Automation and its Impact on Cost Structure

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By: Jegan Venkatasamy -- Senior Analyst, Cost Modeling

26 November, 2019

automation-and-its-impact-on-cost-structure
ARTICLE

automation-and-its-impact-on-cost-structure

Abstract

Automation refers to the creation and application of technology to monitor and control the production and delivery of products and services.  It is not new to the world.  It has been in place for years but the level of automation was low.  With the technological improvements in robotics and artificial intelligence, the robots are able to do much complex work than a simple task of handling materials.  Due to the introduction of automation, cost of production would decrease and the cost structure of products across various industries will change significantly.  It would enable high cost countries to compete with countries like China.  It also has adverse effects on the economy and puts pressure on labour wages.

Benefits of Automation

If implemented properly, the benefits of automations are:

  • Lower labor cost due – Based on the level of automation, from material handling, inspection to supervision would decrease the labor cost significantly

  • Lower raw material cost – An automated production line would eliminate material wastages, thus lowering total raw material cost

  • Higher accuracy – The automated machines are highly accurate, it could do intricate details and complex work on metals, plastics, etc.  It is also precise and can do the job repeatedly

  • Efficient production line – The production lines are more efficient due to zero idle time and short changeover time.

  • Availability of real time data – This is one of the exclusive benefits of automation.   The process data in every stage is recorded with the help of a centralized system.  It could be used to improve the process and throughput

Cons of Automation

  • Capital investment – It requires significant capital investment to design, develop & implement an automated production line or a plant

  • Loss of Jobs – Since, the machines replace huge number of jobs than they create specialized jobs.  The job losses would decrease the purchasing power of the people where they could spend lesser and create a serious problem for the economy

  • More Pollution – A standard automated machine will run on a motor, consuming more consumables like fuels, chemicals, gases  & electricity

Impact on Cost Structure

Let’s see how automation could impact the cost structure in a low cost country like China or India and much more expensive country like United States or Germany.

Typically, the production lines in low cost countries like China are either semi-automated or highly manual process.   Due to availability of cheap labour, the companies don't find any economic value to invest in an automated process.  But the trade tariffs and protectionism around the world will force these companies to automate their production process to be competitive in the market.

cost-structure-manual-process-automated-process-china

For an instance, in the production of rigid plastic containers in China the manual production process requires around 80 workers whereas an automated plant would require only ~15-20 workers.  In China, the major impact of automation will be in labor cost followed by indirect cost.  The increase in indirect cost is mainly due to the additional investment on automation, depreciation cost, training cost & maintenance cost.  The raw material cost would decrease due to lesser wastage of materials used during production.  The utility would increase by ~0.5-1% of total production cost due to the additional electricity consumption of automated production line.

ost-structure-manual-process-automated-process-germany

In high cost countries like Germany and the USA, the cost benefits of automation will be more substantial than low cost countries like China and India.  It is mainly due to the labour cost, the average hourly labor cost in Germany ($30/hour) is ~8.2 times the labour cost in China ($ 3.65/hour).  Hence, the major impact of automation will be in labor cost followed by indirect cost.  The cost structure of an automated German plant will be similar to the semi-automated plant in China.  Thus the manufacturers in Germany and USA will be able to compete against the low cost manufacturers.

Conclusion

With the help of automation, the high cost countries could easily compete with the low cost countries like China, India, Indonesia & Vietnam even with high labour wages.  In order to survive and offset the  tariffs, the Asian and other low cost manufacturers will be forced to automate their production lines with additional capital investment

  • The automation economy is extremely labor and capital efficient.  It will certainly bring down cost of a product or a service and increase profit margins of various industries.  It also could decrease the value of human work as workers compete with robots for jobs.  The loss of jobs when transitioning from a traditional economy to automation economy could create a multiplier effect.  Hence high level of automation could affect the world economy negatively

References

  1. Automation Makes Things Cheaper, So Why Doesn’t It Feel That Way? - William H. Davidow, https://hbr.org/2017/04/automation-makes-things-cheaper-so-why-doesnt-it-feel-that-way
  2. Cost Structure – Beroe Analysis & Cost Model
  3. Why does Automation Enable a Factory to Reduce Production Costs? - https://www.granta-automation.co.uk/news/why-does-automation-enable-a-factory-to-reduce-production-costs/
  4. Advantages of Automation - https://www.robots.com/articles/advantages-of-automation
  5. Automation, robotics, and the factory of the future - Jonathan Tilley
  6. The International Society of Automation - https://www.isa.org/about-isa/what-is-automation/

 

 

 




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