Global electric auto and solar power producer Tesla reported Q1-2017 automobile production and delivery performance this weekend, and the numbers provide both good, or concerning news, depending on perspective.
The automaker reported that it had delivered just over 25,000 vehicles for the March-ending quarter, establishing a quarterly record. Total deliveries consisted of 13,450 Model S and approximately 11, 550 Model X vehicles. These numbers were characterized as a 69 percent increase over the year-ago quarter. However, the year ago, quarter is perhaps not a meaningful benchmark, given Tesla’s strategic objectives.
As noted in our last Tesla operational and business performance focused commentary, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles across all model lines on an annual basis by 2018.
There are many areas all along the supply chain that could prove to be weak links, not to mention the steep ramp-up needs for both the battery gigafactory and the Fremont facility. We called attention to a published San Jose Mercury Times expose commentary in February indicating that long hours and reported unsafe working conditions was causing disgruntled workers to seek out potential external labor union assistance. The report indicates that during November and December, employees worked a minimum of 6-day workweeks to keep-up with production needs, as well as a supply chain disruption involving auto pilot technology, that skewed production output into December.
Included in Tesla’s Q4 production report was a notation that 2750 vehicles missed the production cutoff at the end of December, while a total of 6450 vehicles were classified as in-transit to customers. Thus, the recent Q1 2017 performance numbers had a total Q4 carryover of 9200 vehicles at the start of the quarter. Thus, net production could be interpreted to be 20,450 vehicles when one nets out the 9200 vehicle Q4 carryover and the 4650 vehicles that were still in-transit to customers at the end of the quarter.
A broader historic to the vehicles in-transit carryover numbers would be the following:
Q1-2016: 2615 vehicles in-transit
Q2-2016: 5150 vehicles in-transit
Q3-2016: 5500 vehicles in-transit
Q4-2016: 6450 vehicles in-transit
Q1-2017: 4650 vehicles in-transit
As Supply Chain Matters has previously observed, the above in-transit trending points to a building vehicle transportation and customer last-mile fulfillment challenge, that continues to weigh on overall operational performance. To reach its 500,000-annual performance goal in just under two years, both production, distribution and customer delivery processes must scale at a much higher rate.
Tesla is now completing an additional round of equity and debt supplemental funding to launch the scale-up of the new Model 3, designed to appeal to a broader consumer audience, and with higher pent-up demand for production output.
Which each passing quarter, there will be far more scrutiny surrounding Tesla’s operational performance as well as the underlying supply chain processes and management systems. While this week’s financial headline is that Tesla may be a more valuable company than perhaps Ford Motor Company or General Motors, we submit the broader determinant is overall consistent supply chain performance and scalability.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
If Supply Chain Matters readers have been following along our streams of blogs related to Tesla are probably aware that the global electric automaker has had its share of growth and supply chain scalability challenges. It’s the good news notions of groundbreaking technology and a cult following of loyal customers, fueling demands for vast scalability in supply, manufacturing, and global distribution of completed vehicles.
In addition to producing the increasingly attractive and rather expensive all-electric Model S and Model X sedans, the supply chain is now in the throes of preparing for the ramp-up of volume production of the less expensive, broader market appeal Model 3 sedan targeted at a sales price of $35,000. The latter vehicle began pilot production in early February with plans to produce upwards of 5000 Model 3 vehicles weekly by the end of this year. That is an aggressive timetable from many supply chain perspectives.
To prepare for Model 3 volume production needs, both the existing “gigafactory” in Nevada that produces lithium-ion batteries, and Tesla’s existing production assembly site in Fremont California have undertaken square footage expansion. The Fremont facility itself will expand by up to 4.6 million square feet, adding upwards of 3100 additional jobs.
