Low Cost Labour Vs Automation

Just imagine the situation where the manager or the supervisor doesn’t have to negotiate with the union over wages. Instead, he can just order the robot to perform the tasks. No questions asked. As per the supervisor’s wish. This is exactly what is going to happen in the future in most of the manufacturing industries as a result of automation in businesses. The debate between the need for automation and the availability of low cost labour has been going on for a very long time. Most of the people arguing against automation cite the social and economic impact of rapid job displacement as a reason. But at the same time, these people fail to see the cost required for employing labour and the fact that every economy in the world is facing a declining talent pool (skilled people eligible for employment).

If you look at our country, the rise of service sector in India’s GDP is mainly attributed to our country’s large pool of highly skilled, low cost workforce. Foreign multi-national companies are outsourcing their work to India especially in the fields of business process outsourcing and information technology services. The offshore outsourcing of IT increased because of the cost of offshore labour. This labour cost has been a powerful lure for foreign customers, but many expect this labour cost advantage to diminish in future. With rising technological advancements and rising labour costs, search for cheaper labour elsewhere will be a thing of the past. Offshoring will thus possess lesser competitive advantage in the future.

IT service firms are shifting to automation, cloud, Internet of Things etc. And it’s not just the IT services, the arrival of automation has spread to almost all industries across the world. According to an International Business Report by Grant Thornton in 2015, a survey of more than 2500 executives across 36 countries, 56% of the firms are either automating processes or plan to do so over the next 12 months.

The need to ensure productivity in every department is what drives the companies to go for automation. The businesses are now encountering situations where the capital costs are low while the labour costs are increasing, increasing the clamour for automation.

In the field of manufacturing, automation has played a significant role. Automation has enabled companies to produce goods at lower costs by employing economies of scale. Automation can also lead to shorter lead times, and more efficient use of inventory and thereby, cash flow. German automotive giant Volkswagen has observed that by automating the German factories, they are achieving higher cost savings than moving the manufacturing unit to China.

Till date, the most significant contribution of automation in India has been observed in the field of supply chain and warehousing. Butler, an orange robot, developed by GreyOrange, India’s largest warehouse robotics startup, helps online retailers and logistics firms cut delivery time and cost. GreyOrange has Flipkart, DTDC, online furniture portal Pepperfry and Delhivery as its clients. These robots (as shown below) can also sort around 1.2 crore packets a month and they even have the potential to replace 60-80 % of the warehouse workforce.

These robots are questioning the very need for low cost labour as it is evident to the companies that in the long run, the one-time investment required for the robot is much smaller in comparison to the high monthly wages demanded by each worker.

Courier parcel service DTDC Express Ltd. is using the GreyOrange Sorter since 2014. After deploying Sorter, DTDC has been able to bring down the time required, to send a parcel from its hub, from 6-7 hours to 90 minutes. This was made possible by reducing the number of human interactions involved while transmitting the parcel. This reduction in human touch points not only increased the speed of transfer but also reduced the number of human prone errors.

Technical feasibility is the necessary precondition for implementing any kind of automation. It has been estimated that 59 percent of activities performed in manufacturing sector involves operations in a predictable environment and thus could be automated, given the technical considerations. But the remaining 41 percent of activities still requires complete or partial manual intervention. This characteristic varies across industries. Service sector, for example, is the top most readily automatable industry in any economy. Almost 79 percent of activities in service sector are in a predictable environment and hence, could be readily automated.

It is very evident that most of the economies are shifting towards automation owing to the rapid rise in technology and internet. But the economies/countries which will be severely affected by this shift will be the ones that focus on rudimentary, low-skilled routine work relying on labour arbitrage without associating the human sentiments to it. This was bound to happen since the labour costs were increasing over the years and the cost of machines were gradually decreasing owing to the technological innovations. So, in the long run, the cost of machines (robots) will only come down, giving the organizations/companies another reason for implementing automation in their businesses.

On the other hand, if firms adopt the low-cost labour strategy, the workers will end up doing the repetitive work daily. These jobs may not possess immediate risk, but the growth opportunities provided to the workers will be far and few. This can, in a way, make the workers unproductive causing the firms to look for other alternatives.

All the evidences suggest that the developed economies would be less affected because of this shift to automation since these countries can support the high-end automation processes with a highly skilled workforce and an advanced technological environment.

The important question right now will be where and how to unlock value, given the cost of replacing human labour with machines. The majority of the benefits may not arise out of reducing labour costs but from the need to increase productivity by limiting errors and improved quality and speed