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Candid Admission from Tesla Provides the Importance of Design for Supply Chain Practices

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Supply Chain Matters provides an additional update relative to our previous commentary regarding the Tesla Motors Model 3 Product Unveil that occurred several days ago.

Yesterday, Tesla delivered an update relative to its Q1 FY16 operational and delivery performance.  The update indicates, among other items that the electric powered automotive provider delivered a total of 14,820 completed vehicles in Q1 consisting of 12,420 Model S and 2,400 Model X automobiles. While the statement indicates that Q1 operational performance was almost 50 percent more than the year earlier period, equity analysts were expecting an output number of upwards of 16000 vehicles. Tesla Model X SUV

Tesla further indicates that it is on-track to deliver 80,000 to 90,000 new vehicles in 2016.

The statement further indicates that deliveries were impacted by severe Model X supplier parts shortages in January and February that extended longer than planned. According to the update, build rates for the Model X in March rose to 750 vehicles per week once the parts shortages were resolved, but many of the vehicles were built too late to be delivered to owners before the end of the quarter.

Of more interest was a candid admission that the root causes of the parts shortages was:

Tesla’s hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house.”

First and foremost, Supply Chain Matters applauds Tesla for its direct candor.

There are very few automotive manufacturers, and for that sake, other industry manufacturers that would publically state such candor even though internal operations was well aware of the challenges that were encountered and the efforts required to make the numbers. Tesla clearly indicates that the operational details disclosed for Q1 were provided because of: “unusual circumstances of this quarter and will not typically be provided in quarterly delivery releases going forward.”

We none the less, applaud this action because it provides the broader industry supply chain community another important learning relative to the importance of design for supply chain practices, where product design and product management teams work collaboratively with supplier sourcing, procurement and manufacturing operations teams to insure that product design and manufacturing specifications can adequately meet production volume scalability requirements. Obviously there is learning relative to supply chain risk mitigation, having back-up contingency plans in-place to account for supplier snafus or shortcomings.

Supply Chain Matters continues to admire Tesla’s boldness and embrace of modern supply chain and manufacturing practices and such public lessons are indeed learning that even the best can encounter a snafu.

When product design boldness outpaces the realities of the current supply chain, something will give. Apple, among other supply chain leaders, have previously stumbled in new product releases because of design for supply chain factors not addressed in the initial product launch and release cycle.

Tesla indicates that it is addressing root causes to insure that these mistakes are not repeated in the Model 3 launch. We raised that possibility in our prior commentary.

Time will eventually tell the final outcome.

Earlier this week, Tesla indicated that customer reservation orders for the new Model 3 had surpassed 276,000 orders. At current production rates of the Model X of 750 vehicles per week, that order backlog is the equivalent of 368 weeks or roughly 7.36 years of production at current volumes. That gap alone represents the critical tensions of elegant or leading-edge product design contrasted to customer delivery and experience expectations. The end-to-end supply chain becomes the important difference in meeting such expectations.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Tesla Motors Model 3 Unveil- Product Marketing Meets Supply Chain Realities

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Today marks a product milestone for Tesla Motors, namely the public debut and availability of the new Model 3 SUV targeted for a broader customer base. In shades of Apple product availability events, Tesla’s PR team insures that photos of prospective customers camped out overnight at Tesla outlets are spread throughout media channels.  Tesla Model X

The hype cycle is on but the real test will be Tesla’s supply chain and product management flawless execution in the coming months.

In a prior Tesla commentary published in January, Supply Chain Matters noted that while Tesla met its internal goal to deliver more than 50,000 total vehicles in 2015, customers who made deposits as far back as three years ago to secure the new Model 3 remained disappointed. The model, which was supposedly designed to be built for a lower price point and with higher output volumes, has undergone a series of repeated delays making the overall program almost two years later than originally planned for market availability. Of course, such a delay has provided industry competitors such as General Motors ad Toyota the opportunity to bring to market electric powered models that can compete with the Model 3.

Tesla’s founder Elon Musk has characterized the Model 3 as “The hardest car to build in the world.” We interpreted that statement to mean the most sophisticated engineered vehicle but not necessarily one designed for higher volume manufacturing. Its falcon wing doors and air filtering system are examples of noteworthy engineering accomplishments but call into question needs related to design for higher volume manufacturing. Luxury seat manufacturing was recently moved from a supplier, in-house to Tesla’s production facilities because of quality and volume needs. Another ongoing open question is whether the planned Gigafactory designed to produce lithium-ion batteries in-volume will be ready to meet production ramp-up needs.