As noted in our prior blog commentary at the time of Tesla’s report of Q4 and 2016 financial reporting, the company has amassed upwards of $18 billion in debt with total cash on-hand amounting to $3.4 billion at fiscal year-end. That condition prompted Founder and CEO Elon Musk to call for an additional round of a combination of upwards of $1 billion in bond and equity financing to provide an added cushion for capital investments needed to ramp Model 3 production. As we pen this blog posting, a breaking news report indicates that China based Tencent Holdings has invested a reported $1.8 billion in Tesla, amounting to a 5 percent stake in the company. Tencent acquired its stake in a combination of the added stock offering by Tesla and shares purchased on the open market. While Tencent’s stake is reported to be passive, it does represent that Chinese company as the fifth largest shareholder of Tesla stock. Tencent own’s China’s largest social network, WeChat, and is recognized as the world’s largest electronic games publisher.
Regarding the ongoing scalability challenges of Tesla, the San Jose Mercury Times published an expose commentary in February indicating that long hours and reported unsafe working conditions was causing disgruntled workers to seek out potential external labor union assistance. The report indicates that during November and December, employees worked a minimum of 6-day workweeks to keep-up with production needs. At the same time, the high cost of living within Silicon Valley forces production workers to have a reported reliance on overtime to survive financially. The report further indicates that all Tesla employees were recently asked to sign a supplemental non-disclosure agreement indicating that all observations of work activities, schedules or production plans are confidential information.
As noted in our last Tesla focused commentary, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles across all model lines on an annual basis by 2018. There are many areas all along the supply chain that could prove to be weak links, not to mention the steep ramp-up needs for both the battery gigafactory and the Fremont facility.
The market stakes are high, along with the rewards. In the end, the supply chain, including product management and manufacturing will serve as the critical enablers to Tesla’s bold expansion plans.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In October of last year, Supply Chain Matters published a blog commentary: Good and Not So Good News When All Eyes Are Focused on Your Supply Chain. Our commentary focused on ongoing developments involving certain commercial aircraft and aerospace industry supply chains, and specifically aircraft engine manufacturer Pratt & Whitney. We committed to our readers to follow through on this stream of ongoing developments to provide added insights and learning. This week, Pratt parent United Technologies briefed analysts and shareholders on Q4 and 2016 performance and there were even more nuggets of information and learning.
Once again, we alert readers to the overall length of this particular commentary, but we want to make sure that full context is presented.
The commercial aircraft industry remains challenged by conflicting goals. They include the ability to more rapidly scale-up overall aircraft production levels. However, that sometimes conflicts with the industry dynamics of OEM dominants Airbus and Boeing in their respective desires to deliver higher margins, profitability, and more timely shareholder returns.
Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity, process innovation and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings. We will have more to state on this dynamic when we get to our 2017 Prediction deep-dive on unique industry-specific challenges for the coming year.
In response for airline industry needs for more fuel-efficient and more reliable aircraft, Pratt has designed and introduced a revolutionary new geared-turbofan (GTF) aircraft engine. However, a series of supply chain glitches and volume production ramp-up challenges directly impacted the aircraft delivery production plans of both Airbus and Bombardier in 2016, causing both final manufacturers to now incur some financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link was Pratt. There are others as well, such as interior seats for new wide-body aircraft, but in this new world of ubiquitous visibility, any one supplier can bear the brunt.
In September, UTC, the parent to Pratt, and specifically CEO Gregory Hayes, warned the conglomerate’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers. Haynes acknowledged the obvious in that Pratt’s airline customers were not happy with the news. Neither were UTC stockholders who initiated an immediate 2 percent sell-off in the company’s stock. During that time, Haynes briefed analysts and investors on many of the operational details of Pratt’s supply chain challenges which was an obvious indication of high levels of visibility and detailed briefings that the CEO was obtaining.
Also at that time, Hayes indicated that of the approximately 800 parts for the high-level bill of material for the new GTF Pratt engine, five parts were causing the most pain due to supplier challenges in meeting Pratt’s volume production and quality needs. One critical problem was the heart of this new engine, its newly designed aluminum titanium composite fan blade, noted as a breakthrough in material design and expected performance. Initial production yield problems of the fans had averaged an unacceptable 20 percent.
