Question

Over the past few decades, the cost structure of manufacturing companies has shifted. In the early 1900s, direct material costs were substantial while fixed costs represented a small fraction of total manufacturing costs. However, the cost structure has reversed and now fixed costs make up the majority of total manufacturing costs.

What caused this to happen?

What would explain the drastic change in cost structure?

Which industries would be most affected by this change?

Answer 1

Previously, in the cost structure of the manufacturing companies, direct materials were substantial in the total manufacturing costs. However, now a day, fixed costs constitute major portion of the total manufacturing costs. It is because the manufacturing process is fully technology devloped, nowadays use of robotics has reduced labour costs drastically, termed as advanced manufacturing . Nowadays, manufacturing involves the use of technology to improve products and/or processes, with the relevant technology being described as "advanced," "innovative," or "cutting edge."which has reduced cost of production to produce the goods by reducing total labour costs and direct materials(Machine and technolgy when combines make effective utilisation of resources) ,which in turn has increased total volume of output as per economies of scale.

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger factory will produce power hand tools at a lower unit price, and a larger medical system will reduce cost per medical procedure.

Technolgy devlopment use of robotics is the main cause of drastic change in cost structure. As due to low cost of production, fixed costs represents a large fraction of total manufacturing costs.

Industries would be most affected by this change:

1).Manufucturing Industries

a).Petroleum Refining and Related Industry

b).Chemical and Allied Industry

c).Electronic and Electrical Equipment Industry:

d).Furniture and Fixtures Industry

e).Printing, Publishing, and Allied Industry

2). Banking Industry: Most of the processes are automated by the use of technolgy(Robotics, smartpro etc)

3). FMCG: Cost of production has reduced due to use of advanced machinery

4).Software Developers

5). Automobile Industries

Other examples of industries which has cause massive disruption due to technology devlopment:

• Travel websites such as Expedia (EXPE), Kayak, and Travelocity have eliminated the need for human travel agents.
• Tax software such as TurboTax has eliminated tens of thousands of jobs for tax accountants.
• Newspapers have seen their circulation numbers decline steadily, replaced by online media and blogs. Increasingly, computer software is actually writing news stories, especially local news and sporting event results.
• Language translation is becoming more and more accurate, reducing the need for human translators. The same goes for dictation and proof-reading.
• Secretaries, phone operators, and executive assistants are being replaced by enterprise software, automated telephone systems, and mobile apps.
• Online bookstores such as Amazon (AMZN) have forced brick-and-mortar booksellers to close their doors permanently. Additionally, the ability to self-publish and to distribute e-books is negatively affecting publishers and printers.
• Financial professionals such as stock brokers and advisors have lost some of their business to online trading websites like eTrade and robo-advisors like Betterment. Robinhood is a free online brokerage service that is subsequently stealing market share from traditional online brokers. Many banks are giving customers the ability to deposit checks via mobile apps or directly at ATMs, reducing the need for human bank tellers. Payment systems like Apple Pay and PayPal make even obtaining physical cash unnecessary.
• Job recruiters have been displaced by websites like LinkedIn (LNKD), Indeed.com, and Monster (MWW). Print classified ads have also been replaced by these sites, while sites like Craigslist have replaced other kinds of classifieds.
• Uber, Lyft, and other car-sharing apps are giving traditional taxi and livery companies a run for their money.
• Airbnb and HomeAway are doing the same for the hotel and motel industry.
• Driverless cars, such as those being developed by Google (GOOG), may prove to replace all sorts of driving jobs, including bus and truck drivers, taxi drivers, and chauffeurs.
• Drone technology may revolutionize the way products are delivered, and Amazon is trying to make that a reality. Drones may also replace pilots in a number of specializations including those pilots in the film, crop-dusting, traffic monitoring, and law enforcement sectors. For years, fighter pilots have been replaced by drones on numerous military missions.
• 3D printing is growing rapidly, and the technology is becoming better and faster. In a few years, it may be possible to manufacture a wide variety of goods on demand and at home. This will disrupt the manufacturing industry and diminish the importance of logistics and inventory management. Goods will no longer have to be transported overseas. Assembly line workers have already been largely displaced by industrial robots.
• Postal workers first saw bad news with the widespread use of email reducing the volume of everyday mail. High-tech mail sorting machines will eliminate even more jobs in the postal service.
• Fast food workers recently protested to raise the minimum wage. Fast food companies responded by investing in computerized kiosks which can take orders without the need for humans. Retail cashiers have also been displaced at supermarkets and big box stores with self-checkout lines. Toll-booth attendants have been replaced by systems like EZPass.
• Radio DJs are largely a thing of the past. Software now chooses most of the music played, inserts ads, and even reads the news.
• Educational sites such as Khan Academy and Udemy, as well as Massively Open Online Courses offered by leading universities for free, will greatly reduce the need for teachers and college professors over time. It is plausible that children today will receive their undergraduate education largely online and at very little cost.
• Traditional television distribution is being upended by digital distribution outlets such as NetFlix (NFLX) and Hulu. People are dropping their cable or satellite TV services opting to stream online instead. Spotify and iTunes have done the same for the recording industry: people now choose to download or stream on demand rather than buy records.
• Libraries and librarians are moving online. References like Wikipedia have replaced the multi-volume encyclopedia. Librarians used to help people find information and conduct research, but much of that can be done individually over the internet nowadays.
• Farmers and ranchers used to make up over 50% of the U.S. workforce. Today less than 2.5% are employed in this sector. Yet, more food than ever is being produced in America due to the automation in agriculture and food production
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