respective lead times, ensuring they arrive just in time for production.

Items That Can Have Both Independent and Dependent Demand

This is a critical concept for the CPIM exam. Some items can have both independent and dependent demand simultaneously. The classic example is a service part or spare part.

Consider a brake pad:
• It has dependent demand when it is used as a component in assembling new bicycles (derived from the bicycle production schedule).
• It has independent demand when it is sold separately as a replacement/spare part directly to customers or repair shops.

When an item has both types of demand, the total demand is the sum of both the dependent (calculated) and independent (forecasted) demand. MRP systems allow for the inclusion of independent demand at lower levels of the BOM to account for this.

Planning Methods Summary

Independent Demand:
• Planning tool: Forecasting + MPS
• Replenishment: Reorder Point (ROP), Periodic Review, Min-Max
• Safety stock: Typically required
• Demand pattern: Continuous, relatively smooth (though can be seasonal or trending)

Dependent Demand:
• Planning tool: MRP
• Replenishment: Time-phased order planning based on BOM explosion
• Safety stock: Theoretically not required (but may be used in practice for supply uncertainty)
• Demand pattern: Lumpy, discrete, intermittent

Common Misconceptions to Avoid

1. "Dependent demand items never need safety stock." — While theoretically true, in practice, organizations may carry safety stock or use safety lead time for dependent demand items to protect against supplier variability, quality issues, or yield losses.

2. "Only finished goods have independent demand." — Service parts and spare parts at any level of the BOM can have independent demand.

3. "You should forecast dependent demand." — This is incorrect and is a key exam trap. Dependent demand should be calculated through MRP, not forecasted. Forecasting dependent demand leads to inaccurate planning, inflated inventories, and the so-called "lumpy demand" problem.

4. "Independent and dependent demand are mutually exclusive categories for an item." — An item can have both types of demand simultaneously.

Exam Tips: Answering Questions on Independent and Dependent Demand

Here are targeted strategies for tackling CPIM exam questions on this topic:

Tip 1: Know the Definitions Cold
The exam frequently tests whether you can correctly identify independent vs. dependent demand. Remember: Independent = external, forecasted, not derived from another item. Dependent = internal, calculated, derived from a parent item's demand through the BOM.

Tip 2: Associate the Correct Planning Method with Each Type
If a question asks about the best way to plan for a component used in manufacturing, the answer is almost always MRP (dependent demand → MRP). If the question is about a finished good sold to customers, think forecasting and MPS.

Tip 3: Watch for the "Both" Scenario
The exam loves to test the concept that an item can have both independent and dependent demand. If a question describes a part that is both used in production and sold as a spare part, recognize that it has both types of demand and total demand = forecasted independent demand + calculated dependent demand.

Tip 4: Remember the Safety Stock Distinction
Questions may ask about safety stock policy for different types of demand. Independent demand items typically carry safety stock to buffer against forecast error. Dependent demand items ideally do not require safety stock if MRP is functioning well, though real-world exceptions exist.

Tip 5: Understand Why Forecasting Dependent Demand Is Wrong
A common distractor answer will suggest forecasting components. Remember: forecasting dependent demand introduces unnecessary error. Since you know the parent item's schedule, you should calculate component needs, not guess them.

Tip 6: Connect to the Demand Pattern
Independent demand tends to be relatively continuous and can follow patterns (trend, seasonal, cyclical). Dependent demand is typically lumpy — it occurs in discrete batches tied to production schedules. If a question describes lumpy demand for a component, this reinforces that it is dependent and should be managed by MRP, not by a reorder point system.

Tip 7: Link to the Broader Planning Hierarchy
Understand how independent and dependent demand fit within the manufacturing planning and control (MPC) system: Strategic Business Plan → Sales and Operations Planning (S&OP) → Master Production Schedule (MPS — handles independent demand) → Material Requirements Planning (MRP — handles dependent demand) → Production Activity Control / Purchasing.

Tip 8: Use Process of Elimination
When unsure, eliminate answers that:
• Suggest forecasting component parts (wrong method for dependent demand)
• Suggest using reorder point for manufactured subassemblies in a make-to-order environment (should use MRP)
• Confuse the source of demand (external = independent, internal/derived = dependent)

Tip 9: Pay Attention to Keywords
Exam questions will use specific keywords to signal the type of demand:
• "Customer orders," "market demand," "forecasted," "end items," "finished goods" → Independent demand
• "Components," "subassemblies," "raw materials," "derived from," "calculated," "BOM," "parent item" → Dependent demand

Tip 10: Practice with Scenarios
The CPIM exam is scenario-based. Practice by reading real-world descriptions and identifying whether the demand described is independent, dependent, or both. The more scenarios you work through, the more instinctive your identification will become.

Summary Table for Quick Review

Independent Demand:
• Source: External (customers, market)
• Nature: Uncertain, must be forecasted
• Items: Finished goods, service/spare parts
• Planning Tool: Forecasting, MPS, ROP systems
• Safety Stock: Yes, typically required
• Demand Pattern: Continuous, can follow trends/seasonality

Dependent Demand:
• Source: Internal (derived from parent item via BOM)
• Nature: Calculable, determined by MRP
• Items: Components, subassemblies, raw materials
• Planning Tool: MRP
• Safety Stock: Theoretically not needed (but may be used in practice)
• Demand Pattern: Lumpy, discrete, intermittent

Conclusion

The independent vs. dependent demand distinction is far more than an academic exercise — it is the organizing principle behind modern production and inventory management systems. By understanding this concept deeply, you not only prepare yourself to answer CPIM exam questions with confidence but also build a foundation for understanding MPS, MRP, inventory management, capacity planning, and the entire manufacturing planning and control framework. Master this concept first, and many other CPIM topics will fall into place naturally.