The impact of technology on operations
Technology changes how a business produces and delivers. Automation and robotics replace repetitive manual tasks, raising output per worker and consistency while cutting labour cost, at the price of a large capital investment and reduced flexibility.
Before you start
Make sure you're comfortable with these topics first:
Method
- Name the specific technology in the case rather than talking about technology in general, and say what task it replaces or changes.
- Build the cost chain: the technology raises output or reduces errors, which lowers cost per unit, which allows a lower price or a higher margin.
- Always calculate where numbers are given. Productivity is output divided by number of workers, and unit cost is total cost divided by output; these are the two calculations that appear most often.
- Handle the people side directly. Redundancies carry redundancy pay, damage morale among those who remain, and may be resisted; retraining costs money and time but retains experience.
- Bring in the payback idea: a large fixed investment is only justified if the annual saving recovers it within a reasonable period, and say what would make the period too long.
- For a judgement, weigh the size of the investment against the stability of demand, because technology locks a business into one way of producing.
Worked example
Calder Packaging employs 20 workers producing 4,000 boxes a day at a total daily cost of 3,200 pounds. A machine costing 180,000 pounds would let 12 workers produce 6,000 boxes a day, cutting daily labour cost by 640 pounds while adding 100 pounds a day in running costs. Calculate the change in productivity and unit cost, and advise Calder.
- Find current productivity: 4,000 boxes / 20 workers = 200 boxes per worker per day.
- Find new productivity: 6,000 / 12 = 500 boxes per worker per day, an increase of 150 per cent.
- Find current unit cost: 3,200 / 4,000 = 0.80 pounds per box.
- Find new daily cost: 3,200 - 640 + 100 = 2,660 pounds, so the new unit cost is 2,660 / 6,000 = 0.443 pounds, about 44p per box.
- Find the payback. The daily saving in running terms is 640 - 100 = 540 pounds; over a 250 day working year that is 135,000 pounds, so the 180,000 pound machine pays for itself in about 1.3 years, ignoring the extra output.
- Add the qualifications that earn the higher marks: the 6,000 boxes a day are only worth having if Calder can sell 50 per cent more output, and eight workers face redundancy, which costs money and damages the morale of the twelve who stay.
- Advise: the investment is financially strong on a payback of under two years, but Calder should secure additional orders before committing, and should look at redeploying rather than dismissing staff to protect morale and retain experience.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define productivity and state the formula.Show answer
Answer: Output per unit of input, most often per worker. Productivity = total output / number of workers.
Q2A factory produces 9,600 units a week with 16 workers. Calculate output per worker.Show answer
Answer: 9,600 / 16 = 600 units per worker per week.
Q3Explain one benefit of computer aided design.Show answer
Answer: A product can be modelled and tested on screen before any material is used, so design faults are found and corrected at almost no cost instead of after prototypes or tooling have been paid for, which shortens development time.
Q4State two drawbacks of automating a production line.Show answer
Answer: Any two of: high initial capital cost, often requiring borrowing; job losses and the redundancy costs and morale damage that follow; reduced flexibility, since retooling for a different product is expensive; total dependence on the equipment, so a breakdown halts output.
Q5Explain how stock control software reduces costs.Show answer
Answer: It records stock levels in real time and reorders automatically at the right point, so the business holds less buffer stock, ties up less cash and wastes less through obsolescence, while still avoiding stockouts.
Q6Give one way e-commerce changes a small retailer's operations.Show answer
Answer: It removes the need for a physical shop in a high-rent location and allows selling nationally, but it creates new operational demands in picking, packing, delivery and handling returns, which the shop did not previously have.
Q7Why does technology investment need to be judged against demand rather than cost alone?Show answer
Answer: The saving per unit is only realised if the extra output is sold. A machine that doubles capacity in a business that cannot sell the extra units simply adds a large fixed cost, which raises unit cost rather than lowering it.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Thurso Textiles employs 30 machinists producing 7,500 garments a month with total monthly costs of 60,000 pounds. New automated cutting and sewing equipment costing 240,000 pounds would allow 18 machinists to produce 12,000 garments a month, reducing monthly costs to 54,000 pounds. (a) Calculate productivity per worker before and after. (b) Calculate unit cost before and after. (c) Analyse two factors Thurso should consider before investing.
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Evaluate whether a manufacturing business should always invest in the newest technology available.
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