Tesla Motors Reports Q2 Production and Operational Results- The Critical Ramp-up of the Supply Chain
Tesla Motors remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs.
On Sunday, Tesla announced that the electric auto maker had produced 18,345 vehicles during Q2, a volume increase of 20 percent from Q1. However, in classic “hockey stick” fashion, 5150 completed vehicles were still in-transit to customers at the end of Q2 because production completion was skewed toward the latter part of the quarter. That in-transit number represented double the number reported in Q1 (2615 in-transit), a reflection of Tesla’s unique challenge of supporting a direct to consumer distribution model that adds direct to customer delivery acknowledgement to actual revenue recognition.
The auto maker acknowledged that almost half of the quarter’s Q2 final production occurred in the final four weeks of the quarter which is an obvious sign of component supply and other production challenges. The goal set by Tesla management in Q1 was to produce 20,000 total vehicles in Q2.
Tesla reaffirmed that it is on-track to deliver 80,000 – 90,000 new vehicles in 2016 which implies that production volumes in Q2 and Q3 must continue to ramp-up to deliver 50,000 total vehicles. To that end, Tesla indicated that it excited Q2 at a production rate of 2000 vehicles per week, with milestones of 2200 vehicles per week in Q3 and 2400 per week by Q4. Thus there is little tolerance for any future supply chain disruptions.
As noted in previous Supply Chain Matters commentaries and in the company’s statements to shareholders and customers, Tesla has elected to accelerate plans to ramp annual production volumes to 500,000 vehicles annually by 2018, two years earlier than previously planned. At the recent annual meeting of shareholders, Founder and CEO Elon Musk indicated that Tesla will “completely re-think the factory process.” Musk repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. To that end, he disclosed that he now no longer has a Tesla office, instead spending the bulk of his time residing on the production floor and observing. He has challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.
Further acknowledged was that the Model X design was overcomplicated, perhaps too much to accommodate production volume needs. Going forward with the development of the new Model 3, he indicated that a tighter integration loop among product design and manufacturing would be fostered.
Going forward, Tesla has to have a laser focus on supply chain and production execution. Invariably, the company will become distracted by other needs requiring management attention such as product issues or the ongoing autonomous auto-pilot software caused accident that has caught the attention of U.S. regulators.
Traditional auto manufacturers attain a supply chain ramp-up focus via a permeating culture of just-in-time continuous production and total elimination of production waste. Culturally, that can be a tall order for most innovative high technology companies whose emphasis is on innovative and breakthrough product design while leaving the production details to contract manufacturers.
Tesla however continues to push the envelope of traditional thinking. Over the coming months and years, we all get to observe the results.
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In the light of this week’s announcement of the mega-merger among HJ Heinz and Kraft, coupled with the new interest in zero-based budgeting techniques, we felt it was timely to provide a brief tutorial on the process.
A Google search can yield ample content and perspectives on this process.
In definition, zero-based budgeting (ZBB) is essentially a financial-driven process where budgetary resources are set to zero every year and must be justified for the new budget period. It was a process originally conceived in the seventies in an era where organizational bloat among large corporations was rather common. Instead of referencing the previous year’s budget, the slate starts over with managers having to justify their business assumptions and required expenditures for the upcoming period, as if they were a new business or support function. Every budget is viewed from a fresh perspective and evaluated and approved based on relevance to overall corporate goals and expected outcomes.
In context it is rather important to note that ZBB is often a financial-driven process and can be undertaken and applied within companies or organizations that are required to considerably reduce costs and improve profits. As some are now pointing out, that is why it is garnering increased interest in among large consumer product goods producers.
It is rather important that organizations understand the pros and cons of this process. In our effort to do so, we are sharing our perspectives. We certainly encourage our readers to add their perspectives and experiences in the Comments section associated with this posting so that many can benefit.
Pros of ZBB:
- A mechanism that facilitates much higher levels of cost reduction than traditional budgeting methods.
- Relate costs to the specific mission and purpose of an organization at a given time.
- Garner much more detailed understanding of an individual organization’s role and purpose and that organization’s staffing and resource levels.
- Weed out duplication, ineffective and/or counterproductive activities.
- Uncover additional opportunities for cost synergies.
- Provide a means for prioritizing spending cuts
- Some would argue that it diffuses an entitlement mentality by requiring detailed justification.
Cons of ZBB:
- Clearly ZBB consumes a tremendous amount of time and organizational energy. Some would argue it can take up the bulk of organizational time, constantly having to justify and re-justify efforts.
