Operations and Supply Chain Management: Tesla Motors - Essay Example

Tesla Motors: Supply chain metrics Introduction The concept of supply chain management (SCM) was developed during late 1950’s but in the last 20 years actual proliferation of the concept being done by academicians and scholars (Nakano, 2009). Lambert (2006), Kim (2006) and Frohlich and Westbrook (2001) pointed out that complexities of supply chain management differs in accordance with difference in business requirements companies. Historically, supply chain management researches are being mostly done in context to manufacturing industry (Gimenez and Ventura, 2003 and 2005). In such context, in order to understand complexity of supply chain activities of a real world manufacturing company, the study has selected TESLA Motor. In order to develop functional background for further discussion, business activities of TESLA Motor will be briefed in the next section. Tesla Motors, Inc is renowned automobile company that specializes in manufacturing electric vehicles (EV) and plug-in hybrid electric vehicles (PHEV) (Moran, 2013; International Energy Agency, 2013). The company was founded in the year 2003 and it is being headquartered at California, USA. Product portfolio of the company includes emission free electric vehicles, roadsters backed by electric mobility, electric power trains and cars run by solar electric technology (Teslamotors, 2014). In the last 5 years, Tesla Motors, Inc has established 31 stores across the world and more than 2,300 units Roadsters (Model S and Model X) of the company are being purchased by customers (Teslamotors, 2014). Moran (2013) identified integrated supply chain metrics as key success driver for Tesla Motors, Inc. In such context, information flow within the supply chain of the company can be described in the following manner. Information Flow Analysis Peter Carlsson (Supply Chain Vice President at Tesla) used concept of procurement innovation in order to manage information flow within the company (Hall, 2013). Figure 1: Facility Management (Source: Kelty, 2013) It is evident from the above diagram, Tesla uses more centralized and self sufficient facility management techniques in order to avoid complexities regarding complexity of supply chain management regarding automobile manufacturing. Car parts are being purchased from Daimler and Toyota but most of the unique procurement needs are being met through internal facility management of Tesla Motors, Inc (Kelty, 2013). For example, infotainment system of Model S is being developed within the factories of Tesla. In order to avoid mark-ups and decrease operational costs, Tesla only outsources commodity items to suppliers such as power system, car parts, wheel, tire tubes and others (Hall, 2013). However, power distribution and high power electricity are being sourced from suppliers located in USA and Japan. Communication with Japanese suppliers like Denso and Panasonic is being done through four way mechanisms such as appointing Japanese staff within facilities of Tesla Motors, face to face visits, video conferencing and feedback from engineer being stationed in Japan (Kelty, 2013). Within supply chain premises of Tesla, information flow is being done through three verticals. 1-customer order is being registered in the registration office and information regarding the order is being channelled to procurement department. 2- Procurement departments’ contacts with facility management division (Paint Centre, Assembly Centres, Press Centre, Body Centre and others) regarding the requirements. 3- Production requirement information is also being supplied to suppliers for commodity items (Hall, 2013). Therefore, information flow is being done from register office to procurement department to facility management division to suppliers of suppliers for commodity items like power system, car parts, wheel, tire tubes, sits, paint materials and others. Supply chain metrics CPFR (Collaborative planning, forecasting, and replenishment) model can be used to analyze the supply chain metrics of Tesla Motors, Inc. CPFR model is being developed on the basis of concepts of collaboration between supply chain partners and aggregation of supply chain activities (Kahn and Mentzer, 1996; Kahn and Mentzer, 1996). In the CPRF model, requirement of customers are being placed at the centre, middle ring represents retailers (buyer) and manufacturers represent the outside ring (Nakano, 2009). Consumers generate the demand for the goods while retailers work as provider for demanded goods while manufacturer supplies the demanded goods to retailers. Simatupang and Sridharan (2005) identified numerous benefits of deploying CPFR in the supply chain model such as, 1- risks for stock-outs get decreased with the help of reliable forecasting techniques, 2- frequency of customer fulfilment orders gets increased due to accurate estimation of consumer demand throughout the supply chain, 3- carrying cost gets reduced by reducing safety stock inventory level and 4- overhead costs regarding inefficiencies of IT process gets reduced such as antiquated manual processes or not finding useful information due to presence of multiple sources. Four steps are involved in the CPFR (Collaborative planning, forecasting, and replenishment) model such as Strategy & Planning, Demand & Supply Management, Execution and Analysis. In case of Tesla Motors, these four steps can be adjusted. Strategy & Planning- developing capable supplier base is the primary phase of deployed CPFR model by Peter Carlsson (Supply Chain Vice President at Tesla). For the Model S, team of 300 suppliers was being integrated prior designing of the product. On the other hand, the company is working with battery (lithium ion batteries) manufacturing partners to develop Tesla Gigafactory or large scale factory for battery manufacturing (Wesoff, 2014). Scope of collaboration has further been increased through re-engineered business processes and vertical integration of supply chain sourcing activities (Moran, 2013). Demand & Supply Management: within the supply chain practices, statistical forecasting techniques are being used in order to analyze inventory level or forecast customer driven demand for new cars. ERP (Enterprise Resource Planning) system and EDI (Electronic data interchange) systems are being integrated by with the supply chain activities in order to upgrade inventory level in real time manner. Tesla cars are being sold through own stores that are being connected to the facility management centres of the company such as Assembly Centre, Body Centre and others (Kelty, 2013). All the stores of Tesla are well connected with facility management centres through e-mails, telephonic conversation, video calling or internal company portals. Store wise demand for particular Tesla model is being communicated to facility management as well as procurement centres with the help of above mentioned techniques. As a result, real time demand data are being fed to forecasting system of the company which decreases errors in the forecasting process (Sanders and Premus, 2005; Sanders and Ritzman, 2004). Execution & Analysis: as part of unique supply chain management activity, Tesla has developed procurement plans