The Tesla inventory management system and Tesla’s supply chain strategy has gotten a lot of attention. Some of it good and unfortunately some of it bad. The good comes from the revolutionary vision that Elon Musk has for his company and the possibilities of what a full on vertically integrated supply chain can look like, the bad comes from Tesla’s inability to meet their own predictions and the delays in production that have been well publicized due to the breakdown in their supply chain.
This boutique automotive company has come up with some innovative supply chain solutions, but the question remains is it enough?
Marching to a Different Beat is it Worth It?
Tesla’s vertical integration was born out of need. They were doing something no one else was doing. Tesla has a fully operational plant in California and they also have some short-term goals that are impressive. In a time when everything is being manufactured in Mexico or China, Tesla plans on building a supply park adjacent to their plant so that they will be able to manufacture all their parts on site.
They also built a giant battery factory in Nevada to meet their needs for batteries for their cars. The need for batteries that are designed to Tesla’s specifications has become so critical and so hard to find that they almost must build their own. One of the key “bottlenecks” causing delays for manufacturing has been battery issues. Unfortunately, the battery plant experienced some of their own woes which required some redesigns.
Tesla’s value chain also includes building charging stations across the country so that power recharges are not an issue for their drivers. This promise has been somewhat slow to be realized.
The logistics world has called Tesla’s motors supply chain revolutionary because of the impressive strides they have been able to make but there have also been some big disappointments in the last year which have some experts wondering if the revolutionary ideas of Elon Musk and others, are applicable in real world time.
The Model 3 unveiled in 2016 had been promised to over 400,000 drivers around the world that have paid $1000 up front to secure their vehicle, but production has been slow, as of the 4th quarter of 2018 only 55,840 had been delivered.
The point is that at this juncture the company is struggling, consumers are mad, investors are nervous, and the stock is falling rapidly and all the blame lies with the supply chain.
The Factory of the Future
The vision of founder and CEO of Tesla is to build a vertically integrated supply chain that is self-sufficient enough so that his “factory of the future” can grow and thrive and deliver on all the promises. At one-point Tesla was constructing Model 3’s in a “tent” which really was not a tent as reported by Elon Musk but instead a temporary structure erected next to the Fremont CA plant that would focus solely on assembly of the Model 3.
While it is not the “alien dreadnought” factory that Elon predicted it might have been the saving grace had it not been for all those pesky supply issues. Evidently the tent idea coupled with the around the clock assembly was not enough to push Tesla to the finish line and deliver the vehicles as promised.
Early on in 2017 CEO Musk promised that production would be ramped up to 5000 cars per week. The average has fallen short by more than half even with 3 full assembly lines working around the clock.
An Analysis of the Problems
Supply chain failure is the problem. What is Elon Musk doing about it? He is moving his company toward complete self-sufficiency, but many critics agree that what he needs to do to overcome the problems is to collaborate with a firm like Magna that has experience in mass production of automotive parts. Albeit Magna may not have the knowledge base to manage electric car production but with some input and a lot of support from the team at Tesla the issues of lack of knowledge could be overcome.
Another issue that Tesla might want to consider is to get someone on board that is a supply and logistics whiz. This is a big operation not because of the scale of production but because Tesla cars have over 10,000 parts in each one!
Another mistake Tesla is making is the “blame game”. It is never a good idea to blame the supply chain for your woes, yes there have been delays because of suppliers but and it is a big but, consumers do not want to hear that the providers that you choose cannot meet your demand.
Frankly, knowing when to ask for help is critical in any manufacturing. There are plenty of contractors out there that can deliver exactly what Tesla needs to ramp up production, but Musk just refuses to adjust his vision.
What are the Benefits of Vertically Integrated Supply Chain?
We do not need to continue to harp on Tesla’s short comings. The fact is there are some key values to Tesla’s vertical integration model that can benefit any business. We could stay with the positives and look at how did vertical integration allow a business to reduce costs? Tesla deployed a plan that without a doubt, operations and supply chain management for the 21st century and for all intents and purposes, it is a cost saving strategy that will allow growth.
Considerations that are key to the success of this type of integrated supply chain strategy include:
With vertical integration of the supply chain it is possible to reduce the costs of transportation through out the chain, but that relies heavily on proximity and the geographical location. Musk has the vision of building a compound where every step of the supply chain is managed in close proximity, the problem is that his cars need 10,000 parts to function. In another setting where there is not the need for 10,000 parts for production that integration could be simplified.
Costs for transportation of supplies and parts is not the only savings that can be realized. There are time savings and labor savings as well that can be realized with a vertical integration of the supply chain. Of course, it can also improve your competitive advantage. For example, if there is a scarce resource that is firmly allocated to your supply chain that your competitors cannot get, you win.
Control is also a huge benefit. You can easily improve supply chain efficiency with this model, have access to downstream distribution channels that you may not have any other way and more. There are many attractive potential benefits, but there are also some disadvantages as well.
The Downside to Vertical Supply Chain Integration
Tesla’s problems are a tale of caution when it comes to this model. There are some serious potential risks with this model that can include:
- Increased costs
- A decrease in flexibility of product design
- Balancing issues
This model can ramp up costs due to a lack of competition. When suppliers compete for your business it drives costs down, when you have a single select supplier, costs can get out of control. There may be additional bureaucratic costs as well.
Flexibility can be constrained as well. Changing designs or changing models can be difficult if it will take a lot of new development.
Balancing upstream and downstream supply and demands can get difficult.
Who Can it Work For?
Clearly it is not working for Tesla but there are some businesses that would thrive under this model. Any business that:
- Experiences obstacles to contract formulation or monitoring of contracts can find that this model of supply chain would work for them
- Have large production quantities can benefit from this model because of the scale
- Are strategically like the activities in the vertical chain
This model can work for a wide range of manufacturers with the right set of circumstances. It may eventually work for Tesla.
Who Should Avoid It?
There are some businesses that are just not well-suited to take advantage of this model including:
- When the quantity that is needed from the supplier is not on enough scale
- The product is widely available
- The competencies are very different between the activities
- The vertically adjacent activities are in different industries
This useful model can be integrated but all the above must be considered before decisions are made.
Tesla is still a startup and of course there will be struggles and a huge learning curve. After all Elon Musk is a visionary not a logistics and supply expert. One of the things that will help to propel this company forward is to sign on a true logistics expert that is experienced in automotive manufacturing.
Yes, the Tesla cars are something that have never been done before, but building cars is still building cars and to do that well, there has to be a strong supply chain and a proven method. A few tweaks to the supply chain management, and Tesla may become the factory of the future and be able to muscle in on some of the big guys in automotive manufacturing