- In many cases, ZBB can stifle bottom-up or supplier based product or process innovation, since there is little time or resource for such efforts.
- Consensus is difficult and often painful.
- The impact to employee morale can be substantial, not only in the dimension of perceived perks, but in individual value and promotional opportunities.
- Pits individual organizations in competition with one another.
- Cuts can be taken to an extreme.
- There can be a loss of focus to new, emerging or undiscovered opportunities among business, industry or new markets.
- Needs to be implemented very carefully and skillfully.
Now at this point, you may have discerned that this analyst and consultant may have biases towards the cons of ZBB. Contrary to the past, many industries and businesses have undertaken initiatives grounded in Six-Sigma, Just-in-Time or Lean Manufacturing methods. Thus, a lot of bloat or excess has already been analyzed and addressed. Some might argue whether these efforts were ultimately positive or detracted from business goal fulfillment or the overall reduction of costs. Others would argue that the above methods did not effectively address organizational overhead or layering. I believe that on the whole, they were successful.
In my career, I have found that ZBB methods must be carefully and methodically conducted in the light of a well understood mission and clearly articulated strategic roadmap. Talent recruitment, skills development and ongoing career opportunities must not be sacrificed by the process. ZBB can often bring foreword a “survivor” mentality where political skills outweigh either proven years of experience or sacrifice the required leaders of tomorrow. ZBB can sometimes be a panacea for wholesale human resource shifts. The process can further serve as a radical change to supplier relationship and collaboration practices.
The difference today is that certain private equity investment firms such as 3G Capital are setting a different, or perhaps more acute standard.
We now invite our readers to weigh in. Share your pro and con perspectives
Bloomberg BusinessWeek published an article profiling General Electric’s efforts to get the company acting more like a 21st Century startup. Taking a cue from Silicon Valley’s start-up culture, GE recruited tech entrepreneur Eric Reis, author of the book The Lean Startup, to initiate the company-wide movement titled FastWorks.
Similar to Lean Six Sigma that fueled rallying and transformational efforts in the 1990’s, FastWorks is targeted to motivate GE employees to be more customer focused, speed new product development, reduce costs and improve customer engagement. The Reis philosophy is that faster product innovation is garnered from building imperfect early versions, gaining timely customer feedback, while continuously “pivoting” and adapting products to address market opportunities. The initiative is described by GE Chief Marketing Officer Beth Comstock as “giving employees the freedom to try things that may not prove successful: Fail fast, fail small.”
Easily stated, but with far different implications for a rather large, global based manufacturer.
According to Bloomberg, GE has already trained 40,000 employees in FastWorks. With more than 300 projects underway, the program is described as one of the largest initiatives in GE history. Early product development projects include a high-output gas turbine developed two years faster with 40 percent less cost than would traditional program management would have yielded. Other product initiatives cited were a light bulb with built-in wireless dimming chip, an oil well flow meter which launched after a year in development and is being commercialized in alliance with an energy company.
In the article, a Harvard Business School professor is quoted as observing that as large companies get bigger and scale, they tend to slow down because they have so many processes, systems and structures. Having worked at large and small companies on technology related projects, and having observed the enterprise and supply chain technology marketplace for over ten years, this author can well relate to the obstacles and bureaucratic inertia of large organizations. Most of the innovation in software has come from smaller, best-of-breed start-ups who were laser focused on customer and supply chain needs. That said, failing fast is quite different in a larger vs. a smaller organization. If the philosophy is an integral fabric of the organizational culture, than teams expect to incur failures, learn quickly and move on. In larger organizations there tends to be analysis paralysis as to why the failure.
Supply chain transformation initiatives take on similar characteristics. In a previous Supply Chain Matters commentary highlighting the Supply Chain Management Review article, Culture Eats Strategy, authors John D. Hanson and Steven A. Melnyk provide us reminders that organizational attempts for implementing strategies of radical innovation are often stymied by inherent organizational culture. That includes the spillover of efforts directed at a firm’s value-chain focused processes. If an organization was previously managing suppliers based on cost competitiveness, adding quicker product innovation implies a potential conflict in culture. The article reminds us that the management myth of showing teams a better way and they will embrace it is often de-railed by an inherent organizational culture that can, and often will, resist radical change unless old ways are discredited.
Similarly, many organizational transformational initiatives need to address inherent organizational culture, especially if it detracts from desired outcome objectives, whether they target innovation, efficiency or responsiveness. Is it any surprise that certain enterprise software vendors have embarked on an acquisition frenzy to secure product innovation?
