Tesla’s Supply Chain Problems and Potential Solutions

Tesla’s Supply Chain Issues

 

One company right now that is increasing in popularity is Tesla. Their main claim-to-fame is their high-end, electric car feature and their newest improvements on self-driving cars. That being said, they have had many problems with their supply chain, potentially plaguing future success.

 

Personally, they are one of my favorite car companies and certainly my favorite of all the US car brands. They are a huge factor to the growing popularity of electronic cars. Electronic cars are the future, because they save a lot on gas and are eco-friendly. However, Tesla is still growing. Comparatively to other American car companies such as GM or Ford, they are still small. Therefore, they struggle with the necessary funding it requires to have adapting supply chains to meet demand. Unfortunately, they have missed many deadlines they promised they would meet. They report that they will have a certain amount of units (cars) done by certain dates and have fallen short a number of times. Furthermore, they are doing things like making their own batteries. They may be saving on the necessary tools it requires to make batteries, but is hurting them in the long-run.

 

According to the article attached at the bottom, Tesla’s supply chain is still in the developmental stage. One would hope that a company as prominent as Tesla would be passed the developmental stage of supply chain processes. It is still a long way from being able to produce at the level it requires to be as rapidly growing as they are.

 

Another reason for these problems can be because of the fact that they are buying many of their supplies from one single source. According to the article, Tesla made a statement which says, ” ‘While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source,’ the statement reads. ‘To date, we have not qualified alternative sources for most of the single sourced components used in our vehicles and we generally do not maintain long-term agreements with our suppliers. While we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term or at all at prices or costs that are favorable to us.’” One clear problem seems to be that they often have short-term agreements with suppliers. If they can find a way to make long-term agreements, they can be able to establish continuity and consistency within their supply chain. As they grow, they can adjust with their suppliers accordingly. Also, the supplies required to develop these luxury cars are far too expensive for them.

 

Lastly, we must come back to their funding problem. According to the article, they are still not making profits. This is not a detrimental problem, as we can see many companies are not profitable in their growing years. For example, Amazon was not turning a profit until recently, after its conception in 1994. However, many investors are having a hard time pulling the trigger to help Tesla improve their supply chain, due to the scary fact that they are not yet a profitable company. Funding is their main problem because they will need a lot of it to be able to get the supplies for the production of the new Model 3, which is extremely costly. They will then need to sell a very high amount of those to pay back their suppliers, and, in turn, keep healthy relationships with those suppliers. Investors should hear them out; and listen to what they plan to do more efficiently within their supply chain processes to reduce costs and manage these constraints. Obviously, it is a risky investment for anyone considering Tesla, but every good financier knows that high risk can yield very high returns.

 

https://www.supplychaindive.com/news/case-study-how-tesla-changed-the-auto-industry/517251/

 

 

12 thoughts on “Tesla’s Supply Chain Problems and Potential Solutions

  • March 1, 2018 at 12:21 pm
    Permalink

    I found your post very interesting especially as an automotive enthusiast myself. The impact that Tesla has made on the car industry as a whole has been very significant. As one of the newest mass market automotive brands it is really disrupting the industry and forcing other manufacturers to stay ahead of the curve in the technology they are able to incorporate into their products. Tesla was the first major car band to implement an “autopilot” feature into its street legal cars and now other major companies such as General Motors and Ford are racing to develop the best and system.
    The difficulties with the supply chain management at Tesla is one of the major concerns investors have when valuing the company. That along with other factors like the fact that the company does not pay a dividend can make potential investors wary. With their new Model 3 they have encountered a variety of delays which you identified. CNBC has said that just the batteries specifically are very far away from the mass production required for its $35,000 Model 3. However, with the production of Tesla’s gigafactory, it is likely that many of the production issues they may have faced could be resolved. With so many resources in once central area, a significant amount of waste can be eliminated. The gigafactory being built in Nevada will have more than 4.9 million square feet of operational space across several floors. Addressing the various wasted of TIMWOOD would be far easier in a facility like this while creating lean operations.

  • March 1, 2018 at 8:50 am
    Permalink

    Connor,

    I appreciate the idea to use an example of a company who has struggled with their supply chain and propose possible solutions, as opposed to observing what a company has done well. Tesla is an interesting example because they operate with their number one priority being innovation and producing products that will change the world. This is different from companies like Toyota who dedicate so many resources to having the most cost effective and efficient supply chain and manufacturing process as possible.

