Chapter 1: The Operations Function Learning Activity: Is your great idea worth it? Activity: You and your team came up with a plan to automate the very time-consuming process of manual welding by using robotic welders. First, compute how this would increase productivity Productivity Tip: To calculate the productivity,"we need to divide the output, over all of our investment (all labor + capital). Like seen in the formula below! output Productivity Year 1 120 s 32 S 45 S $ Output (sales, in Smillion) S Labor (payroll, in Smillion) $ Capital (expenses, in Smillion) $ One-time capital investment (Smillion) S Year 2 160 26 65 10 Annual Inflation 2.50% 3.2096 2.5096 2.5096 capital + labor Productivity Year 1 = Inflation Tip: When we are projected into the future, it is best to "adjust for inflation." You do this by taking the projection in question and multiplying it by (1-inflation). Productivity Year 2=1 Vinote: adjusted for inflation in NPV) Change in Productivity Tip: Change in productivity has us look at what (if any) change do we see year over year. As this is a %, we should subtract the next year, from the previous year, then divide that by the previous year. That way we can see the change, as a %. next year - previous year Change in Productivity previous year Change in Productivity = Example: Year 2 value of $150, with 2.50% inflation. Would be: 150 x (1-0.025) = 146.25. This reflects the inflation adjusted = Next, using just the first year benefits (no amortization/depreciation), what is the ROI for this investment? ROI Based on these results, is this project a good idea or not? ROI Tip: The Rol is the Return on Investment. Your formula will look at values in the Year 1, Year 2 and Annual Inflation columns. When answering the question if this project is a good idea or not, remember that a value of greater than 1, implies you do make money on your investment (i.e. you have a positive ROI). Example For a fim with the following labor and output numbers, calculate the rate of labor productivity change assuming annual labor Inflation of 3 percent and annual output (sales) inflation of 2 percent. Output (sales) Smillion Labor (payroll) Smillion Year 1 $56.7 $23.4 Year 2 $64.8 $ $26.6 Annual Info 2% 3% Output year 1 56.7 Labor productivity year 1 Labor year 1234 -2.42 Labor productivity year 2-Dofoted output year2_64.80.98) = 2.46 Deflated labor year 2 26.64.97) 2.46 Change in productivity - 242 - 1.016 which is a 1.6% increase 1016 % Notice, both the output and input in year 2 have been adjusted for inflation between year 1 and year 2. The productivity increase achieved by operations and supply chain managers in one year is 16 percent