for developing intermittent raw materials that are unique in nature. For example, instead sourcing the electronics and infotainment systems from Johnson Controls or Bosch, Tesla designed as well as manufactured such materials in its own procurement plans plants. As a result, the company has not only decreased dependency on supply chain partners but also gained control over supply chain activities. Due to presence of such unique procurement channels and short length supply chain, Tesla Motors can easily transform the forecasted demand to actual demand and fulfil the order of customers in responsive manner. Replenishment of inventory is also being done in more responsive manner by integrating centralized demand information sharing process. Due to strong control over supply chain activities, Tesla Motors has the opportunity to automate execution activities like manufacturing electric vehicles, shipping the car to stores, delivering the car and adjusting the inventory level for electric vehicles within the store. Performance assessment technique is being used by Tesla Motors to review the performance of suppliers in terms of on time delivery, quality of supply and volume of units being supplied by partners. Alternative supply chain strategies are being developed by the company in case poor-performance of suppliers or non-fulfilment of customer requirements. For example, Moran (2013) reported that the company is developing an alternative strategy in order to reduce dependency on suppliers being located in Japan in order to decrease lead time for procurement. Supply Chain Relationship Stank, Keller and Daugherty (2001) identified trust or communication with supply chain partners and power execution are two main parameters for analyzing supply chain relationship. On the other hand, Zollo and Winer (2002) stressed on development of dynamic capability as important aspect of supply chain relationship management. In automobile manufacturing industry, big companies tend to establish contract with well known as established suppliers. For example, in case of sourcing of electronics and infotainment systems, large automobile manufactures tend to sign contract with global leaders like Johnson Controls and Bosch (Moran, 2013 and Hall, 2013). However, Tesla Motor is a small company and supply requirements for electric vehicles (EV) and plug-in hybrid electric vehicles (PHEV) are significantly different from traditional automobiles (AEA Technology plc, 2009). On the other hand, Tesla Motor has the agenda to source only commodity items from suppliers and develops its own raw material sourcing capabilities. Trust or communication- Tesla motors select only those suppliers who have sufficient engineering capabilities that can match the stringent supply requirements for manufacturing electric vehicles. Communication is being done mainly through business meetings, client site visit, knowledge seminars, telephonic interview and video conferencing. Trust factor between Tesla motors and supply chain partners is being directed by willingness of the supply chain partners to match with the flexibility as well as speed of supplying that are being demanded by facilities management division in Tesla motors. For example, Tesla motor evaluated the performance of its battery (lithium ion batteries) manufacturing partners before taking the decision to establish Gigafactory or large scale factory for battery manufacturing. Therefore, trust between Tesla motors and supply chain partners is being developed on the basis of commitment level as well ability of suppliers to reduce tooling lead times. As part of trust factor, the company still maintains the supply chain contracts with small group of suppliers who showed belief in business prospect of electric vehicles being offered by Tesla during initial period of product concept demonstration (Moran, 2013 and Hall, 2013). Power- generally, Tesla motor tries to decrease its dependency on supply chain partners by establishing own supply sourcing capabilities. Power distribution is almost equal in through supply chain management network of the company. For example, Kelty (2013) reported that Tesla motor involves its cross country suppliers during car designing phase or during concept generation for new product development. Recommendation Slack, Chambers and Johnston (2007) identified five factors that are determinants for operations performance objectives such as speed, dependability, flexibility, cost and quality. All of these five factors are close related to customer satisfaction and address the uncertainty factors in the business environment. In such context, the study has found that Tesla motor has the opportunity to improve above mentioned determinants in order to compete in global electric vehicle market. Major competitors for Tesla motor include big players like BMW, Honda, Audi, Nissan and GM (AEA Technology plc, 2009). Following recommendations are being proposed for Tesla motor that can help the company to achieve competitive advantage. Speed: Tesla needs to dependency on Japanese supply chain partners and rely more on USA based suppliers in order to decrease lead cycle time. Competitors like BMW and Nissan are also trying to decrease distances in supply chain in order to decrease delivery time and speed up the supply sourcing process. Cost: unit sales volume of electric vehicles of Tesla motor is low; therefore, company needs to decrease the operational cost in order to retain the profitability margin. In such context, Tesla motor needs to deploy concepts of TQM (Total Quality Management) and economies of scale in order to eradicate wastes and non-revenue generating activities throughout the supply chain. Dependability: Tesla motor needs to work will small group of suppliers who qualify the quality criteria and supply requirements of the company. Contract with old suppliers should be renewed in order to achieve the desired dependability. Flexibility: the company should focus more on vertical integration of suppliers in order to increase its souring as well as resource competency. For example, Tesla motor needs to centralize the procurement functions in order to increase flexibility in addressing shift in customer requirements. Quality: TQM (Total Quality Management) and periodic product quality checking techniques need to be implemented by the company in order to reduce errors in final production. Statistical process control (SPC) techniques can also be implemented by Tesla motor to increase accuracy of quality measurement technique. Reference List AEA Technology plc., 2009. Market outlook to 2022 for battery electric vehicles and plug-in hybrid electric vehicles. [pdf] AEA. Available at [Accessed 5 June 2014]. Frohlich, M. T. and Westbrook, R., 2001. Arcs of integration: an international study of supply chain strategies. Journal of Operations Management, 19, pp. 185-200. Gimenez, C. and Ventura, E., 2003. Supply chain management as a competitive advantage in the Spanish grocery sector. The International Journal of Logistics Management, 14(1), pp. 77-88. Gimenez, C. and Ventura, E., 2005. Logistics-production, logistics-marketing and external integration: their impact on performance. 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