    I read an article which supports my idea of Tesla being an innovative and bold company, but not an efficient one. 2 years ago Tesla opened a 5 billion dollar manufacturing plant in Nevada with the goal of producing 500,000 cars per year by the year 2018. They have encountered many difficulties and fallen well short of this lofty goal set by CEO Elon Musk. Many of the difficulties they have had manufacturing the product is because the car models are very complicated. Companies like Toyota can manufacture quickly because they design their cars with simplicity and efficiency in mind. Tesla on the other hand is concerned with innovation, not simplicity, and this does not translate well to manufacturing lines.

    SOURCE: http://www.businessinsider.com/tesla-has-to-overcome-a-major-problem-for-its-massive-new-gigafactory-to-succeed-2016-7

  • March 1, 2018 at 12:37 am
    Permalink

    Tesla is an innovative company that is still relatively new. Tesla’s cars are part of the reason many car companies are creating electric and hybrid cars. Its innovativeness is also a part of the reason it’s supply chain is failing. Tesla receives all of their supplies from a single source due to the fact that not many suppliers are able to provide the products Tesla needs. Only having a single source will slow down the supply chain. Tesla is a growing company and this part of the car industry is relatively new so It may take time for Tesla to find new suppliers. Relationships between supplier and distributor are very important. Tesla states that they do not maintain long relationships with their suppliers which adds to the inconsistency of the supply chain. Tesla produces some of the sources necessary for their products in-house, such as the batteries. Tesla could develop a relationship with a company that produces batteries and make better use of their time and create a better supply chain. Because Tesla is in a developmental stage, one possible solution is to provide training on supply chain management. Another possibility is to join an association such as APICS.

  • February 28, 2018 at 11:52 pm
    Permalink

    Connor,

    I also love Tesla as a company, especially because of some of the things it is doing and its increasing popularity, but you bring up some great points here. It is troubling to read this and wonder how Tesla is even where it is at right now with the different problems and inefficiencies it has.

    Although Tesla is still a small automobile company, at least relative to some of the other companies in the United States and in the world, it is never good news to hear inefficiencies in supply chain. I feel as if Tesla management should recognize the lack of necessary funding and should adjust deadlines and benchmarks accordingly. It is always a good thing to be able to put a report out with information consumers like to hear, but it usually comes back to haunt the company if they can’t stay true to its word. Something to consider going forward is if Tesla will adjust, or if management will stay content with reporting numbers that cannot be maintained.

    The last point you bring up about funding is interesting and important to consider. If all Tesla needs is this increased funding, hopefully they will be able to get it in order to improve the supply chains, but unfortunately, I think it might be hard to persuade some investors. Management will have to persuade people to invest in a company that is not profitable yet and that has inefficient supply chains. Tesla will need to put together very realistic and strong future plans for improvement in order to gain more trust from potential investors.

  • February 28, 2018 at 10:02 pm
    Permalink

    Thank you sharing this article. I am always interested in reading about the latest Tesla. Recently, it seems like their delays and issues with manufacturing have been a PR nightmare. However, I was interested to read an article in Bloomberg that said the majority of the 400,000 people on the waitlist for the car are not as phased by the delay as you might expect. It is stated that of the twenty people Bloomberg surveyed, only two of them were considering canceling their reservation and no one had yet. One participated was quoted as saying, “I just want Tesla to get the Model 3 right, even if it takes them an extra six months.” It is amazing that the brand and anticipation for this car is so powerful that despite repeated delays, there is still a positive attitude towards the brand. The article hypothesizes that one reason there is not more frustration is because Tesla never gave a specific delivery date. One person is even quoted as saying it is increasing anticipation especially because there are very few people that have seen or been in the Model 3.

    What is also impressive is the fact that Tesla’s stock has not been too influenced by this setback. As Conor mentions, it seems that stockholders and investors would be concerned about the constant delays; however, the numbers are not showing this. Today Tesla’s stock is at $343.06 (NASDAQ) and has increased by 12% year-to-date. It will be interesting to see if this will continue or if another delay will have a larger effect.