To help our readers follow developments, we reviewed the entire transcript of UTC’s senior management briefing to equity analysts and shareholders regarding Q3-2016 financial and operational performance delivered in October. It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain, hence the title of this commentary stream. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and it’s going to be fixed this quarter.” He later stated that UTC senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway related to process and yield improvements, lead-time reductions and additional added capacity. The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more of Pratt and its supply chain challenges.
We can now update this Supply Chain Matters commentary stream with some highlights of this week’s Q4 2016 and year-end investor briefing.
CEO Hayes declared a solid year for UTC in terms of business and financial results. He praised the Pratt division on GTF accomplishments and reiterated that this engine is now powering 46 in-service Airbus A320 neo’s with more than 82,000 operational hours.
For the year, Pratt delivered a total of 138 GTF engines, 62 of which were in the final Q4 quarter. Moving to the question and answer period with equity analysts, we noted seven specific questions related to Pratt, the GTF engine, and the Pratt supply chain. Among the more detailed information that was shared in executive responses:
- On the positive news side, executives stressed that Pratt’s supply chain challenges are in a far better state than that of June last year. Production yields on the critical fan blade are now up to 80 percent production yield, a new partner manufacturing facility begins production this quarter and excellent progress is being made in opening a second facility in Michigan scheduled to begin production at mid-year. Reiterated was that Hayes monitors such numbers from his Pratt division on a weekly basis.
- There have been some issues with GTF in-service reliability, specifically the engine’s combustor liner and an oil seal. Regarding the combustor, issues are related to what was described as harsh operating environments of which India was specifically cited. Hayes indicated a component re-design is underway and will be retrofitted in operating engines later this year. Premature failure of an oil seal was noted as supplier related, with a fix identified with a modified seal available by May. Hayes characterized these issues as “typical of a new product introduction.” Hayes emphasized that the engine’s fuel burn performance metrics are being met right out of the box, its revolutionary designed geared-turbo fan is performing as designed, and again stated his confidence in the Pratt leadership team to resolve any supply chain or component related issues.
- In addressing this year’s production plan for the GTF, Pratt plans to build 350-400 engines, 50 of which, (roughly 7 percent of production) will be designated as spares to support customer uptime while the above described component performance issues are addressed.
- One analyst from Bank of America Merrill Lynch specifically questioned whether this was the fifth iteration of the combustor design. Hayes emphasized that not all airline operators are experiencing combustor performance issues, only those in harsh operating environments. The overall timeline for the combustor seal was described as three design iterations. The first 17 engines had the first design which Pratt was aware had to be upgraded because of durability issues. The ‘B” version was described as not having met expected life in harsh environments and thus the third design is expected to be in-place by the end of this year. Again, spares will be made available to airline customers as these component design changes are completed.
- This same equity analyst asked a follow-up question. If the GTF engine has 30 percent fewer parts, does that translate to a goal that these engines can be sold a breakeven profitability at introduction? Hayes reply was that Pratt is currently losing money on each GTF engine that is shipped, but that is the reality of commercial aircraft engine development. Returns come in later years, and in the case of GTF, that is planned for the 2018 time-period. Another analyst continued to probe on breakeven expectations.
We have highlighted the above year-end UTC briefing summary statements to provide our readers reinforcement as to how visible supply chain challenges can become in today’s world of ubiquitous information and especially on how investors and equity analysts can now hone-in on supply chain vulnerabilities. The supply chain indeed matters, and investors are becoming more well informed to this tenet.
We expect many Supply Chain Matters readers to have added impressions or feelings regarding UTC’s latest supply chain related disclosures. Questions such as whether Pratt teams were aware of combustor or oil seal issues earlier in the program or whether pressures to meet first and subsequent customer ship milestones were overriding. There may be other questions related to multi-tiered supply chain visibility or early-warning from suppliers. That is not for this specific commentary to address. Certainly not without speaking to those with knowledge.
As noted in October, operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. This is where the learning comes in.
The looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast of today’s industry supply chains.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
The following Supply Chain Matters commentary has a theme, let’s call it a good news- not so good news theme. Be warned that its length is somewhat longer because it represents a Research and Consulting Advisory that I felt should be shared with our blog readers.
