Tesla Part 2: Logistics and Management Goals

AUTHORS: Srujit Biradawada & Friends (Aarti, Lucy, Laura, Sumer, Vincent & Joyce)

Current Situation: Suppliers, Transportation, Logistics and Supply Chain Challenges

  • Supplier <~> Tesla :
    • For instance, Model S is normally assembled using more than 2000 parts which are sourced globally from over 300 suppliers (Gianesello et al. 2018). The company has created a close relationship with most of its major suppliers of cells and other main parts of electric cars. Tesla obtains its components from several suppliers whenever the opportunity arises, however, most of their car components come from a single source like other automobile industries. Some of Tesla’s suppliers and components that they produce include;
      • ZF Lenksysteme – power steering mechanism
      • Stabilus which supplies liftgate gas spring
      • Sika – acoustic dampers
      • Modine Manufacturing Company- battery chiller
      • Fisher Dynamics – power seats
      • Inteva products – Instrumental panel
      • Brembo – brakes
      • AGC Automotive – windshields
    • Since the company was established, management has not identified alternative options of single-sourced components and they also do not engage in long-term relationships with suppliers. Since these suppliers are from around the world, the process of getting the parts involves transportation covering road, air and water.
  • Tesla <~> Tesla (warehouses for parts) :
    • Inside Tesla Inc factories, there are forklifts, conveyors and motors which helps in assembling electric cars like the Model S. The production line is linear and has been automated to eliminate errors and unnecessary heavy lifting of some parts, thus, speeding up the process. The assembling process includes components like wiring, carpet, dash, monitor, center consoles, seats and several other parts that are fixed into vehicles as they move down a production line (Gianesello et al. 2018). In the general assembly of model 3 cars, the assembly line has a balance between automation and human energy input which makes the process more predictable, faster and friendly to the labor force.
  • Tesla <~> Customers (distribution network) 
    • Tesla Inc owns its distribution channel, meaning consumers have to place their orders online or directly from the showrooms and wait for their shipment depending on the geographical location. Tesla also has a unique approach to the delivery of its inventory. Normally, samples of electric cars exist in showrooms where consumers place their orders accompanied by specific features they want for that particular car (Chen & Perez, 2018). The consumer will then have to wait for the car to be assembled for it to be delivered. In most cases, the company owns the vehicle until it is received by a consumer. In this regard, the organization usually has some inventory loaded in docks and ships as they wait for clearance protocols in Asia and Europe. By the end of 2013, Tesla had inventory worth 340 million dollars which increased to 450 million dollars by the end of March 2014 due to shipment of many products overseas (Chen & Perez, 2018).

Supply chain challenges

Despite Tesla’s tremendous growth in the past few years, the company still does not fully own a supply chain and is one of the smallest automobile producers in the industry. Due to the nature of their product, the company has to deal with suppliers who do not operate in the production of automobiles. Tesla needs to own a supply chain for it to enjoy economies of scale-like their competitors and be able to deliver their final product in time. Many consumers have complained of delayed models that Tesla had projected as some of their long-term projects (Ianni et al. 2018). However, it should be noted that Tesla might have been over-ambitious while making promises to its consumers before considering the aspect of suppliers. Since the company does not establish long-lasting relationships with their suppliers, it becomes difficult for them to take precedence when there is a delay. Thus, the organization should consider establishing long-term partnerships with suppliers to avoid delay. 

Supply delays have caused Tesla to drop way below their projection of producing 1000 vehicles weekly. Therefore, with existing challenges that the organization experience frequently, it is only possible to manufacture 500 cars weekly, half of what investors were promised. The greatest supply chain challenge that Tesla is facing lies within the supply of batteries from Panasonic and remains a problem since their first contact in 2014 (Manna, 2017). The company has not met the market demand of Model 3 electric vehicles given the number of battery packs that Panasonic can deliver to reconcile the gap. Thus, Tesla has been forced to issue statements concerning their long-term projects that were made to consumers, citing internal challenges. In this regard, the company should develop a culture of choosing a supplier whose track record is clear and is capable of meeting manufacturing needs (Manna, 2017). A supplier’s product may meet the manufacturing needs of a specific company but fail to meet that of Tesla for the same product.

Inventory problems and delayed customer deliveries

Tesla has been running out of space in its warehouse due to keeping a lot of inventory and delayed customer deliveries. For instance, in 2017, the organization leased 3 warehouses to create space for the massive production of model 3 which was part of growth objectives. A shortage of space in the warehouse should urge the company to increase the number of warehouses by about 25% of the factory’s size (Voigt et al. 2017). Since warehouses can also be used as showrooms during sales, the plan can also have additional advantages like making sales besides storage purposes. It is also important to note that when inventory is low in the warehouses, they can still be leased out to generate revenue. Storage problems can also be solved by keeping little inventory which protects the company from risks associated with keeping a large inventory.

Retailing Strategy

Tesla has currently reversed its retailing strategy where it has started closing most of its warehouse stores in an attempt to make its sales through online platforms. The proposed closure of a few stores due to low inventory is a cost-cutting measure that I projected to help Tesla fulfill its promise of pricing Model 3 car at 35, 000 dollars (Bilbeisi & Kesse, 2017). Keeping more stores open means that the organization will have to raise car prices by about 3% to meet the cost of operating such warehouses. The move aimed at shutting down most stores is essential as it is likely to facilitate more sales through the online platform and also allow the company to fulfill some of the promises it made through projections (Bilbeisi & Kesse, 2017). Despite the closure of most stores, the company has stated that some warehouses would be re-opened with fewer employees while those located in infamous places will remain shut to reduce operational costs. 

Tesla has always rejected long distribution channels that are accompanied by additional cost on the products and instead ought to deliver their products directly to their customers. Tesla has established that selling their cars directly to consumers is capable of saving approximately 2, 225 dollars for a vehicle worth 26, 000 dollars or 8.6% (Voigt et al. 2017). The organization uses internal marketing strategies and sales to reach their target customers. Tesla’s electric cars can only be acquired through its website or stores. It should be noted that obtaining the company’s vehicle through any other means apart from the ones in the distribution channel automatically leads to a failed attempt.  For instance, in 2014, a consumer got into a case with Tesla after purchasing the Model S 2012 version on auction only to find out that the company could not activate the vehicle, sell him any component or offer him any service.

Distribution Strategy

Total control over the distribution channel enables the organization to elevate its distribution efforts to reach more markets. The organization channels its increased distribution and sales efforts to service centers that incorporate all business activities that enhance sales. The institution has also established that starting a service center in a new geographic location increases demand and public awareness about its product (Cho, 2018). In consequence, Tesla has enhanced its storage strategy with sales facilities to improve retailing services. By the end of 2015, Tesla already had about 208 facilities globally that supported its distribution strategy and was enough to meet the market, distribution and sales needs.  However, selling directly to consumers has posed a great challenge to the company as some movements call for their shut down and other nations do not accept such distribution channel (Cho, 2018). Since Tesla has no authority over some markets, it can only minimize the number of inventories it keeps and produces cars on-demand or placed orders. Keeping little inventory also ensures that the company is free from capital risks.