How to Reduce Direct Labor With Capital Investment

by Walter Johnson

Reducing direct labor costs through capital investment is a much longer substitute for the term automation. The industrial revolution, among many other things, promised that the direct labor, that is, the work actually applied to raw materials to create usable products, will drastically decrease. Other forms of labor, however, such as design and maintenance, would increase. Automation is the process, one of very long standing, of replacing human direct labor with machines.

1. Analyze the nature of the manufacturing plant and its product. What you are looking for are areas where direct labor is used inefficiently. Certain kinds of simple, repetitive tasks can be more efficiently accomplished by machines. This not only increases the efficiency of the production line, but it also frees up labor for more rewarding and interesting tasks. Although automation will make those laborers redundant, those jobs are in many cases dull, repetitive and unrewarding.

2. Conduct a present value (PV) test. PV is a set of mathematical ideas designed to, among many other things, analyze the nature of capital investment in automation. A simple example would be to analyze the actual cost of new machines versus the benefits that they will later provide. PV is far more than cost-benefit analysis, but it comes down to the same bottom line. The question is how long would a machine take to pay for itself, and then produce profit. A PV test would analyze the value the machine will add to the process, its speed and costs of maintenance and lost jobs. Technically, the PV test will see how long a machine will take to render its actual cost as $0.

3. Think in terms of integration. When dealing with manufacturing, the real issue is how to connect research, design, planning, manufacturing and supplies into a single production planning system. Such an integrative approach to production will drastically cut production costs and direct labor costs. On the other hand, reducing the cost of direct labor is not the same as reducing labor costs as a whole. These integrated computer systems require a highly skilled labor force that is much different from the shop workers who have now been put out of a job. In some ways, given the skill level of those who will run and maintain the machinery, labor costs, at least in the short run, might rise. In this case, leasing the technology might be the better bet, because then the firm that manufactures it will then be in charge of maintaining it.

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