This Supply Chain Matters blog is a supplemental update which adds additional information to our prior blog commentary- Tesla Conducts Model 3 Customer Handover Event.
It concerns this week’s formal briefing of Q2 2017 financial performance by Tesla’s senior management team, where more information was shared regarding the planned ramp-up of the company’s new and innovative Model 3 sedan.
In our prior posting, we stated that we know less about how Tesla will manage the huge planned production and supply chain ramp-up of the Model 3. That question resonated among Wall Street equity analysts to the extent that CEO Elon Musk fielded a lot of questions related to ongoing Model 3 supply chain and manufacturing strategy.
In the briefing, Musk reiterated that when he indicated the term “manufacturing hell,” he really meant it. He further provided an explanation of the manufacturing S curve, a trend quite familiar to our manufacturing and supply chain readers, a curve that essentially depicts the series of plateau constraints that can occur with any product ramp-up. Situations such as supplier shortfalls or production machinery that does not support ramp-up volumes, for example. His message to Wall Street analysts and investors was to not fixate on individual snafu’s but on the target milestone for full production volume levels in 2018.
Nice try- Elon! Tesla is way-too visible a company to not have multiple eyeballs focused on any snafu.
Further communicated was that Tesla has turned to its major suppliers to assist in achieving both required cash flow and product margin goals. This strategy has a way too familiar ring. However, Musk was quick to praise what he described as the “A-level” collaborative effort and expertise extended by suppliers to prepare for the ongoing production ramp-up.
Tesla has negotiated what the automaker considers better payment terms with suppliers, extending payments out to an average of 60 days. Since the Model 3 consists of less component parts, and can supposedly be manufactured faster than other prior Tesla models, such a goal is the strategy initially adapted by Dell Computer, namely to get paid by the customer before paying all suppliers for the components. Musk’s statement to analysts was on-average, the industry average combined time of production, distribution, and actual sale to end-customer averages 70-90 days. (In today’s sales environment- much higher) Since Tesla owns and controls its own distribution and customer delivery processes, the goal for the Model 3 is an order-to-cash strategy of under 60 days.
From our lens, it’s a great strategy, but as we all know, there are many moving parts to such a strategy, especially in automotive manufacturing that presents a steep production ramp-up phase. This is an area worth monitoring.
Supply Chain Scale-up
CEO Musk acknowledged that Tesla would eventually need to invest in added battery production capacity, particularly for other geographic regions. Acknowledged was the added expense for shipping batteries and completed cars across oceans to fulfill international demand. We believe that this represents a public acknowledgement that Tesla must eventually consider added manufacturing and supply chain presence beyond just the U.S. Musk communicated to equity analysts to expect some further announcements before the end of this year.
In our prior blog, we estimated the Model 3 outstanding order reservations to be in the range of 400,000 – 500,000 vehicles, which was candidly an educated guess on our part. In this week’s briefing, Musk clarified the real numbers after queering the automaker’s sales teams. Noted was 518,000 gross reservations and 450,000 existing net reservations for the Model 3 after factoring ongoing customer cancellations. Consider that number for a moment, nearly a half-million customers lined-up with money deposited to secure a Model 3. That is clearly an incredible and enviable position for any automotive or other manufacturer to be in from a customer demand perspective. In fact, Musk noted that his teams can easily drive the current Model 3 customer demand higher with little effort, but cautioned that there would be little point if actual delivery times extend for many additional months. The analogy was waiting an hour-and-a-half for a hamburger to be served. So much for quoting a 2018 delivery date on the Tesla website for new Model 3 orders.
We cannot close without highlighting what we believe was a very positive depiction of cross organizational alignment and collaborative strategy among the extended supply chain management team and senior Tesla management. It concerns the termed Model X, which is the internal depiction of the planned compact SUV iteration of the Model 3.
Musk indicated that his prior communicated goal was to unveil a totally-new architecture for this planned model. The CEO than received council from the executive team (and no doubt product engineering and supply chain focused executives) that incorporating substantial carryover platform features of the Model 3 would facilitate a lower technical and production risk with a faster time-to-market, allowing Tesla to tap a larger existing small SUV market much faster than with a complete new platform.
Musk publicly thanked his team “who reeled me back from the cliffs of insanity”
We highlight all the above for readers to reinforce the notions that supply chain and manufacturing strategy does indeed matter in achieving desired business outcomes. In the specific case of Tesla’s Q2 briefing of financial performance, it was the essence of a briefing on detailed manufacturing and supply chain strategies. We observe much more of this occurring in financial performance briefings with every passing quarter.
Supply Chains indeed matter.
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