Chapter 3: Limiting Factor Analysis
Optimising production plans when resources are scarce.
About this Lecture
What happens when you have high demand but limited materials or labour? In this chapter, we explore Key Factor Analysis. You will learn why prioritising the product with the highest profit per unit is often a mistake, and how to use the "Contribution per Unit of Limiting Factor" to maximise total profit.
Study Guide Highlights
1. The Golden Rule
When resources are scarce, you must prioritise the product that generates the highest Contribution per Unit of the Scarce Resource (not just per unit of product!).
2. The 5-Step Decision Process
- Identify the Limiting Factor: Calculate what you need vs what you have.
- Calculate Contribution: Find the Contribution per unit for each product.
- Calculate Specific Contribution: Divide contribution by the usage of the scarce resource (e.g., £ per kg or £ per hour).
- Rank the Products: Priority 1 goes to the highest specific contribution.
- Allocate Resources: Fulfill demand for Rank 1, then Rank 2, until the resource runs out.
3. Exam Tips
Always start by proving there is a shortage. Compare Total Required Resources against Total Available Resources.
Remember: You can't produce more than the maximum demand for any product, no matter how profitable it is!
Chapter Resources
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