The topics of this article include:

  1. Types of needs
  2. Why determining the needs is so important
  3. How to calculate exactly what you need

What categories of needs exist?

Every ordering process begins with the determination of needs. In procurement, a distinction between principally three types of needs is made.  Primary needs include all end products, spare parts and finished component groups. Secondary needs comprise all components and component groups that are needed to make these end products. It does not make any difference whether these parts are made in house or have to be purchased. Tertiary needs are all supplies and operating resources as well as additives requires for the production of components or component groups. This also includes energy.

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Why is the determination of needs so important? 

Let's presume a company determines insufficient requirements. This may potentially lead to production downtimes, delivery problems or contractual penalties. And obviously, it may also impair the image of an enterprise.

If a company's determinations are excessive, on the other hand, this will lead to excess inventory. It the goods are perishable, such incorrect planning may cause the company to sustain a total loss of merchandise.

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How to properly determine your needs

Besides estimated (heuristic) planning of needs, companies tend to primarily focus on two processes to determine their needs: the program based (deterministic) needs analysis and the consumption (stochastic) oriented determination of needs. In some cases, the application of the process depends largely on the types of products or parts to be procured (A, B or C parts) and on the information the company has available about them.

Program oriented needs analysis

Fixed customer orders or the primary needs provide the basis for the program-oriented needs analysis. After all, if a company knows the level of its primary needs it is easy to determine the individual components or raw materials that are required for the production of these parts. If the company has determined its secondary needs, it may potentially also derive its tertiary needs from the former. However, this is only essential for goods that have to be purchased. Energy, for instance, is available as a tertiary needs in most companies already. If the company has determined all of its needs it only has to deduce the difference between the required goods and its inventory.

Program oriented needs analysis is the established standard in many enterprises. It is particularly important in contract manufacturing since it helps determine the exact secondary needs and thus minimises overhangs and bottlenecks.

Consumption oriented needs analysis

Unlike program-oriented needs analysis, consumption-oriented needs analysis uses the consumption values of past periods as the basis for its computation.  To that end, consumption-oriented needs analysis is based on the assumption that the future needs will develop along the same values as they did in the past.  Using statistical methods, timelines are generated and analysed for their impacting components. Frequently used statistical processes are for instance arithmetic and sliding median values, linear and non-linear regression analyses or 1st and 2nd degree exponential   equations.

Consumption oriented needs analysis is particularly helpful for the determination of tertiary needs. Hence, for additives and operating resources or wear and tear tools and play only a subordinate role because of their quantities and value. Consumption oriented needs analysis is also the better method if the complexities of program-oriented needs analysis are not on par with the benefits. This is for instance the case if only a small number of products is slated to be made.