According to the latest update on the Tesla web site, general reservations begin today on a worldwide basis with a different order queue planned for each geographic region. Existing Tesla customers will also get a priority in the queue, which at first blush, somewhat defeats the objective of a car produced for new customers. Volume production of the new model is noted as beginning in late 2017 with deliveries initially targeted for North America. While those expectations might change during tonight’s scheduled Model 3 unveil, it does set muted expectations as to when large numbers of global consumers can expect to be driving the new Model 3.

It would appear that this is another classic case of product marketing meets the hard realities of supply chain ramp-up execution of a product in high demand. As in the case of Apple, be careful as to marketing hype when supply chain is the real determinant of customer fulfillment.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Foxconn Acquisition of Sharp Off Again- Maybe or Likely Not

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The on again, off again proposed acquisition of Japan based Sharp Corporation by Foxconn Technology Group is as of today, reported as off again. Thus, a multi-year saga continues.

Yesterday, Sharp’s board of directors reportedly approved the acquisition plan which made headlines in social and traditional business media. Today, however, Foxconn indicated it is delaying the signing of the definitive agreement because of last minute disclosures by Sharp of a 100 item list of “contingent liabilities”. A published report in today’s edition of The Wall Street Journal cites informed sources as indicating that Foxconn received this contingent liabilities list consisting of ¥350 billion yen of costs that the company might face in the future related to either outstanding lawsuits, accounting changes, supply contracts or other uncertainties.

In a prepared statement to the WSJ, Foxconn indicated it hopes to clarify the newly disclosed information quickly and bring the proposed acquisition to a successful conclusion. Sharp has reportedly declined to comment to the WSJ and other publications on Foxconn’s latest statement.

The stakes are obviously high in this proposed acquisition. As noted in our most recent posting, LCD screen suppliers such as Sharp have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs. LCD screens account for a considerable amount of COGS not only in smartphones and tablets, but increasingly in other products that want to cater to needs for enhanced user interaction.

Customers such as Apple exercise bargaining power by multi-sourcing component supply contracts. In the specific case of Apple, Sharp represents one of three other suppliers of LCD screens.  The other reported bidder for Sharp was the state-directed Innovation Network Corp of Japan, which controls one of the four Apple LCD suppliers, Japan Display. In its reporting today, The WSJ quotes an academic professor at Waseda Business School opining that Apple would likely not desire that Sharp and Japan Display join forces because it will diminish bargaining leverage on price and other supply conditions.

There are other more strategic far reaching implications for Foxconn as well. A recent commentary published by The Economist (Paid subscription required) observes: “At face value, there is little sense in the $5.6 billion proposal by Foxconn, the world’s largest contract electronics manufacturer, owned by Hon Hai of Taiwan, to buy Sharp of Japan.” While the commentary also cites the increased bargaining power with Apple to the advantage of Foxconn, it cites a broader strategy implication, a risky attempt to reinvent a business model.

If Foxconn could design and sell its own devices under Sharp’s globally recognized name, it could at least keep the brand owner’s margin for itself.”

The commentary further points out that in acquiring Sharp, Chairman Terry Gau gets the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches.

That ladies and gents is the mother lode insight- the ability of the world’s largest contract manufacturer that continues to have to deal with the slimmest of margins from high tech and consumer electronics equipment OEM’s , having the opportunity to diversify both up and down the value chain. This author wrote of that possibility several years ago and since then, others have joined in predicting the inevitable, namely that the CMS model could evolve into the designing and selling of owned products under a recognized brand, or in becoming the leading-edge, preferred supplier of advanced LCD screens.

Our sense, for what’s it’s worth, is that Foxconn will go-forward with its acquisition despite last-minute financial concerns because the strategic high tech value-chain opportunities are bold and reflect the visions of industry icon Terry Gau.

Time will tell how the saga of Sharp and Foxconn transpires and what it eventually leads to

Industry supply chain strategists should obviously continue to monitor events such as these since the traditional contract manufacturing business model is about to change.

It is inevitable, and OEM’s need to be prepared to deal with the potential consequences.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Report That Ford is Planning to Double Production Capacity in Mexico- The Political Dimensions Become More Prominent

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In August of 2014, we initially alerted our Supply Chain Matters readers to the growing attractiveness of Mexico as a North America based Manufacturing and export hub for the global automotive industry. At the time, automotive OEM’s BMW, Honda, Kia Motors, Mazda, Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. That process has continued. Today, The Wall Street Journal reported that Ford Motor Co. has plans to more than double its Mexico based production capacity by 2018. The decision, if confirmed, has many further implications from many dimensions, including the political dimension.

