Lets look at the hard topic...Money..

Posted by Joe Amick on February 1, 2022

When you look at automation one of the issues that comes up is money. Its the case with every aspect of life in some way and you have to be ready for it. You find a system you like and it will do the job so you are a bit excited to see an end to your problem process. Then you take it to the office only to have purchasing fall out of their chair. You have to look at the cost in context and not just as a number.

You could pound nails with a rock and why not its free? With an odd shape rock say you can manage 5 nails per min. With a real hammer say you can do 20 per min. If you spend $40 on a nice hammer you can finish pounding your nails 4 times faster. Now if you only have one job that requires nails it may not be worth it. But if you pound a lot of nails it will easily pay for itself in short order. Automation works much the same way.

I am going to use a fabricated metal box in a hypothetical example.I cant get into every detail or aspect here so this is going to be very loose and stick to the very most basic points. The goal is to give you the frame work of how to look at the costs and weigh your options.

Right now I produce 10 boxes a day. I have 2 people that grind the boxes and each produces 5 a day for my total of 10. I have more demand than 10 boxes a day so I hire 2 more people to do boxes. I will just skip the new hire getting up to speed part and say they each can do the same 5 as the current 2 people. Now I can produce 20 parts a day and have doubled my production. So I start to accept orders based on my 20 part volume I can produce. Well lets say the total cost per employee is $50 per hour for wages, insurance and other costs. This obviously can and will vary based on the area. $50 per hour times 4 people is $200 per hour to produce my finished boxes.

Now I have more demand for my boxes and it is a long term part for me. So I need more volume and I cant find 2 more people. Now I am looking at automation. I find a system that can produce 50 boxes a day but it is going to cost $500,000. Ouch is my first thought. Well it will make 250 boxes a week where I can only make 100 per week now. It will only need one person as well. If I look at 40 working weeks at 250 parts per week that is 10,000 boxes a year with one person on a single shift per day. If you look at the $500,000 buy in and the 10,000 parts a year it will cost me $50 per part for one year to pay for the machine. If you add a second shift you get double the volume and drop the per part cost.

To get the same 50 boxes per day I would need 10 people total as each can make 5 a day. At $50 per hour times 10 people labor would cost $500 per hour to make 50 boxes a day. 10 people x $50 per hour is $500 per hour, $500 per hour for the 40 working weeks used in this example is $800,000 in labor per year. Or I can spend $500,000 and be able to produce 50 boxes a day for the next 5 or 10 years with a single person.Short term the $500,000 is a lot of money but it would in this example save me $300,000 vs just bringing in more people in the first year. After that first year the machine is paid for and it is now making a higher profit per part and I still do not need 10 people at $800,000 a year in cost saving more.

Another way to look at it, If the people produce 5 each per day in an 8 hour day they need 1.5hr very round math to make a finished box. At $50 per hour for labor cost that is $75 per part. With the $500,000 system we estimated $50 per part for the same finished box. The machine will produce a box in 10 min more or less. So in that same 1.5 hours it takes a person to make 1 part the machine will produce more or less 9 parts.

I know this is very basic and is not touching all the points involved but my goal was to give you the basic frame work for looking at costs. The knee jerk reaction in my example to $500,000 would be no way that's just too expensive. Well to get the same volume throwing people at the problem is more expensive and far more problematic that is if you can get people in the first place. There is an initial cost to automation and an ROI of 12 or 24 months will carry a cost. Its the long term that you do not want to over look. After you have covered the cost of the machine you have years to come where its been paid for and is generating profit.

If I sell my boxes in this example for $500 each then the $50 it cost me to finish them is 10% of that. And if it takes 1.5 hr to finish one the odds are it sells for much more than $500 each. You need to look at the cost of automation in context. Its not just a single number and you need to look at the whole picture to see the details. This skips over many points such as the tax implications of equipment purchase and other factors. I would be happy to look at your more specific situation and look at some numbers if needed just let me know.

I hope this made sense and gave a basic idea on how to look at the cost of automation. The initial cost can be off putting in some cases but looking at the whole picture should help to put it in context. Automation brings capacity, speed, reliability and many other things while reducing the reliance on labor. But its not free and the cost to move into automation will need to be addressed.

Joe Amick