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The Hidden Costs of NOT Automating

In every economic cycle, businesses are always faced with the same questions: what are our next critical investments? When will we see demand rise? How are we going to get the best possible workforce in place while still making a profit? Are there any strategic threats to our business as a whole?

The fact is, the process of growing an industrial business can seem predictable to many. Analysts, investors and even managers and engineers themselves will often chalk up the development of industrial firms to three key factors: overall demand, the price of inputs like labor and materials, and new processes or technology that amplify competitiveness and profitability.

Many industries, however, tend to drop the third one unless the process they adopt is truly revolutionary. For the first two factors, they’re often considered easy, predictable and following along general trends. New technology, on the other hand, is often treated as a wild card, and companies often have a difficult time assessing what role they play in a company’s success. The uncertainty that comes in this kind of forecasting has the unfortunate effect of discouraging manufacturers from pursuing automation projects that otherwise might generate a great return.

COVID-19 has driven companies to focus their automation efforts on production, quality assurance and process control – investments that represent the core value-adds of their business. In competitive markets over the next 5 years, this kind of focus could leave marginal or flat-footed manufacturers behind. Source: ThomasNet.

While managing risk is essential, it’s important to understand what exactly makes technology a profit-driver at any given point in the industrial cycle. To that point, technology isn’t here to replace labor, but to amplify its productivity. At the same time, materials savings through increased labor efficiency can reduce your exposure to fluctuations in materials costs. With the same cyclical effects in mind, automation can serve to provide flexibility according to varying levels of demand, increasing broad profitability and competitiveness – particularly when prices are low. 

In all cases, automation can play a servant, not a master. By extension, it can also form the core of a business that uses the right type of ingenuity to drive consistent growth. 

Amplifying Labor Productivity

It’s a common misconception that automation replaces labor. A facile way to look at things is that more jobs have been created – with far less inequality – since the beginning of the Industrial Revolution compared to even the number of human beings that existed before it occurred.

A more complex way to look at it is that it isn’t automation that displaces labor, but ultimately economic downturns. Labor can grow and have power according to the need for it and the output it provides. When prices rise, when there are fewer customers, or when things simply slow down, there is after all that simply less work to do. Any system where workers earn wages – whatever the protections afforded to them – doesn’t sustain if it forces firms to keep on more than they need. At the same time, if this labor doesn’t have the tools it needs to be sufficiently productive, there will be no jobs to do in the first place.

Ultimately, it’s the downturn that replaces labor, and the introduction of automation that actually creates jobs through decreased costs, increased prices, increased demands and finally the growth that helps jobs get better. Historically speaking, much of the surplus in industrial labor has come from people moving away from farms – not because of rising agricultural productivity, but ultimately because the price of food itself falls. The effect is commonly understood, but the cause of action itself – disruption in the labor market – is always misunderstood.

In this circumstance, it’s important to think of how automation can augment existing labor and enhance its productivity. In the olden days, a factory manager may have noticed that repetitive jobs for 12 hours daily would become less productive as the day went on. Ultimately, if the number of parts processed could justify automation, machines and robots would ultimately step in. In fact, the very first robot was designed to do a hard job – pull fresh parts out of a powerful, dangerous diecast machine. Increasing the efficiency of this process could create more productivity elsewhere in a production line, not just creating more jobs, but also more equality among them.

Statistics Canada has further identified a trend here. While we commonly attribute stagnation in industrial jobs to automation, globally there are more industrial jobs (paying higher wages) than ever before. Much of this has been transferred out of the United States due to trade policy, while the result of new global markets has been to create more jobs globally than have ever existed before. To that point, a study by Statistics Canada has shown that firms who use robotics – when controlling for other factors over a 20 year study – end up employing 15% more people than those who don’t. At the same time, those workers have more freedom, autonomy and equality among them in setting and achieving their goals. 

None of this tells you what automation projects to invest in, but they do signal two important things: automation isn’t what puts people out of work, and automation that augments the productivity of your existing workforce will ultimately grow your business in the long run. Not to read too much into it, but you could say it’s possible that not using robots over the course of time will give you 15% less business. Not a precise science, but food for thought nonetheless. 

Saving on Materials

While augmenting labor productivity is essential to growing a business, many of the cost overruns that industrial firms experience center on rework and wasted materials. 

After falling at a record pace earlier in 2020, materials costs are soaring again. Taken in a global perspective, there are more jobs, more workers, more consumption and more competition for the same goods and materials used to make them. Rising prices here are what ultimately force a downcycle and compromise growth. Where industrial businesses are unable to manage materials costs, economies almost inevitably go into recession.

Unfortunately, this is most dangerous to industrial firms themselves. The shorter an economic cycle is, the more any firm in a capital-intensive sector is likely to face a loss on its investment. Rising materials costs mean waste is an essential factor in avoiding this. In fact, industrial materials costs have been at a systemic high point since the Great Recession of 2008-2009.