As we observed in 2014, Mexico’s attraction stems from two strategic considerations.  The first is to serve as an alternative global manufacturing region in the context of lower direct labor costs as well as to offset global currency impacts. The second is serving as a hub of automotive exports to serve both North America and other global markets because of the former considerations.

Citing informed sources, today’s WSJ report indicates that Ford will build an entirely new assembly plant in Mexico as well as expand capacity of a current facility. The new assembly complex is expected to be built in San Luis Potosi with an annual capacity for as many as 350,000 vehicles per year. A separate expansion is being planned for Ford’s Cuautitlan production facility near Mexico City, which will reportedly augment production capacity for an additional 150,000 vehicles annually. Total invested cost is noted as $1 billion, on top of the $2.5 billion in investment that Ford announced last year concerning a new engine and transmission production facility.

As for models being considered for Mexico production sourcing, the WSJ indicates the current Ford Focus is scheduled to transfer production from a U.S. facility in Michigan within the next two years to make room for more profitable truck based vehicles. Two other new models are being planned for Mexico, one being termed as an all new hybrid car designed to compete with Toyota’s Prius hybrid. Ford already produces two other midsized sedans in Mexico. The WSJ views Ford’s product strategy as having higher margin product models such as SUV’s and pick-up trucks sourced in U.S. plants under labor union contracts, with lower margin models sourced in Mexico and other foreign countries.

The WSJ report’s editorial reflects that Ford’s latest moves are indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raises direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates are indicated as being one-fifth that of unionized workers in the U.S.

Ford itself refused to comment on both the WSJ report as well as its editorial related to offsetting direct labor costs.

Speculation that Ford was considering an increased manufacturing presence in Mexico has been cited among certain candidates in the U.S. Presidential election cycle, and not in a positive manner. The politics of such a decision are ripe given that certain U.S. states with unionized workers will vote in presidential primaries over the remainder of this year, and states like Michigan, Ohio and Illinois have influence in delegate and Electoral College voting. Presidential Republican candidates such as Donald Trump while democratic candidates Bernie Sanders and Hillary Clinton echo the fears of more jobs being lost to Mexico and other countries. Then there is the rhetoric in Republican ranks of building higher walls on the U.S. and Mexico borders to stem illegal immigration and protecting jobs.

As our Supply Chain Matters readership is well aware, major production sourcing decisions have broader implications, the need for many dependent suppliers to also increase their sourcing presence to supply production in Mexico.   This is especially important in automotive supply chains that are mostly driven from just-in-time production and inventory movement methodologies. The greater the investment presence in a single country, the more value-chain presence occurs, adding to more investment.

The Trans Pacific Partnership Agreement when and if ratified, will provide even more implications to multi-industry global sourcing strategies, especially automotive. No doubt it well heightens more political discourse on job creation or job loss among North America countries. Mexico itself threw a monkey wrench in ongoing talks hoping to preserve the current automotive sourcing investment wave and to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S.  Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free.

Mexico recently overtook Japan to become the second-largest exporter of vehicles to the U.S. The WSJ report cites data from LMC Automotive indicating that auto factories in Mexico produced 3.4 million vehicles in 2015, about one-fight of all North America production.

U.S. and other global-wide political leaders, whether current or aspiring, should be concerned with such global supply chain strategic sourcing decisions. This latest WSJ report cites Mexico’s economy minister as indicating that there will be several other significant automotive industry investments announced in the not too distant future.

The obvious takeaway is that in the current period of trending reflecting global manufacturing recession and consequent heightened concerns for global trade and local economies, strategic sourcing decisions will take on heightened political dimensions, and such an environment transcends quantitative data such as direct labor and landed costs. Beyond analytics, quantification and spreadsheets are the politics of jobs and economic security, which are taking on far more concern.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.  All rights reserved.


Top Ten Most Read 2015 Supply Chain Matters Content

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This Editor had the opportunity to view our Supply Chain Matters readership analytics (thanks to Google Analytics) for all of 2015 and can now share our ten most popular 2015 commentaries during the year.  Supply Chain Matters Blog

In reverse order:

Number 10

Highlights of the APICS Annual 2015 Conference held in Las Vegas in October, and specifically ex-GE CEO Jack Welch’s keynote interview. Welch expressed a number of insights on the topic of leadership, and more specifically, supply chain management, and the professionals who manage today’s supply chains. We are very pleased that this commentary made our top ten.

Number Nine

Our September commentary related to Tesla Motors contracting of strategic supply of lithium for its new gigafactory. Our commentary addressed the  broader strategy unfolding, one that extends beyond automotive supply chain needs, including the power storage needs of homes and businesses. The site was chosen because of its close proximity to supplies of the all-important raw material of lithium as well as to the Tesla factory in California.

