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Identifying the limiting factor

There are many steps to limiting factor analysis, but the first step is identification. Watch this video to learn more.

To identify the limiting factor, we first establish how much we have of each resource required. While it may look like there are multiple constraints to reaching optimum sales demand, there is usually only one.

As the Kaplan tutor explains in the video, there may be many things that are in short supply for an organisation. In the example, we have the following of each material:

resource units
sales demand 100
availability of material 95
availability of labour 98
operating capacity 150
cash 110

Now that we understand the resources available, we can then determine what the limiting factor is. The limiting factor in this example is the availability of material. We only have enough materials to produce 95 units, so even though we have the money, sales demand, operating capacity and availability of labour to produce more, we would run out of materials before then.

If you don’t know what the scarce resource is, you can work it out by multiplying the demand for each product by the resource it requires. For example, if the demand for a product is 100 units and you need 2kg materials per unit, you would find that you need 200kg of material for your product. Comparing this to what is available, you can figure out what the limiting factor is.

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