Analyzing Automation vs. Labor Cost.  by Gregg Lowney

The single largest recurring expense in most businesses is salary and payroll.  It is imperative that management at all levels, from sales to production, understand the cost relationships between capital equipment and human resources -- and how they interact.

We've all heard the anecdote comparing the productivity of 10 men with shovels versus one man with a backhoe.  The point of the story is to illustrate the leverage provided by investment capital.  What's missing is an analysis to determine the market, what throughput is required to realize a benefit, and how lowering cost and increasing demand will affect profit past the margin.  In many cases providing the proper tools to one worker will yield greater productivity than two or more workers -- at a lower cost, and with enhanced throughput capacity.

Let's examine the cost of a 'minimum wage' employee.  A full time employee earning $5.00 per hour will earn $200 per week.  At 4.3 weeks per month, the total monthly wages would be $860.  Assuming the employee is receiving no benefits other than what's required by law, I'll use a burden of 17% for payroll taxes and payroll service -- bringing the monthly total to $1,006.20 (860. x 1.17).

Using a factor of .032 for a 36 month lease, the monthly outlay for a minimum wage employee is the equivalent of a lease payment on $31,443 of equipment.  Using the same formula, an $8 hour employee translates to a $50,310 purchase over 36 months. 

These numbers are just a baseline.  They don't take into account that machines are available 24 hours a day, 7 days a week -- without holidays or vacations.  Equipment is an investment, and the purchase payment will go away while the investment keeps on paying returns.  Annual full service maintenance contracts are generally 10-15% of the purchase price, and are not required until the purchase warranty expires.

While good people are indispensable -- it's the right mix of skilled labor and good tools that build a business.  It's worth keeping in mind the next time you delay a purchase or increase the payroll.

SheetWise specializes in providing an analysis of automation options and the impact they will have on your bottom line -- as well as integration plans to minimize any interruption of your business.