    Sources:
    https://www.bloomberg.com/news/articles/2017-11-13/tesla-model-3-depositors-staying-put-as-wait-in-line-lengthens
    https://investorplace.com/2018/02/now-not-time-doubt-tesla-stock/#.WpdspxPwbVo

  • February 28, 2018 at 8:34 pm
    Permalink

    Connor,

    Tesla is my favorite US car brand too! My uncle got a Tesla Model S a few years ago and I have been lucky enough to drive it a few times. I was excited to see that you had researched Tesla’s supply chain, but disappointed that they are having so many problems. Tesla truly is doing great things for the entrance of electric cars into a car market that is dominated by gas-powered vehicles. As you mentioned in your post, insufficient funding seems to be the root cause of many of the problems that Tesla Motors has run into. Relative to the other car manufacturing giants in the market, Tesla is a very small and unorganized company. Unfortunately, they have failed to meet multiple self-imposed deadlines for manufacturing quotas, and the consistently fail to have their supply meet the skyrocketing demand. Tesla already incorporates some aspects of Lean systems in their processes, but the problems they are facing with insufficient funding and manufacturing limitations are evidence that Lean ideology has not been successfully implemented. This company, even though it is new, exciting, and has an unrivaled brand within the electric car market, is still not turning a profit.

    https://www.cnbc.com/2018/01/25/tesla-employees-say-gigafactory-problems-worse-than-known.html

    There is much anticipation for Tesla’s newest car, the Model 3, but early reports say that more manufacturing delays are coming. The article above mentions manufacturing bottlenecks and inexperienced workers as problems that are slowing down the manufacturing process. Hopefully Tesla will be able to remedy these issues by finding much needed funding and implementing the crucial ideas behind Lean systems in their manufacturing process.

  • February 28, 2018 at 8:07 pm
    Permalink

    Connor,

    I agree with your points on Tesla. They are an interesting company to look at as you mentioned because they are not profitable and value innovation over profits. This is seen as an issue to some investors. The CIPS article Joe linked mentions the specificity of the Tesla product and therefore subsequent reliance on suppliers. Tesla as a company is not as focused on standardizing a product and using batch and assembly line processes. This results in the inventory issues. I think this issue could be resolved by creating a degree of separation between ongoing research and development projects and the revenue driving products (the cars). This separation would allow for investors to buy into Tesla and see a return as well as maintaining the creativity and innovation Tesla is known for. Currently there are competitor products on the market that are either cheaper and better. Arriving soon to the market are the Jaguar i-Pace, Nissan LEAF 230-mile range version, Hyundai Kona EV, Kia Niro EV and Audi eTon. Tesla needs to focus more on product which will drive revenue and allow them to resolve their supply chain issues.

  • February 28, 2018 at 3:03 pm
    Permalink

    Connor,

    I enjoyed your post about Tesla. They are a personal favorite of mine as well, however your post shed some light on issues I did not know they were facing. I was reading an article regarding the production of Tesla’s Model 3, which was in the news last year as they failed to meet deadlines. The article (which can be found here: http://www.businessinsider.com/tesla-model-3-production-battery-problems-troubling-2017-11) references issues at their “gigafactory” in Nevada. If you have no seen a picture of the facility, I highly recommend you go to the article because it has a stunning aerial photo of the site. More specifically, the article says that Tesla has dealt with major bottlenecks in the process. To me, this is fascinating because the issues we address in class with basic examples, such as putting stickers on cups which are put into a tray, are actually issues that some of the world’s most notable companies regularly address.

    With Tesla, this seems like an issue that should have been planned for, but instead it caused the backup of production and caused them to miss delivery dates. Furthermore, it continues to plague the company with each new model they release! I do agree that Tesla and electric cars are the future, but in order to get there, Tesla must figure out the present. In their current state, Tesla Motors is not running an efficient manufacturing program and needs to better manage their constraints if they want to keep up with the ever-growing demand for their cars.

  • February 28, 2018 at 12:24 pm
    Permalink

    Connor,

    I enjoyed your analysis of Tesla’s supply chain struggles and the issues that they are having meeting their demand requirements. It is true that Tesla is still a much smaller car company than the giants like Toyota but I believe that Tesla should try to copy the model that the bigger companies have set. Toyota is renowned to have a very efficient system and they use a Lean system to ensure that their processes are efficient. The Lean System relies on a just in time (JIT) philosophy where products and processes happen just before they need to be completed which eliminates waste and downtimes. Tesla could implement this in their process to help keep up with their quotas and reduce the risk of meeting deadlines. Additionally, the Lean system requires a close relationship with suppliers and standardized components and work methods which is something that Tesla is struggling with. Their reluctance to get into long term contracts with suppliers is seriously hindering their ability to operate efficiently. If they want to become more efficient they should try to copy Lean companies like Toyota and minimize the risk of missing deadlines.

