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.
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