Elon Musk, the forerunner of Tesla’s process improvement
Tesla has been at the forefront of innovation, specifically electric automation, whose operations are spearheaded by CEO and product architect, Elon Musk. Tesla is an integral player in the public market and has been heavily publicized recently; they are mentioned in a Morning Brew email at least three times a week. However, what is so interesting about this company, is that they have clear production and process shortcomings. In this blog post I will summarize one of their most recent production issues and then introduce their newest plan to reengineer their processes to improve this issue. In doing so, I will touch upon some of the main topics we discussed in Chapter 2 on Process Strategy and Analysis.
When Tesla released their Q4 numbers for 2017, the market reacted immediately and negatively to the underwhelming report of Model 3 sedan production, their newest and most anticipated car. At the beginning of 2017, Tesla ambitiously announced a production schedule of 5,000 Model 3s per week. In Q4, Tesla reported that they had just reached a production rate of nearly 1,000 Model 3s per week, only 20% of their original target. Elon Musk described the creation of the Model 3 to be “production hell” but attested that Tesla is making major progress in addressing “production bottlenecks”. This is a rapidly growing issue for Tesla because in addition to the shareholder disappointment reflected in share price, the company will also start to receive backlash from customers. In high anticipation of the new model, more than 500,000 pre-orders were placed.
2018 will be a year of change for Tesla to avoid the same fate as in 2017. With the strong leadership of Elon Musk, Tesla plans to reengineer their production process. If successful, Musk will be heartily rewarded with a compensation package totaling $55.8 billion. This 10-year plan has 12 milestones, which all must be met for total compensation. Feel free to read the plan in-depth here, but I will highlight a few important aspects. The final (and jaw-dropping) milestone is for the market cap to reach $650 billion, nearly a 1000% increase from its current position at $6o billion. The plan also includes increased revenue and adjusted EBITDA targets for each milestone. This means that in addition to increasing sales, Musk will also need to finds ways to cut costs through the use of more efficient processes. Lastly, it is possible that Tesla will bring in a new CEO who will report to Musk, allowing him more time to focus on the redesign of the company.
These are high goals being set over a relatively short span of time. Musk will be making large changes to fundamentally redesign processes in order to see drastic improvement in performance; this is the formal definition of process reengineering.
The Six Sigma Process Improvement model can easily be applied to this situation. Tesla’s issue is defined as the underproduction of the new Model 3s. This issue is measured in Tesla’s clear inability to reach production targets in 2017, producing only 20% of their initial weekly target. Elon Musk analyzed this issue further and found the source to be in the manufacturing and assembly of the battery module – a fundamental aspect of this car (read more about this here). To improve the overall company, Tesla has given Musk clear end goals, while allowing him nearly free-reign of the company to achieve these goals. The steps that Musk will take to reach these goals will involve reengineering processes. Finally, Tesla can control their results by assessing if they have reached their targets for production, market cap, revenue, EBITDA, and more. It will certainly be interesting to see what Musk has in-store for re-vamping the company and how effective this process redesign could actually be.
References:
http://ir.tesla.com/releasedetail.cfm?ReleaseID=1054948 quoted in text
http://www.businessinsider.com/tesla-model-3-production-battery-problems-troubling-2017-11 quoted in text
https://en.wikipedia.org/wiki/Tesla,_Inc. for basic info
https://www.cnbc.com/2018/01/03/tesla-q4-2017-production-and-delivery-numbers.html
Jessica,
This is a great analysis of a problem using the Six Sigma Process Improvement Model. Tesla is a very interesting company, with unparalleled ideas, but it is interesting to see they are having problems with production. Until they solve this problem, they will continue to struggle- they need to meet the demand for their product. I think Tesla’s idea to hire another CEO, to allow Musk to focus on the bigger picture and for the new CEO to focus on the execution will be a successful move. In my observations of Musk and Tesla, it seems to me the latter is not Musk’s strong suit. As the new Model 3s is crucial to Tesla’s success, it will be interesting to watch how Tesla adjusts to solve this problem.
Jess,
Tesla is always such an interesting company to analyze from all areas of business. The importance of process reengineering (or improvement) from a marketing perspective of protecting your brand is proven through this example. An efficient process means less issues for the business and its customers. When there are less issues, such as Tesla’s issue with the backup in production, it creates a negative brand reputation, even for such a big, innovative, and exciting company like Tesla. By reengineering their process, Tesla will hopefully be able to deliver as promised and help to rebuild relationships with customers who may have left or been frustrated with their brand.
