Case studies

Tesla Supply Chain - Custom-build World Class Supply Chain

BY Ruoshan Tao 5 Sep, "14

Historically, the automobile industry has pioneered an impressive number of supply chain innovations. Ford's assembly line and Toyota's lean manufacturing technique for instance, were extremely valuable for the development of supply chains in other industries. Given the backlash against fossil fuel guzzling cars, it seemed like the golden age of automobile-inspired innovation was over.

Enter Tesla. There are quite a few companies also in the electric vehicle (EV) business, including formidable automobile giants such as Toyota and Ford. Tesla however, stands out as the only EV maker that has truly captured the public’s imagination. Although some of the mystique may have come about as a result of Tesla’s superhero-like founder Elon Musk, the company’s philosophy has centralised on optimising the consumer experience and bringing to market a product that people really want. None of this however, is possible without an incredibly sophisticated supply chain system that simultaneously reflects Tesla's values.

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So what’s their secret?

Despite being a young company, we can track Tesla’s strategy over time and identify some unique traits that differentiate the company from its competitors. Underlying Tesla’s business model is an idea that has been critical to their success - willingness (almost to the extreme) to take complete ownership of the supply chain, from the technological vision of the company to the end consumer experience.

Tesla designs, manufactures, sells, and services through their own sales and service network. It’s not an exaggeration to say that Tesla has played an important role in the transformation of the automobile business, particularly in customer-facing practices.

Consumers in the US for instance, can go online to purchase their Tesla and choose amongst a wide array of customisation options. In their Beijing showrooms, Tesla has gone so far as to allow payment through WeChat, China’s most popular mobile messaging app. Customers that have paid through this service will also automatically “follow” the company’s updates, allowing customers to feel more engaged with the company as they wait for the delivery of their vehicle.

A supply chain to call their own

Despite Tesla’s phenomenal growth in the past few years, the company is still one of the smallest auto manufacturers in the world. This means that unlike many of its competitors, Tesla cannot independently enjoy the same economies of scale. Due to the nature of their product, Tesla also has to deal with suppliers that don't usually work with car manufacturers at all - such as battery suppliers.

Tesla circumvents some of these these limitations by collaborating with other automobile makers. Partnerships with Daimler and Toyota for instance, help keep costs low for the purchase of some basic component parts. Other more unique features such as the infotainment system however, have to be designed from scratch. Peter Carlsson, Tesla's VP of Supply Chain, says that Tesla is trying to develop vehicles faster than their competitors.

"We really want to be able to develop vehicles in a 2 and a half year time frame. To accomplish that, we need a supplier base that is faster and more agile than most automotive companies are used to, which comes down to everything from industrialisation to tooling lead times. Because if we don't have a supplier base capable of doing that, it certainly would slow us down."

In short, Tesla takes complete ownership of the supply chain by carefully picking and choosing between conventional manufacturing practices and custom designing others that are unique to its own product, in addition to ensuring good chemistry with its suppliers.

Direct selling to consumer and a unique inventory management strategy

Tesla has been vocal in their rejection of the traditional franchise-dealer sales model. Preferring instead of selling directly to their consumers, the company argues that the laws prohibiting these transactions are outdated - and the consumer is bearing the brunt of the additional cost. A report published by Goldman Sachs, an investment bank, estimates that the savings for consumers in the direct-to-consumer model is around $2,225 for a $26,000 vehicle, or around 8.6%.

Cutting out the dealership rung of the supply chain has been a challenge - several states in America have filed petitions to shut Tesla down. Dealerships in New Jersey, Maryland, Texas and Georgia for instance, have effectively banned Tesla from selling directly to consumers. Despite these restrictions, the company continues to grow even in disputed areas - operating a workaround where customers can view the vehicles in showrooms, but must complete orders online or on the phone and have cars shipped in from elsewhere.

So what does selling directly to consumers mean for Tesla’s inventory management?

To try and minimise risk, they keep very little inventory, choosing instead to place most of their customers on a several month long waiting list. Tesla admits that there is little research on the impact of this sales model on consumer demand. So far, there’s been inadequate data to support any conclusion regarding the loss of business due to the wait time.

However, there are also significant upsides to this practice. By keeping little inventory and essentially producing on demand, Tesla can minimise the amount of capital and risk tied up with storing excess inventory. In addition, the wait encourages additional customisation, a premium that many of their paid customers might not have chosen to pay for if they could immediately drive a stock car off the lot.

By tying up fewer resources into storing inventory, Tesla is able to redirect capital to continue growing and refining other areas of their business.

According to their May 2013 Form 8-K, better inventory management contributed over $30 million in cash and reduced logistic costs. This is an impressive achievement considering sales in the same quarter was $526 million, meaning direct savings from better inventory management was around 5.3%.

Unwavering commitment to products, even after-sale

In August 2014, Elon Musk released a statement increasing the Model S warranty to 8 years to match the existing warranty on battery packs. In an unprecedented move, the company also chose to apply the policy retroactively to all Model S vehicles ever produced.

“If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that”, the statement said.

Tesla also offers a three-year buy back guarantee, therefore assuring customers of the vehicle’s resale value. As a smaller company, it's important that Tesla strives to provide the best service whilst assuring customers of the value of their product. For small businesses, reputation can make or break a business.

The company knows this, so it strives to demonstrate both commitment to its products and to the EV industry as a whole. Retroactive adjustments to company policy that benefit existing customers build brand loyalty. It’s precisely because Tesla carefully controls its entire supply chain that they possess the flexibility to handle this policy shift - despite having limited resources compared to their larger competitors.

What can SMEs take away from Tesla’s unique business strategy?

Despite its high profile status, Tesla is still a small player in a massive, billion dollar industry dominated by relatively few players. As a result, the company has had to adopt innovative, technology-driven solutions to keep up with its competitors.

By integrating these solutions with their brand vision, Tesla is able to leverage the economies of scale that were previously only available to very large players in automotive. Their lean inventory management technique will serve to reduce costs and ensures flexibility in their supply chain.

Like Tesla, SMEs can leverage technology-driven solutions to manage and navigate an increasingly complicated business world. With the internet, even the smallest business will often work with suppliers, manufacturers, and customers located all over the world.

More importantly, Tesla’s innovative supply chain serves as a shining beacon to small businesses everywhere. Challenging established big business is a formidable task, but with technology, vision, and a consumer-centric approach, modern businesses have more tools than ever to disrupt industries.

TradeGecko makes world class inventory, order, and supply chain management software for SMEs to help them grow their business. In fact, we support multi warehouse and multi currency functions because we know that many SMEs run global businesses. Our software helps businesses manage their inventory in a way that best suits their practices and objectives - whether it’s Tesla’s lean inventory management model or otherwise.

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