Evaluation of Tesla's Supply Chain Management
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Part of: Supply Chain Management
Throughout the years, supply chain management has grown to be a significant element of any business to increase and maintain its competitiveness and customer satisfaction. For companies today, it is critical to be committed to the efficiency of the supply chain operation, as well to develop and implement strategies for improving efficiency and quality. An efficient and optimized supply chain management plan can make a world of a difference in any business, especially in the automobile industry. This is especially true for Tesla Inc., an American automotive company based in California, who lacks the necessary relationship with its narrow supplier base. As a result, Tesla would greatly benefit from a more efficient supply chain to meet production demands and yield expected profits.
For more information about Tesla as a company and how they operate, take a look at our Tesla SWOT and PESTEL Analysis.
Industry and Customer Value
In today’s market, automobiles represent the largest manufacturing industry in the United States with manufacturers and suppliers in the automobile industry generating billions of dollars each year. According to Auto Alliance (2019) “auto manufacturing drives $953 billion in the economy each year through the designing, building, and selling of vehicles. Beyond manufacturing, the industry is also dependent on other companies supplying parts, components and materials, retail services and vehicle maintenance. At the top of the U.S. automaker rankings based on sales for 2018, is General Motors with 2,150,320 followed by Toyota’s 1,920,026, Ford Motor Company, FCA, Nissan Motor Co., Honda, Hyundai Kia Auto Group, Subaru Co., Volkswagen, BMW, and Daimler (Matthews, 2018). Although Tesla, also formerly known as Tesla Motors, Inc., ranks on amongst the top for innovation and environmental considerations, the company ranks 13thth in automaker rankings and 21st in sales (Matthews, 2018). Despite the challenges in production, Tesla $56 billion market capitalization is greater than many of the well-established automakers in the industry, and thus, Tesla ambition for innovation has resulted in steady stream of aggressive investors.
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In 2003, Tesla was incorporated as a business that focused on designing, developing, manufacturing and selling fully electric vehicles. As a production plan and goal for the company, Tesla’s CEO, Elon Musk, envisions the company building 500,000 cars per year by 2018, and one million cars per year by 2020 (Muoio, 2017). In order to accomplish production goals, the Company continues to expand its product and production strategies through their corporate structure and global operations that enable production needs. Unfortunately, Tesla has struggled with production and maintaining a sustained supply chain, resulting in reduced production, delivery delays, customer dissatisfaction and lost revenue. In 2018, the industry revenues for Tesla were $4.5 billion in Q1, compared to $7.2 in the fourth quarter (Korosec, 2019). Meanwhile, for the first quarter of 2019, Tesla reported a loss of $702 million, or $4.10 a share, after lower than expected delivery volumes, costs and pricing adjustments to its vehicles (Kirsten, 2019). Although Tesla has many major competitors in the automobile industry, product preorders reflect a substantial demand for Tesla products. It should be noted, however, that the risk to be considered is that the demand is for the brand and not cars. Tesla customer base is focused on millennials who give significance to environmentally friendly initiatives, are tech-savvy, and desire inexpensive luxury cars. Tesla’s story of “saving the planet” with vehicle innovation is one that has created respectable customer experience, patience to inventors and profits to the Company. Nevertheless, Tesla faces the challenges and pressure of mass production while trying to stay ahead of their major competitors, such as Chevrolet Volt EV and Hyundai Ioniq EV.
With hundreds of suppliers across the U.S., Europe and Asia, Tesla faces challenges in their supply chain. Specifically, challenges related to vehicle’s battery design, and manufacturing automation. A bottleneck Tesla has is the sourcing of raw materials, especially cobalt, the essential metal used in the battery cells derived from the Democratic Republic of Congo (Stutman, 2017). Not only does the sourcing of cobalt create risks of spikes in pricing, it also creates gaps in supply and production. Other key manufacturing suppliers for Tesla’s include AGC Automotive (windshields), Brembo (brakes), Fisher Dynamics (power seats), Inteva Products (instrument panel), Modine Manufacturing Co. (battery chiller), Sika (acoustic dampers), Stabilus (liftgate gas spring), and ZF Lenksysteme (power steering mechanism) amongst others (Maverick, 2019). With as many suppliers as Tesla depends on, it is critical for Tesla to establish long-term relationships with suppliers as Tesla mostly works on make-to-order (MTO), and highly relies on its suppliers.
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Typically, when selecting suppliers, third-party logistics (3PL) firms, distribution centers, and retail stores, considerations are given to cost, location, quality and value, however, Tesla has done business a little different without full success. While skipping traditional manufacturing steps, Tesla designs, manufactures, sells and services their cars through a vertically integrated supply chain. Tesla’s specialized supply chain focuses on reconfiguring their Fremont Factory to integrate high levels of robotics automation into various manufacturing processes. Tesla’s intense usage of automated robotics and integrated supply chain is the major source value creation for Tesla. The vertically integrated automation system allows for Tesla to incorporate the smaller and generally outsourced subsystems into their own manufacturing process to allow for quicker turnaround and shorter product improvement cycles. More importantly, it allows for manufacturing flexibility, process control and increased supply chain coordination. Meanwhile, Tesla’s outbound logistic include warehousing and distribution of their vehicles after manufacturing and assembly operations.
In short, Tesla owns it all. To meet order demands, however, Tesla needs to optimize their supply chain network (SCN) by identifying three top criteria that focus on supply and product manufacturing flow where the value-stream of the product including the raw materials, components, and sub-assemblies, never stop in the production process. These criteria include speed and agile processes for suppliers that can provide faster tooling lead times, raw materials and parts, as well as having the technological collaboration with the digital supply chain the company promotes to push out updates to existing customers. Furthermore, supply chain coordination strategies, product flows, information flows, and risks mitigation are also critical factors Tesla must consider when selecting suppliers. Supplier relationship management is critical to produce products on time and on budget, while reducing the impacts on manufacturing flow management.
- Autoalliance.org. (2019). Economy. Retrieved from https://autoalliance.org/economy/
- Korosec, Kirsten. (2019). Tesla reports $702 million loss in first quarter. Retrieved from https://techcrunch.com/2019/04/24/tesla-reports-702-million-loss-in-first-quarter/?renderMode=ie11
- Maerick, J.B. (2019). Who are Tesla’s (TSLA) Main Suppliers? Retrieved from https://www.investopedia.com/ask/answers/052815/who-are-teslas-tsla-main-suppliers.asp
- Matthews, Jack. (2018). U.S. Auto Sales Brand Rankings- September 2018 YTD. Retrieved from http://www.goodcarbadcar.net/2018/10/u-s-auto-sales-brand-rankings-september-2018-ytd/
- Muoio, D. (2017, September 09). Here’s everything Tesla is working on right now. Retrieved May 16, 2018, from http://www.businessinsider.com/tesla-projects-long-term-plans-2017-9#tesla-wants-to-build-500000-cars-per-year-by-2018-and-one-million-cars-per-year-by-2020-1
- Stutman, J. (2017, August 26). 5 Major Risks Facing Tesla (NASDAQ: TSLA) Shareholders Today. Retrieved May 29, 2018, from https://www.wealthdaily.com/articles/5-major-risks-facing-tesla-nasdaq-tsla-shareholders-today/8852
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