The financial justification for automation with labor constraints now has an additional component: contribution margin. Historically, automation investments have been primarily justified by reducing people. Retiring baby boomers and COVID-19 have created labor shortages. Here’s the new math:
Automation is a broad term for any technology that reduces human input. While the terminology may be relatively new (believed to be circa 1940’s from the auto industry), the concept is hundreds of years old. Water powered spinning mills from the late 1700’s are early examples. In today’s world, automation is everywhere from the robots that weld cars to the ERP systems that manage supply chains.
Labor savings have been the primary driver for automation. Other benefits can also be considered: safety, quality, scrap, energy, and more recently, flexibility. Return on investment (ROI) is determined by dividing total savings by the cost of the project. If the ROI is sufficient, the automation investment can move forward.
But what if you can’t find enough people?
In a client’s foundry, I noticed robots are now de-flashing large castings. This is hot, dirty, nasty work that few want any part of. There was significant turnover and the operation was always undermanned. While labor savings alone could not justify the automation, lost contribution margin from production shortfalls more than made up the difference.
This suggests a new ROI math for automation with labor constraints.
Add lost contribution margin to the numerator in the ROI calculation. How much money are you not making because you can’t find enough people? If labor is limiting output, then lost contribution margin is a quantifiable benefit of an automation investment.
This new ROI math is not just for manufacturing. It also applies to business processes like the sales funnel. That CRM module may not save many heads today, but will it allow the company to grow without adding hard to find sales professionals tomorrow?
A word of caution. The new automation ROI math is somewhat subjective and, therefore, the possibility of mischief exists. Labor must truly be a long-term constraint limiting output. Other options to attract and retain employees (wages, benefits, working conditions) must be considered.
An understanding of constraints is essential. Goldratt’s The Goal is the definitive primer on systemic thinking and Theory of Constraints. This new math is a logical extension of the Goldratt 5-Step throughput improvement model when the availability of labor is the constraint.
Consider hard automation as first step. Simple examples of hard automation are all around us. In manufacturing, these include tables with multiple drilling fixtures and conveyors or slides between operations. That Excel macro generating the monthly sales report is another example of hard automation.
So that’s the new math. Adding lost contribution margin to your ROI calculation is the key to finding the best automation projects and growing your business in a labor constrained world.