To bridge the gap between computer-aided process planning and computer-aided fixture design, an automated setup planning and tolerance decomposition method is developed in this research. Directed graph is extended to represent feature/ dimension/tolerance relationships (FTG) and datum/machining feature relationships (DMG). According to different production schemes and manufacturing resource capabilities, setup planning principles and algorithms are explored to automatically extract DMG from FTG. Under the true positioning frame (ANSI Y14.5), tolerance decomposition models are concluded to partition a tolerance into interoperable machining errors, such as locating error, tool alignment error, random process error. The setup plan with allowable locating tolerance specifications is the basis for fixture design. The proposed method is verified in a genuine manufacturing enterprise.