On an indexed basis, global materials costs have been higher than 100 for almost the entirety of data available since 2008, while the 90s and early 2000s saw materials as a fundamental enabler to manufacturing growth. Source: The International Monetary Fund.

It’s not just scarcity that produces this, but also rising environmental concerns and the regulations to accompany them. While traditional arguments hold that any regulation inherently adds costs to a business model, the concept of “induced innovation” has gained popularity

In this framework, forcing industrial firms to work within new constraints or without certain hazardous materials ends up triggering a variety of innovations that ultimately achieve higher levels of efficiency and profitability. While this is a rosy picture, the clear positives of it are that technology-driven innovation can cut short any potential avenues for long term materials waste. This inherently adds a certain degree of flexibility to a business, but beyond dispelling the idea that environmental regulation adds costs, it’s important to understand that they are most likely to happen anyway.

A majority of Americans, for instance, now believe that the government should do more to protect the environment. This is broadly the case in North America and Western Europe, but is also increasingly popular in key areas across the globe: Eastern Europe, China and Southeast Asia. Environmental, Social and Governance (ESG) goals are viewed as a greater priority by the investment community, including some of the world’s largest investment funds.

Automation initiatives like those in robotics are already known to generate consumables savings of 20%, 30% or more. In this circumstance, automation can get ahead of “induced innovation”, but ultimately serves the greatest benefit of reducing materials costs per unit sold. If that can amount to 20 or 30% in materials savings, how much do you think you might be leaving on the table?

Being Flexible According to Demand

Finally, the ultimate benefit of effective automation – at any point in the industrial cycle – is the fact that increased productivity and decreased waste ultimately reduce incremental costs to produce new units. That means that as long as the fixed costs of a product are justified for even a short run (i.e. less than one year) economic improvement, you’re basically prepared to address all the demand that’s going to come in at the top of the cycle – before, of course, profits and sales will drop again at the next cyclical turn. 

A basic illustration of the profitability possible relative to revenues when taking only fixed or variable costs into accounts. Source: The Corporate Finance Institute.

Now, you don’t need any old MBA to tell you the benefit of low fixed costs. However, the challenge to understand is this: in order to keep a facility online, you do ultimately need a certain number of workers, a certain amount of materials (primarily in the form of energy) and a certain level of machine capacity. At the same time, you may have fixed financial costs based on bonds, loans or other payments that must be consolidated before any drop in the economic cycle takes place.

Thus, in your fixed machine capacity, you need to find automation solutions that reduce fixed labor and energy costs. Without this kind of approach, you’ll never be hedged against the very downturns which create the hesitancy to invest in automation in the first place. Fundamentally, any automation that reduces consumables waste (i.e. increases process efficiency) will ultimately drop your energy costs on a fixed and variable basis. 

Automation that augments workers – e.g. assistive or programmable machine functions – will reduce variable labor costs. However, autonomous solutions – those which reduce operating activities to simple automated instructions – can reduce your fixed labor costs altogether while allowing you to create more jobs (with less training required) as the business cycle improves.

Here, again, it’s important to understand – reducing fixed labor costs only reduces jobs in a downturn. In fact, it can increase total jobs in the aggregate because you can then afford to hire more workers when demand is high – hence when variable costs can be most efficiently absorbed. Obviously the goal of any industrial firm is to meet its corporate goals, but for those that are often family run or have built important relationships in their communities, the value of being seen as a trusted job creator when times are good cannot be underestimated.

Unit Labor Cost has been on a runaway rise in the United States since 2008-09. Fundamentally, higher unit labor costs means less jobs and less flexibility in that work overall, which can ultimately only be solved with labor-augmenting automation. Source: The Federal Reserve:

And herein lies the last rub: if you don’t decrease your fixed costs, you ultimately collect fewer profits at the top of a business cycle as much as you may face risks at the bottom. What does this amount to? Well fixed costs in many industrial firms can form 30-40% of total costs at the top of a cycle, so a reduction here of even 10% can make a material contribution to profits while still reducing overall risk to the business.

Industrial Automation Is About Autonomy

For industrial firms, automation can sometimes consume more energy than it requires. For high-mix manufacturers, this applies most of all – the variation of parts and the time required to program automation solutions will often significantly hamper return on investment. 

In this circumstance, however, autonomous manufacturing solutions offer new possibilities to manufacturing firms to reduce total costs and finally benefit from flexible automation solutions. If you add up increases in labor productivity, consumables savings, and the total cost savings that come on both fixed and variable costs, it’s hard to see where an autonomous manufacturing solution won’t simply be table stakes for many industrial firms in the future. 

With AutonomyOS™ and AutonomyStudio™, it’s never been easier to deploy an autonomous robotic system. Using 3D Perception with AI-based Task Planning and Motion Planning, manufacturing engineers and integrators can configure autonomous robotic systems for value-added processes that allow manufacturers to achieve more consistency and flexibility in production than ever before.

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