Jessica, this is a well thought out post and is a topic that resonates well with me. When I am out and about in the world, I have seen Tesla sedans driving around and think to myself, “Wow, those are cool.” It had not crossed my mind that there could have been so many process issues within the company. The typical news story surrounding the company is one of innovation and improvement for high-end, innovative products and ideas. Yet, it seems as if the company is struggling to meet their production quotas due to a mismanaged and lacking process structure. I enjoyed that both you and Daniel included an application of Six Sigma. This is informative and interesting, since we discussed SS in class and can now see how companies can actually utilize the system to better the processes. Like you, I am anxious to see where Tesla, and Elon Musk, end up after re-vamping the processes within current operations.
Jessica,
I enjoyed your blog response on Tesla, and more specifically Elon Musk’s, challenges with, and plans to revamp, the mass production of their Model 3 sedan. As you mentioned, Tesla is a frequent topic covered by journalists and I think you did a nice job summarizing the recent coverage of Tesla’s manufacturing difficulties.
The success or failure of Model 3 production will be a critical determinant of Tesla’s future. To date, Tesla’s the large price tag accompanying the auto manufacturer’s product offerings means that they have primarily competed with luxury car brands such as Mercedes, BMW, and Audi. Meanwhile, more moderately priced offerings from Chevrolet and Nissan compete with more affordable internal combustion engine (ICE) vehicles from the Toyota’s and the Honda’s of the auto world.
At this point in my response, I’d like to frame Tesla’s production struggles in the context of the product-process matrix. Products such as the Model S, or even ICE vehicles such as the Mercedes S Class are (1) more expensive, and (2) produced in lower volumes than similar offerings from mass-market offerings from lower-cost manufacturers. The presence of a few major products and moderate volume combined with highly-repetitive work indicate that Tesla’s offerings preceding the Model 3 probably fit somewhere in between a “large batch process” and a “line process” on the matrix. On the other hand, it seems reasonable to classify mass-produced ICE vehicles as “continuous flow processes.”
The goal of the Model 3 is to mass-produce an electric vehicle that has the same attractive product design qualities and performance that Tesla is known for. In order to mass-produce Model 3s and achieve the cost savings associated with economies of scale, Musk and Tesla will have to master the high-volume, high standardization, and continuous flows that characterize a continuous flow process.
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Jess,
Thanks for sharing. Tesla is interesting for myriad reasons, but I think Operations Management provides the perfect lens through which we can examine the company. Elon Musk seems like the type of guy that generally cares a lot more about the quality of his product than what some shareholders think about his bottom line. Maybe that’s honorable, but production targets for every Tesla model to-date have been lofty and unmet–I would argue that he has to find a balance between bottom line and quality of output (including production expectations). I fully back your suggestion of Six Sigma to try and get Musk and the folks at Gigafactory 1 in Nevada into gear, stop the production bottlenecks, and deliver the cars they have promised to customers.
Jessica,
I am always interested to hear about Tesla and their products. This is one of the most innovative companies of our generation, and they clearly get the publicity that comes along with it. Their recent failure for their production processes to meet their growing demand and innovation is a big problem, and will be for them moving forward.
In my opinion, Elon Musk and the of the company is so focused on innovation and releasing new products has inhibited them to have decent production processes. I agree that Tesla could learn something from the Six Sigma model. Firstly, they need to DEFINE that their problem is they don’t have enough focus on production.
Jessica,
I loved reading about Tesla and the creative and innovative things they have been doing. I also am very excited to witness this process reengineering in real life to see how a real company can use the principles of supply chain management to improve their processes and boost production. If I were Elon Musk I think the use of some of the tools we utilized in class could help diagnose some of the issues involving production. A Pareto chart could help clarify what exactly is making production levels fall so short and could help focus Musk’s attention to the most pressing issues. In all, I am very excited to see where Tesla goes from here and to see if they can reach their lofty goals.
Jess,
I always appreciate a good read about the latest news from Tesla. I have also been following the latest updates from Morning Brew. Tesla’s Q4 2017 numbers came as no surprise to me. It has long seemed that their strategy has been to set their sights above and beyond to get the public hyped and fuel investment, then as quarterly reports are released, they rarely reach those goals and their stocks take a hit. It makes me wonder whether it is really a production process problem or it is simply Musk’s way of operating, seeing as how the company is as big as ever. As you said, however, reaching only 20% of production goals spells panic for me if I am an investor and must be explained by a defective process.
I thought your connection between this story and the sigma six analysis was spot on. Now that the problem is (supposedly) solved, it will be interesting to watch as more news comes out from Musk and Tesla about Model 3 production and about their new semi-truck, pickup truck, and model Y production. I do think Tesla will continue to fall short on production goals, but only as a result of high goals and high demand. However, their process re-engineering should ensure that it never be as low as that 20% again. If these production issues are truly fixed, then perhaps Elon Musk will soon be well on his way to meeting those 12 goals and approaching Amazon in market cap. Maybe then he can focus on additional important projects like his recent flamethrower release with The Boring Company (https://www.cnet.com/news/elon-musk-the-boring-company-flamethrower-makes-7-5-million-dollars-sales/)