When I deliver presentations on supply chain management topics, I often use the above analogy regarding our community. You see, for many years, the efforts of supply chain management teams and professionals were often perceived as being taken for granted or misunderstood. Teams were frustrated as to why senior managers did not comprehend why supply chains do matter in accomplishing financial, operational and customer business objectives.
Today, the good news is that, more and more, the C-Suite and indeed the board room now have full understanding of the contributions and the value. The not-so-good news is the same, and it comes with higher expectations for delivering on key business goals, both financial and operational, and in the high-level visibility window now focused on any firm’s supply chain performance. Especially when shortfalls in performance cause the need for broader senior management and shareholder visibility.
So, where are we going with this posting?
Let’s revisit the ongoing developments involving certain commercial aircraft and aerospace industry supply chains. In our ongoing multi-year coverage of industry players, we have continually pointed out the extraordinary circumstances of an industry that is designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels is clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns. Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings.
One specific development has been the increasing visibility to the supply chain challenges occurring at aircraft engine manufacturer Pratt and Whitney, specifically its revolutionary new geared-turbofan (GTF) aircraft engines. Supply chain glitches and volume production ramp-up challenges have now directly impacted the aircraft delivery production plans of both Airbus and Bombardier, causing both final manufacturers to now incur the financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link has of-late been Pratt. There are others as well but in this new world of ubiquitous visibility, any one supplier can bear the brunt.
In our blog commentary published in mid-September, we highlighted that United Technologies, the parent to Pratt, and specifically the UTC CEO, warned the conglomerate’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers. CEO Gregory Haynes indicated the obvious in that Pratt’s airline customers were not happy with the news. Neither were UTC stockholders who initiated an initial 2 percent sell-off in UA stock.
At stake is the ongoing production ramp-up of the Airbus A320 neo which first certified with the new Pratt engine. Certification of the neo version with CFM International engines is in-process, and with the current visible challenges for Pratt, Airbus production operations teams must now deal with the option of whether to shift current backlog order fulfillment more to CFM powered versions to insure attainment of Airbus’s 2016 and perhaps 2017 production objectives. Similarly, financially challenged Bombardier’s new CSeries aircraft has just initiated initial deliveries to airline customers but management was forced to warn that commitments for the overall market must now be scaled back because of the limited supply of finished Pratt GTF engines, the sole certified engine for the CSeries. Bombardier just announced its second round of significant headcount reductions to preserve cash and working capital needs.
UTC CEO Hayes indicated in September that: “five parts are causing us pain this year”, due to supplier challenges in meeting Pratt’s current volume production and quality needs. There are approximately 800 parts for the high-level bill of material for the new GTF Pratt engine. One critical problem is the heart of this new engine, its newly designed aluminum titanium composite fan blades, noted as a breakthrough in material design and expected performance.
This past week, UTC reported on its Q3-2016 financial and operational performance. To follow this story, we reviewed the entire transcript of the senior management briefing to equity analysts and shareholders.
It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain.
CEO Hayes opened the briefing with the review of UTC’s three key priorities: flawless execution, structural cost reduction, disciplined capital allocation. He quickly touched upon the current success of Pratt and its new GTF aircraft engine, noting that the engine is already meeting or exceeding key performance targets and already delivering 99.9 percent dispatch reliability on Airbus A320 neo in-service aircraft.
Thus, the positives related to product design and engineering.
It was not too long before the Pratt near-term challenges and the details of slower deliveries than planned began to come forth. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and its going to be fixed this quarter.” He later stated that UT senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway:
- Process improvements
- Yield improvements
- Lead-time reductions
- Additional added capacity
The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more and more of Pratt and its supply chain challenges.
Highlights of disclosure included:
- In Q3, Pratt delivered 76 GTF engines across all platforms and management anticipates 150 engines to be delivered by the end of this year, meaning similar output level in Q4. The 2017 delivery goal is now set at between 350-400 engines.