It seems that our readers were quite interested in all news related to Tesla  since the auto manufacturer appears twice in our Top Ten.

Number Eight

Our July commentary addressing the needs of supply chain business intelligence for SAP environments, specifically that as supply chain business processes become ever more complex, teams try to fill the gaps with downloads of static reports and ancillary spreadsheets to provide more meaningful operational analysis. We felt and sense that this is indeed representative of the broader SAP community, and brought awareness to other options. Our commentary brought wider attention to Supply Chain Matters Named sponsor Every Angle Software who’s self-service operationally focused business intelligence tool includes an extensive list of European installed base customers with SAP backbones.

Number Seven

Our January commentary, “Extended supply chain” is the new supply chain, a guest contribution by Prashant Mendki, Director Alliances and Business Development for supply chain systems integrator Bristlecone. The commentary called for a holistic “integrated extended supply chain” rather than independent business processes where the entire ecosystem would be treated as part of the supply chain, and where suppliers would have complete visibility into key customer demand and have their response plan ready.

Number Six

Our September market education commentary bringing visibility to Xerox’s new more cost affordable smart labeling technology and the availability of two printed electronic labels that can collect and store information about either the authenticity or condition of products flowing across the supply chain. From our lens, the availability of such advanced labeling technology will foster new, more affordable dimensions of item level tracking, security and authenticity specifically related to products. This author characterized the development as the dawning of item-level tracking technology that industry supply chain teams have versioned for quite some time.

Number Five

The highlights of our Supply Chain Matters interview with Irfan Khan, CEO of Bristlecone while attending the Gartner Supply Chain Executive conference. Our interview touched upon a number of areas including predictive analytics applied to supply chain decision-making needs. Irfan opined that mainstream acceptance of the full spectrum of smarter analytics (Descriptive, Prescriptive and Cognitive) applied to supply chain and manufacturing capabilities will take additional time for most organizations to be fully prepared to leverage. He confirmed organizational change management readiness and client skill impacts that take time to work through

Number Four

Oracle’s July announcement of expansion of public cloud capabilities applied to order fulfillment, specifically Oracle Order Management Cloud and Oracle Global Order Promising Cloud. Out takeaway for readers was that Oracle remained committed toward a broader development and release plan surrounding SCM applications in the public cloud platform than perhaps other competitors such as SAP.

Later in 2015, in conjunction with Oracle Open World, the full Oracle SCM Cloud suite was announced by Larry Ellison in his opening keynote. From our lens, Oracle had developed one of the broadest cross-functional supply chain management, public cloud based applications currently available in the marketplace. That stated, there are qualifiers in that this public cloud suite provides standard functionality as opposed to the ability to support customized customer business needs. Its strength resides in faster time-to-value and potentially lower IT infrastructure deployment costs.

Number Three

Our highlights and impressions regarding the FedEx acquisition of both Genco and Bongo International. Genco was one of the largest 3PL’s in North America and Bongo International provides an e-commerce platform that facilitates international customers purchasing items from domestic websites.  We were intrigued by the low price paid for Genco which as less than current earnings.

Number Two

Our February commentary reflecting on Tesla’s operating results reflecting some supply chain strainsOur observation was that while showing some supply chain strains at the end of 2014, even more challenges remained for Tesla’s supply chain in 2015. Tesla has often demonstrated the effective use of advanced technology applied to manufacturing and supply chain business processes, and that 2015 will be no exception to that trend.

We just published a follow-on commentary reflecting on Tesla’s 2015 delivery performance leaving some Model X customers rather frustrated.

 

Finally, our Number One most read 2015 content was:

Our unveiling of the full listing of 2016 Predictions for Industry and Global Supply Chains published on December 15th.  We interpret that to mean that our readers are keenly focused on what lies ahead in the New Year, and that’s OK with us.

 

We trust that all of our line-of-business, IT and cross-functional supply chain readers have gained value and insight from our independent lens on supply chain focused business developments, business process and technology challenges among various industry and global perspectives. We believe we have accumulated a truly in-depth library of industry-specific and functional content.

Once again, as we enter our ninth year and remaining as a top ten or top twenty-five presence among supply chain blogs, we again thank our loyal global based readers and our sponsors for their continuing support.

Bob Ferrari, Founder and Executive Editor

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.

Content appearing on Supply Chain Matters® may not be used by any third party without written permission of the author and/or our parent, The Ferrari Consulting and Research Group LLC.


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