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Tesla’s Supply Chain Miracle Dissected

Tesla did it: The arguably over-hyped EV car maker has delivered on founder and CEO Elon Musk’s bold claims of making 35,000 vehicles in the first quarter.

Well, actually, Tesla’s production cadence fell just short of the target, topping out at 34,494 cars, although by rounding up to the nearest thousand, Tesla made 35,000 cars during the period. Even Wall Street’s most ardent naysayers described the production metric as a success, while Tesla’s vast legion of media cheerleaders said they had long expected Tesla to meet its target.

The announcement earlier this month also followed a blitzkrieg of recent negative press. The bad publicity was due in part to a widely reported incident of a fatal crash of a Tesla Model X, which caught on fire, in March. Tesla shortly thereafter issued a recall of 123,000 Model S cars made before April 2016 due to potential faulty power steering issues in cold weather caused. Moody’s last month also downgraded Tesla’s credit rating, noting it would have to raise more cash after an expected cash burn of $2 billion a year.

Photo courtesy: Tesla

Photo courtesy: Tesla

Just a few days before the first-quarter production announcement this month, The Wall Street Journal reported Tesla founder and CEO Elon Musk had “good reason to worry” and said Tesla’s faced “severe consequences” if it failed to meet the production schedule.

Regardless, Tesla did save the day in the first quarter, as it would have likely run into cash flow trouble by not being able to make enough cars to begin meeting the long backlog in demand. And that success largely comes down to Tesla’s supply chain prowess.

“It is make-or-break for Tesla or it will face financial consequences, which could even lead to bankruptcy,” Anirudh Venkitaraman, an analyst for Frost & Sullivan, told EBN. “With the production [target it has achieved] in such a short time, Tesla has also achieved a supply chain milestone, which is nothing less than a miracle, done through proper planning and execution.” 

Single-source supply chain

The fact Tesla has practically met its benchmark of making 35,000 cars in the first quarter is, indeed, arguably a supply chain miracle in and of itself, considering Tesla’s over-reliance on single-source suppliers. If one of its key single-source suppliers had failed to deliver, of course, its car production, including assembly of its first “everyman’s car, the Model 3, would have, of course, very likely sputtered once again.

“Musk has been criticized for over-promising and under-delivering several times,” Venkitaraman said. “The major problem was the wrong choice of suppliers and system integrators.”

Tesla is obviously aware of this shortcoming, as it gradually begins to shift away from its largely single-source supplier-based supply chain. In Tesla’s 10K SEC filing for the fiscal year ended in fiscal year ended December 31, 2013 Tesla said over 2,000 parts were purchased from 300 suppliers, most of which were “single source suppliers for these components.”

Tesla’s over reliance on relatively few single-source suppliers was brought to the forefront in November when Tesla said it would not meet its production goals of making 5,000 units per week of its Model 3 by fourth-quarter 2017.  Tesla largely attributed the production shortfall to its assembly of battery cell packages at its gigafactory in Nevada where one sub-contractor in particular “really dropped the ball,” Musk told analysts

Flash forward to this February. In its most recent 10K filing for the period ended February 18, 2018, Tesla implied it had shifted way from single-source suppliers for most of its out-sourced parts to sourcing from “many” single-source supply chain partners. “Whi le 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,” Tesla said in its most-recent 10-K filing.

While Tesla has a long way to go before it begins to build in near-redundancy for all of the parts it sources similar to what the world’s largest carmakers such as Toyota, Volkswagen, and General Motors do; its recent 10-K statement does show it is making some progress. 

Backward integration prowess  

Needless to say, Tesla is highly unique compared to traditional carmakers in what has become a commodity-like industry. Many observers also originally scoffed at Musk’s early vision of essentially designing an electric super sports car that could run over 300 miles on a single charge from scratch over 10 years ago. Musk has since pledged that SpaceX will send people to Mars and that he will spearhead the design of an ultra-fast speed Hyperloop underground transportation system.

While in the past, Tesla has failed to meet production schedules, as mentioned above, Tesla has certainly created technologically advanced all-electric cars available on a volume scale for private sales. And that success is due to its in-house engineering talents and Tesla’s vertically integrated production model it needs in order to bring those technologies to market in its cars.

The technologies Tesla has developed in house include its Autopilot self-drive system, which has largely forced the auto industry to offer driverless options in their cars to keep up with Tesla’s advances; its battery designs, and it’s now famous large 17-inch touchscreen display, which looks and works like a very large iPad embedded in the middle of the dashboard.

Musk also recently told reporters Tesla plans to begin designing its own processors and chips for its machine-taught artificial intelligence (AI) system for its Autopilot.

Photo courtesy: Tesla

Photo courtesy: Tesla

 

In this way, Tesla continues to rely on its relatively very vertically integrated supply chain as it attempts to offer best-in-class car tech. Production hiccups aside, Tesla still continues to deliver (not all of the time and often very late when it does) on Musk’s car design vision as it pulls off its supply chain feat.

There are more potential buyers than there are cars Tesla can make, and it just may able to get its supply chain to work so it can beat its delivery schedule this year before it runs out of cash by end of this year. And that would certainly represent a supply chain miracle.

1 comment on “Tesla’s Supply Chain Miracle Dissected

  1. markgrogan
    November 28, 2018

    It is important for other businesses to study what this particular company has been doing. It is not an easy feat to deliver results as promised even for a large company that has been around for some time. The key is to only promise what can be successfully put across in order not to be deemed as a failure.

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