In the case of GE, culture has always been addressed from the top, and down. The legacy of Jack Welch and the current leadership of Jeff Immelt each demonstrated personal passion toward changing organizational culture. FastWorks will no doubt include GE’s internal business groups but its value-chain suppliers as well.
The takeaway is regardless of what name and purpose an initiative takes on, it must incorporate strategy and organizational culture needs.
What’s your view?
Are large organizational transformational efforts another means to employ large numbers of teams, or is changing existing organizational culture the prime objective?
In our recent Supply Chain Matters update on Q1 commodity price trending, we noted that the severe winter conditions that have occurred across the U.S. and Canada, coupled with operational disruptions in the placement and logistics of tank and bulk commodity railcars have led to reported disruptions in supply contracts of inbound bulk commodities. Commodity producers have had to shift to more expensive trucking options to accommodate food production line scheduling.
The government of Canada is now taking more extreme action against its national rail carriers with proposed legislation that would allow bulk commodity producers to switch between Canadian National Railway (CN) and Canadian Pacific Railway (CP) for flexibilities in getting commodity products to designated supply chain customers.
According to reports, Canada’s current conservative government is getting much more concerned about shipment bottlenecks, especially when it concerns commodity shipments to existing and newer export markets, including the United States. According to a report published by the Wall Street Journal, 150 grain elevators would have access to both rail lines under the proposed legislation. Currently only 14 grain elevators have such access. For its part, the CEO of CN is quoted as indicated that this legislation will have little impact when considering the extreme winter weather conditions seen this year across North America.
No doubt, the debates concerning government vs. private industry solutions to logistics bottlenecks will continue. In the end, it’s always a demand and supply imbalance problem that needs a solution.
If you have been a loyal follower of our Supply Chain Matters commentaries and predictions concerning Aerospace supply chains, you would be aware of the difficult position these value-chain ecosystems currently find themselves in. Once more, you would have had awareness to these challenges three year ago.
Thus we were somewhat amused to stumble upon this week’s Bloomberg Businessweek article, With Epic Backlogs at Boeing and Airbus, Can Business Be Too Good?
The article poses a fundamental question. With over 10,600 of firm orders for new aircraft among both Airbus and Boeing– When is order backlog too big?
In a July 2011 commentary, Aerospace Supply Chain Are Now Stressed, we observed that the building multi-year backlog comes amid an industry track record of not so stellar performance in operational consistency, two-way communication and predictability. Over two years later, although some progress has been made, many of the same challenges remain.
The question posed by Bloomberg, and indeed the Wall Street investor community, is indeed the appropriate question. As the article points out, if a wait for a new airplane stretches out over too many years, it can fundamentally impact the business model strategies of airline customers. Some of those dynamics are already occurring surrounding the continued undelivered backlog of Boeing’s new 787 aircraft. It further can motivate these same customers to consider alternative aircraft deployment or procurement strategies.
Another important consideration are the quickly changing economic environments that often drive demand for airline travel. Airlines from emerging markets are estimated to make-up at least a third of the current order backlog. Current concerns surrounding former booming developing markets are becoming evident in global equity markets as foreign currency tensions, devaluation and and other local economic factors impact business growth within these markets. There will certainly be increased airline travel within emerging economies but this demand needs to be balanced with economic up and down cycles.
In a meeting with Wall Street analysts this week, the CEO of Boeing reported strong earnings for the recent fical quarter but raised some warning signs for 2014 regarding earnings growth. Investors responded by driving Boeing stock down by over 5 percent.
Boeing’s 2014 operational plans call for increasing aircraft deliveries by 10 percent, roughly 715-725 aircraft amid a backlog of 5100 aircraft orders. By the end of the year, Boeing expects to be delivering two new 737 aircraft every day, yet only 10 new 787 Dreamliners monthly. Airbus remains operationally upbeat, empowering localized operational decision-making, yet the realities of a near decade of backlog is hauting.
The new reality is that investors are now becoming aware of the flip side of euphoria- you have to deliver the goods according to customer desires and expectations, and you have to be able to assure required operational on-time performance at customer ship time.
In our most recent commentary regarding Aerospace supply chains, we opined that agility and responsiveness are indeed going to be very important industry differentiators along with on-time and consistent performance for new product development milestones.
An enviable industry position awash with order backlog does not condone business-as-usual. Rather dynamic and responsive capacity management, end-to-end value chain visibility, enhanced supplier collaboration and goal-sharing all come into play.
Each of the major aerospace OEM’s can certainly boast of record performance in 2013, but the real challenges remain as each supply chain ecosystem responds to unprecedented requirements for development and execution. They will each put to the test the real meaning for agile and resilient supply chains.