  • February 28, 2018 at 10:46 am
    Permalink

    Connor,

    Tesla is known to miss production targets. Most recently, Tesla missed its production goals for its newest model, Model 3. At first, Tesla blamed these issues and delays on their suppliers. Recently, Tesla has contributed their delays to production bottlenecks. Tesla is a unique car company different from many of its competitors. Tesla is changing the auto industry and forcing its competitors to produce electric cars that utilize artificial intelligence in their cars. They are increasing the popularity of electric cars as a result of the “cool” factor Tesla has among consumers. Furthermore, Tesla’s cars are like the iPhone of the auto industry. Consumers want the latest technology.

    Tesla is still in the beginning stages of establishing its presence in the auto industry. Therefore, they are a relatively small company compared to the other companies in the auto industry such as Toyota and Ford. As a result of being small, Tesla lacks the funding that these major car companies have. Investors are wary of investing in a company that has not turned a profit yet. Due to Tesla’s lack of funding, it creates challenges for the company to meet their demand. Tesla does not have the necessary funds required to adapt their supply chain resulting in Tesla to miss deadlines.

    Tesla’s supply chain is still in the developmental stage even though it has been rapidly expanding. As a result of its rapid growth, one would expect Tesla’s supply chain to have moved out of the development stage. There are unique aspects of Tesla’s supply chain that can be attributed to the problems in production. Tesla makes its own batteries instead of outsourcing its batteries from suppliers. This means that Tesla has to wait for the batteries to be produced instead of receiving them already manufactured. This waiting period can lead to a bottleneck in the supply chain. Additionally, Tesla buys most of their supplies from a single source, which is different from other major car companies. As a result, they have short-term agreements with their suppliers, which indicates that they do not have strong supplier relationships. Strong supplier relationships are key in having a successful supply chain. You suggested Tesla should establish long-term agreements with suppliers in order “to establish continuity and consistency within their supply chain”. However, since Tesla is still in a period of rapid growth and expansion, I believe Tesla would need to be smart when forming these long-term agreements. These long-term agreements need to provide Tesla with flexibility so they can adjust to their supplies to their rapid growth.

    Here, is a video (https://www.youtube.com/watch?time_continue=270&v=i2VHyC2vws0) showing the innovations of Tesla. It shows the assembly line within the Tesla factory and the time it takes to build one of its models.

  • February 28, 2018 at 10:28 am
    Permalink

    Connor,

    I found this discussion simultaneously surprising and unsurprising. It is unsurprising to hear that Tesla’s failure to meet deadlines recently can be traced back, in part, to their unrefined supply chain and processes. Unlike Ford and Toyota, Tesla is just a baby of a car manufacturer who is still learning to walk. The key to success is constantly reevaluating your system and looking for where fixes can be made. With Tesla, they have had but few chances to observe their supply chain and production processes being put to the test, and never on as grand a scale as with the most recent Model 3’s. If Henry Ford had suddenly quadrupled sales orders on his model T, then flaws probably would have risen to the top with his supply chain as well. With no established success as a manufacturer and no operating profits in a competitive industry, I would imagine that finding suppliers who are willing to sign long-term contracts would be nearly impossible. For these reasons and more, it does not shock me to hear about Tesla’s supply chain woes.

    On the flip side, I am surprised that Elon Musk has not concocted a magical solution to this dilemma yet. When met with obstacles in the past, Musk has proven his ability to work tirelessly to solve the problem. We even saw an example of this as discussed in a previous blog post about process analysis. Musk has already won over tons of investors with his talent and presence, so I would not think that winning over suppliers would be any more challenging. Perhaps, as somebody who leads with his heart and works out the details later (i.e. Mars project), Musk has just not seen eye to eye with supplier proposals. Musk has a vision of how he wants his product to be crafted, so the real problem may be finding a supplier who can align with his vision and commit to it for the long term. It also appears as if innovation is a bigger priority for him than profitability or efficiency. Resultingly, Musk and Tesla may be putting supply chain issues on the backburner.

    Based on these ideas, I expect that Tesla’s supply chain for their current products will continue to struggle until they can reflect on their current process shortcomings and prove their longevity in the market. Further, I think they will always face some supply chain issues with their new products simply because of Elon Musk’s vision and tenacity in relation to how he wants things to be made.

Comments are closed.

css.php