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Tuesday, July 29, 2014

Electric Car Maker Tesla Builds Supply Chain in its Own Image

This article courtesy of My Purchasing Center.


By every measure, Tesla Motors is having the best year of its decade-long life. 

  • In early January, its Model S sedan was named Motor Trend Car of the Year, the first electric vehicle to earn the prestigious award in the magazine’s 64-year history.
  • During the first quarter of 2013, the Palo Alto, Calif.-based car company outsold every other electric vehicle (EV) on the market, as well as Mercedes S Class and BMW 7 Series models, notching its first quarterly profit in history on revenues of $561.8 million.
  • It’s on an aggressive track to produce a record number of cars in 2013.
  • In late May, Tesla shares surged past the $100 mark for the first time.
  • And days before, the company paid off its Department of Energy (DOE) loan with a nearly half-billion-dollar check – nine years early. (The loan was part of a DOE program to stimulate development of vehicles powered by alternative energy.)
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Peter Carlsson

Part of its success is owed to Supply Chain Vice President Peter Carlsson, the ebullient young executive who came to Tesla from NXP Semiconductors, where, as chief procurement officer, he transformed a purchase organization from a tactical decentralized entity to a strategic global commodity organization.

In the company’s zeal to design, test, and produce cars faster than any auto company in history, Carlsson is helping Tesla imbue the same entrepreneurial and innovative spirit in its supply chain as it does in its groundbreaking vehicle design and performance.

Tesla’s Obstacle Course

Tesla’s recent good fortunes are tempered with challenges.

The general public’s fascination with electric vehicles appears to be slipping, in part because of new cleaner-burning, higher-performance gas-powered vehicles, as well as the higher price point for EVs.

The Model S comes with battery power options that take the vehicle price from a low of $62,400 to a high of more than $88,000 (after a $7,500 tax rebate). Recent high-profile failures of so-called “green energy” companies (including solar power maker Solyndra and green car maker Fisker) haven’t helped to stimulate the public’s appetite for alternative energy. EVs also face some competition from other emerging non-fossil fuel-burning technologies such as hydrogen and natural gas.

Even Tesla finds itself embattled by car dealership organizations fighting the company’s efforts to sell directly to consumers, prompting CEO/co-founder Elon Musk to claim conventional car dealers are disincentivized to push electric vehicles. (A recent statewide poll of Texas consumers found them overwhelmingly in favor of Tesla’s plan.)

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Tesla Model S sedan

Still, such challenges have not dissuaded Tesla from plans to ramp up Model S production, build nearly additional 20 retail stores this year, and pursue plans to aggressively grow its network of EV charging stations across the country — and globally (Tesla sells its cars in more than 31 countries).

To date, Tesla has placed more than 10,000 of its cars on the road. In the first quarter of 2013 alone, it delivered 4,900 of them.

Part of its determination comes from the confidence it earned during the Great Recession. Add a little serendipity for good measure.

“We started to develop the Model S in the midst of the recession in 2008 and 2009, which gave us a couple of opportunities that would have been more expensive otherwise,” Carlsson tells My Purchasing Center. “Our manufacturing facility in Fremont [Calif.] was able to buy during the downturn because of the over-capacity in the industry. We managed to negotiate good deals during the downturn. So we did get a few benefits from that.”

The fact that the Model S is able to outsell similar premium gas-powered Mercedes and BMW models in the same price ballpark also has shown Carlsson that Tesla can compete outside the EV niche.

“It’s interesting because you can look at our vehicle and on one hand ask, ‘Is it just an electric vehicle that competes in the EV market? In that case, you need to compare it to the [Nissan] Leaf and the [Chevy] Volt, which is to some extent true,” Carlsson adds. “But it’s also a premium vehicle that probably competes well in the same price range as BMW, Lexus, and Mercedes. The interesting aspect is during the first quarter of this year, we outsold both of those categories.

Of course, Carlsson admits that it helps Tesla is headquartered in California, home to so-called “early adopters” and higher-income buyers. “In the Northern California market, we do see people who normally would buy a vehicle in maybe the $45,000-$55,000 range are willing to pay an extra $10,000-$15,000 to get a Model S,” he says. “So it kind of goes a little bit out of the conventional wisdom of what people are willing pay. Whether that will be the case for the rest of the U.S. and the world is too early to say.”

‘Rocket Science’

People may argue that building cars isn’t rocket science, but at Tesla’s sister company SpaceX, which Musk also heads and founded in 2002, it’s all rocket science. SpaceX is the leading designer, manufacturer, and launcher of the world’s most advanced rockets and spacecraft. Its Falcon launch vehicles and Dragon spacecraft have made several missions to the International Space Station.

To what extent the company shares its technological expertise in Tesla’s cars and the EV powertrain components it makes for shareholder-partners Toyota and Daimler isn’t known. But Carlsson openly admits that each company has the same entrepreneurial spirit.

