The Automation Decision
A furniture workshop makes 25 timber stools per week by hand, selling at $180 each. A robotic sanding and assembly cell costs $210,000, would raise output to 120 per week, and cut labour per stool from 90 minutes to 25 minutes. However, the market study suggests demand at the current price is only about 60 per week, and reaching 120 would require cutting the price to $140, which the study says might lift demand to 110 per week. The owner has $90,000 in savings and would need a loan for the rest. Two staff would be retrained and one role would disappear. The owner asks whether to buy the cell now.
1. Analyse whether the automation investment is justified, using the demand and cost figures.
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Key insight: capacity is not demand. The cell can make 120 per week, but the market will not absorb that at the current price.
Scenario at current price: demand is about 60 per week. The cell would run at half capacity, so the capital cost is spread over fewer units than planned. Revenue rises from 25 × $180 = $4,500 to 60 × $180 = $10,800 per week, but the $210,000 debt must be serviced from that margin.
Scenario at reduced price: 110 × $140 = $15,400 per week revenue, higher than the current-price case. But the price cut of $40 per stool reduces margin per unit, and the demand figure is a study estimate, not a commitment.
Risk factors: the loan is $120,000 against $90,000 savings, so the owner is highly leveraged on an unproven demand forecast. Losing a role affects morale and skill base. The 25-to-60 jump assumes the market responds as predicted.
Judgement: the investment is not justified now on these numbers alone. A staged approach is defensible: secure firm orders or pre-commitments for 60+ per week first, then buy. The decision hinges on demand certainty, not on the cell's technical capability.
2. The owner says 'automation always pays for itself eventually'. Evaluate this claim and identify what evidence would change your recommendation.
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Evaluating the claim: 'eventually' hides the assumptions. Automation pays back when (a) volume is high enough to spread the capital cost, (b) labour savings exceed loan servicing and maintenance, and (c) demand exists to use the capacity. Here (c) is the weak link: the machine can make 120 but the market may take 60.
Rough payback logic: labour falls from 90 to 25 minutes per stool, saving about 65 minutes per unit. At 60 units per week that is about 65 hours of labour saved weekly. Whether that covers a $210,000 loan depends on the wage rate and loan terms, which the owner must calculate explicitly rather than assume.
Evidence that would change the recommendation:
- Signed orders or contracts for 80+ stools per week at $180.
- A confirmed price elasticity showing 110+ units sell at $140 without further cuts.
- A shorter payback period, e.g. a smaller or leased cell at lower capital cost.
- Grants or low-interest finance reducing the loan burden.
Conclusion: the claim is a hope, not an analysis. Automation is a tool whose value depends on demand, finance terms, and utilisation. With firm demand evidence, the recommendation flips to 'buy'.