Business leaders need to carefully evaluate their operations to find the optimal mix of resources for producing goods and services. A new production equation proposed in the article provides a straightforward method to analyze different combinations of resources. The equation factors human labor, machine equipment, raw materials, processed materials, land usage, and other costs. By calculating different scenarios using the production equation, business managers can compare the costs and productivity of each resource mix.
The article introduces three theoretical operating scenarios as reference points when evaluating the labor force: All-Human Labor Force, All-Machine Equipment Force, and Mix Labor-Equipment Force. An All-Human Labor Force relies solely on human workers with no automation. An All-Machine Equipment Force removes all human workers and fully automates operations. A Mix Labor-Equipment Force combines human labor and machines, with the mix percentage based on an organization’s specific resources and needs.
These scenarios serve as guideposts, not necessarily recommended options. The optimal mix likely falls somewhere between full human and full automation. The production equation gives analytical insight to determine the right balance.
For decades, economists have used the Cobb-Douglas production function to analyze economic output. It calculates production based on labor and capital inputs. But it has limitations when applied to individual organizations. The equation favors labor over capital, despite technology’s growing role. It also lacks detail on types of capital.
The proposed production equation overcomes these limitations. It disaggregates capital into machine equipment, raw materials, processed materials, and land. Each input is multiplied by its cost per unit to determine total cost contribution. Additional costs are also incorporated. Analyzing the costs and productivities of different inputs under different scenarios reveals the ideal resource configuration.
The article provides examples calculating total revenue, total cost, net revenue, cost per unit of output, and output per unit of input. Comparisons identify which resource mix minimizes costs and maximizes productivity. The production equation can optimize operations for specific organizations or calculate production at the national economic level.
In addition to guiding resource allocation, the three labor force scenarios prompt important workforce questions as automation advances. While humans still have capabilities unmatched by machines, AI and robotics are rapidly enabling full automation in some industries. Companies need to strategically manage this technology shift and its labor impacts.
The scenarios serve as thought experiments as leaders contemplate future strategies. Will the optimal mix in 10 or 20 years contain mostly machines alongside a smaller human workforce? Or will other factors maintain the value of human skills despite technological abilities? How will productivity compare? How might new technologies change concepts of human vs machine capabilities?
Leaders will increasingly run these scenarios with real data as automation expands. The production equation will provide the analysis to determine the best path forward. Companies balancing productivity aims and workforce obligations will find guidance in the equation’s neutral, data-driven approach.
As with past economic shifts, the right human-machine balance should emerge if analyzed logically. The production equation outlined in the article offers an insightful new tool for organizations navigating the automation age. With careful study of costs, productivities and scenarios, business leaders can chart optimal strategies benefitting their operations, workers and customers.