As one recent Tesla job description for a product lifecycle coordinator that appeared on the web notes, “Our world-class engineering teams operate with a non-conventional automotive product development philosophy of high inter-disciplinary collaboration, flat organizational structure, and technical contribution at all levels.”

“There is a certain synergy between the two,” Carlsson says. “For example, we may explore how to build IT systems around what we’re doing to our mutual benefit. There also may be a certain amount of sharing of supplier information and ideas.” On the procurement side, however, there are very few commonalities. “It’s different when you’re buying and building one rocket or satellite per month versus 500 vehicles per week,” he adds.

Still, Tesla is innovating in ways conventional car makers aren’t.

Last year, for example, Tesla began building its solar-powered EV charging stations in certain parts of the country to allow it customers to “refuel.” (The 85-kWh Model S has an EPA rating of 265 miles between charges.)

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The Model S, with a refined interior, competes in the luxury sedan market.

The Model S alone has more than 250 patents, many pertaining to the company’s proprietary battery technology, but some are for its sophisticated “infotainment” system, which features an unusually large touch-screen in the front console that controls everything from media and communication to cabin and vehicle functions.

Building Its Own Supply Chain

Carlsson tries to apply the same energy and innovation to his procurement and supply chain management role at Tesla. Prior to his work at NXP, Carlsson was chief procurement officer at Sony Ericsson, where he worked for 13 years in various roles, one of which entailed building and implementing Ericsson’s framework for supplier quality assurance.

In some ways, procurement at Tesla works no differently than at any other company. But like its speed demon sister SpaceX, the company is on a fast track to not only innovate, but compete on the world stage.

“Procurement is always procurement,” he says. “But we are constantly mindful of how we, being the smallest auto manufacturer in the world, can still be competitive in a large-scale industry. That goes from looking at commodities in different ways. We go for what works, as well as ways we can benefit from the same economies of scale as other car makers.” It helps having a partnership with Daimler and Toyota, through which Tesla can benefit in terms of basic car part purchases, he adds.

But there are other procurement needs unique to Tesla. One example is the Model S’s infotainment system, which the company designed from the ground up.

“We’re also trying to look at the traditional tiered structure of this industry, and we’re looking at where it makes sense to us and where would we like to have a different setup,” he says. “With our electronics and infotainment system, we could have taken the traditional car maker approach and designed it around a core system from a supplier such as Johnson Controls or Bosch. We decided to design and build our own system because we have both the hardware and software engineering capability.”

In short, Tesla can exploit a lower tier for commodity items without the need to reinvent the wheel, so to speak, “and avoid significant markups and at a lower cost,” while focusing more unique efforts on its own designed components.

Unlike other car makers, Tesla also has the unique opportunity to work with suppliers outside the conventional auto supply universe. Take the Model S engine, for example. “When you push its accelerator, you could get several hundred to 1,000 amps of current,” he says. “So we would be sourcing suppliers in the realm of power distribution and high current or high-power electricity applications.”

As a result, Tesla began developing its own unique supplier base for key components of its vehicles. “We’re constantly looking at the industry from different angles to see how we can find and build up a really competitive supplier base in the field that not only makes us a bit unique, but also gives us an opportunity to be more competitive in this field,” Carlsson.

As the only major car company that designs, tests and builds its cars in California, Tesla enjoys one key advantage over its competitors. “We’re very close to our biggest market and we are very close to our development, which means we can do design and technology implementation really fast,” he says.

But the downside is being 2,000 miles away from the heart of the conventional car manufacturing and supplier hub – the Midwest.

“We have to some extent a logistics disadvantage that we need to offset, and we need to find different ways of overcoming that,” says Carlsson. One such way is developing relationships with suppliers willing and able to meet Tesla’s unique component demands.

“We’re trying to develop vehicles much faster than anyone else,” he says. “We really want to be able to develop vehicles in a 2 1/2-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 industrialization to tooling lead times. Because if we don’t have a supplier base capable of doing that, it certainly would slow us down.

“We’re telling our suppliers that both parties need to think proactively and work hard at significantly reducing tooling lead times,” he adds, “making sure they’re able and willing to put together engineering support teams for us willing to work with the speed and flexibility we’re asking for.”

The plan, so far, has been a success. Tesla developed an entirely new and dedicated base of nearly 300 suppliers for the Model S. “The majority have really stepped up, and once we got the management teams of the suppliers engaged with what we’re trying to do, it’s worked out in a much better way,” he says.

Of course, Tesla’s strong performance during and after the recession, capped by the Motor Trend accolades, has helped.

“Five years ago when we were knocking on doors, not everyone was interested in working with us,” Carlsson says. “They thought we were too risky, had too small volumes, or any number of other reasons. I don’t think we’re saddled with that anymore. I think the suppliers who were early adopters and who were really willing to take a bit of a risk and bet on us, probably have a profile that fits us a little bit better than a more conservative type. We’re the risk takers.”

 

John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com.

This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com. 

 

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