This article discusses the term gross requirements and all the questions that arise about it. Read on to find out more about the topic and develop a clear concept about it.
What is the gross requirement?
Gross requirements are the total of independent and dependent demand for a component before the netting of on-hand inventory and scheduled receipts.
The total requirement for raw materials, other components, and subassemblies required to produce a certain item is termed as the gross requirements.
It is an additive feature of both the dependent and independent demands. It takes into account both the availability of dependent demands and independent demands.
Dependent demand is that of the processed or unprocessed items through the production line, and independent demands are that faced by the ultimate finished product guided by external market factors.
How is it evaluated?
Even before netting the on-hand inventory or subtracting the demands based on the scheduled receipts, we calculate and fix the gross requirements.
It is the minimum amount of inventory required to keep the firm running smoothly. It does not consider the availability of raw materials in the inventory or any predetermined evaluation of scheduled receipts.
The total amount of input of a thermal plant can be termed as its gross requirement. It will be measured in amounts of tons of coal required at the end of each periodic productive cycle.
The total amount of flour required to produce, say 40 pieces of bread at a roadside food joint would be its gross requirement. This is done without considering the leftover materials from the previous month, or any orders placed beforehand that are scheduled to arrive.
Why is it essential to figure out?
A firm needs to figure out its gross requirements capacity before it starts operating. It is the amount of raw material at which the firm can function at its full potential.
Thus, the amount of on-hand inventory and other inventories based on rising demands can be easily calculated based on the gross amount required.
Costs based on storage can be cut down if a company has a clear idea of the gross amount required to function. This gives an idea of the on-hand inventory required to avoid running a risk of huge loss due to loss of demand.
Similarly, due to loss of supply, a firm can lose out customers, if it is not stocked sufficiently for the future.
Characteristics of Gross Requirements
- The gross requirement does not vary from day to day or even within two periodic productive cycles.
- Gross material meaning for a firm is the position it holds over the market it captures. The higher the demand is, among the customers, the more is the gross requirement of the company.
- The gross requirement can be increased by improving the facility, performing units, production units, and also demand for the finished product. This is where Materials requirement planning (MRP) can be implemented.
What is net requirement?
Net requirements are requirements for a product based on its gross requirements minus on-hand stock and scheduled receipt.
The difference between a gross requirement and a net requirement is as follows.
A net requirement plan adjusts for on-hand inventory and scheduled receipt at each level, whereas a gross requirement plan is a plan that shows the total demand for a product and it also shows when production should start to meet its requirements.
Most manufacturing industries are all about maintaining the balance between the gross and net requirements, also keeping in mind the on-hand inventories and scheduled receipts.
Striking the balance is very important, and is the key to a thriving industry.