- Pratt’s negative margin trend will increase from $650 million in 2016, to $950 million in 2017 because of absorbed engineering and development costs and break-even volumes not expected until way after 2017.
- The GTF titanium aluminum fan blade was again identified as being a prime bottleneck. At the beginning of 2016, the total lead time, from start to test completion, for the fan blade averaged 100-105 days, more than 3 months. First pass test yields were described as 30 percent. Today, the same lead time was noted as 55 days with first pass yield rate of 75 percent. The overall production process related to the fan blade was described as incredibly difficult.
- An additional fan blade production partner is scheduled to come on-line with added capacity by November. Full production of this partner is expected in January.
- Pratt is additionally starting-up a brand new, more automated factory, next to the current owned blade factory in April of next year.
- Pratt has a strategy in-place where no single point of failure resides in the supply chain. In-essence, at least two key suppliers for each of key parts within the GTF engine.
- And finally, UA brought back former Sikorsky Aircraft and GE Aviation senior operations executive Shane Eddy to lead operations at Pratt.
The need for the sharing of all this supply chain operational detail with investors comes back to our original theme of good and not so good news.
Operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. The revolutionary new fan blade was a known critical component, yet now with visibility at the highest levels of management, additional financial and operational resources needing to address disappointing ramp-up needs are now being allocated. Bringing in a new senior operational manager with prior known accomplishments is another potential sign. Another theme we believe is the recurring one of having to balance billions of dollars of investment in stock buy-back with perhaps the need to invest capital earlier in manufacturing automation and worker productivity.
In essence when the CEO of your holding company, under the constant gun for higher shareholder returns, is now disclosing the detailed operational get-well strategies of your supply chain, than you know that the looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast.
The good news of higher visibility is the priority for marshalling all required corporate resources to address existing supply chain challenges and needs. The not so good news is the peril that such visibility can sometimes bring.
This state is one that senior supply chain leaders will have the most difficulty managing.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
No sooner had Supply Chain Matters raised our awareness to the collective march to the bottom of the U.S. airline industry came this week’s network-wide computer systems disruption impacting Delta Airlines. As we observed, it is looking more and more like the industry is being led by financial types who seem to have completely ignored the tenets and principles of basic operations and network management.
But, Supply Chain Matters wants to extend direct praise to Delta Chief Executive, Ed Bastian. The primary reason- as the CEO he stepped-up and took full responsibility for the systems failure resulting in the cancelling of thousands of flights and inconvenience to countless customers. He further praised all of his employees for the extraordinary effort in delaing with this crisis and efforts to assist impacted customers.
The airline further posted a video where the CEO directly apologized to Delta customers.
According to Bastian, the disruption began when a power switch failed causing a power outage that subsequently led to other cascading incidents including a transformer blow out in Delta’s data center. The entire system crashed and backup systems did not perform as expected. Bastian indicated openly: “This is our responsibility- the buck stops here.”
What impressed us even more was Bastia’s statement:
“It’s not clear the priorities in our investment have been in the right place. It has caused us to ask a lot of questions which candidly we don’t have a lot of answers for.”
Unlike some other airlines, Delta has invested in operational capability both in aircraft and in supporting systems. In 2012 we praised Delta’s bold supply chain vertical integration initiative in acquiring its own oil refinery. We have also highlighted innovation in aircraft re-purposing.
Yet, this week, the system failed, and the airline has taken full responsibility to find out why and hopefully correct flaws.
Too often in times of major operational or supply chain disruption, CEO’s turn silent and de-facto let operational executives take the arrows and blowback. Some are arrogant enough to openly blame disruption on suppliers, partners or equipment, not acknowledging the principles of ownership and accountability.
Hopefully this week’s incident may provide a watershed for the U.S. airline industry. The compass of services focused on customer needs for a convenient, somewhat pleasant and reliable travel experience has been pointed in the wrong direction, and the consequences and cost of these decisions are coming home to roost.
Praise to a CEO who demonstrates accountability and leadership. We need more of this.