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Tesla Motors Reports Q2 Production and Operational Results- The Critical Ramp-up of the Supply Chain

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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.  Telsa Motors Model S

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.

Bob Ferrari

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

 

 

 


Additional News Related to Tesla’s Gigafactory

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There has been some additional news regarding the status of electric car manufacturer Tesla Motor’s rollout of its planned gigafactory to produce its own electric cells for use in both its automobiles as well as other rechargeable battery supply needs.

The Associated Press reports that Tesla has now received and sold about $20 million in transferable tax credits granted by the State of Nevada in conjunction with an overall $1.3 billion incentives package put in place to lure Tesla to selecting the northern Nevada site location. In its most recent progress report issued to the state, Tesla indicated that as of the first quarter of 2016, an average of 369 workers were employed at the plant thus far, while an average of 599 construction workers continue to work on plant construction and fit-out.

Tesla battery gigafactory

Source: Tesla Motors

Reports point out that Tesla continues with a strategic supply agreement with Japan based battery supplier Panasonic. This supply agreement reportedly calls for the production of 1.8 billion battery cells through 2017, to support the output needs for both the Model S and the Model X. As of Q1, Panasonic had over 50 employees working at the Nevada battery plant.

The battery plant is being designed to eventually support the production needs of upwards of 500,000 electric powered vehicles per year. The design goal is that the plant would ultimately be able to produce batteries at 30 percent less cost, and when operational, would provide the capacity to be the single largest battery manufacturing volume plant in the world. The gigafactory is part of Elon Musk’s vision that batteries will not only be required in new automobiles, but in alternative energy applications as well. Hence, Tesla’s recent announcement of its intent to acquire SolarCity, the other component of this strategy, which includes supplying storage batteries to capture electricity captured by solar cells during the day, for use in other periods.

Meanwhile, a Bloomberg Businessweek published a report indicates that pressure to speed-up the original production ramp-up output of the gigafactory has taken on new significance because of the 330,000 preorders that have already been received for the new Model 3.

According to the report- “The accelerated schedule to supply the Model 3, the automaker’s first mass market car, doesn’t leave much time to create a complex supply chain that includes expanded mining and exploration operations.”

Further noted is that the Model 3 will feature a newer high-capacity battery with enhanced energy density to expand operating range.  To keep the base price of the Model 3 at its targeted $35,000 range, Tesla engineers are working on different compositions of metal content within the rechargeable batteries. Tesla has reportedly hired specialized metals experts to travel the world to seek out and work with metals suppliers.

In a Supply Chain Matters commentary published in September of 2015, we highlighted the bold supply chain vertical integration strategy that resulted in the concept of the gigafactory, destined to be one of the largest battery manufacturing plants in the world. We further noted the strategic importance of plant’s location in Nevada, close to available suppliers of lithium metal.

At Tesla’s annual stockholders meeting in May, Founder and CEO Elon Musk indicated that lithium metal will only account for two percent of the total materials in the firm’s electric cells. Rather than compete with high-tech and consumer electronics producers across Asia and Korea that consume 85 percent of current lithium supply, the strategy appears to be substituting other metal compounds instead. Similar to what we noted last year, the Bloomberg report indicates that strategic supply agreements for lithium have been signed with Bacanora Minerals and Pure Energy Minerals, each to explore and mine the metal within sources close to the new factory. However, a specialized metals research firm predicts a global deficit of lithium supply this year, turning to slight surplus in 2017 and 2018.

Musk reportedly indicated to stockholders that a bigger determinant for the Model 3 is the cost of nickel in the form that Tesla engineers require. That metal is being substituted for cobalt. Global-wide supplies of nickel have increased during the past two years resulting in a 50 percent decrease in prices.

As with many value-chain strategies related to a firm’s product supply chain, the ability to support both short and long-term customer demand need often rests with key strategic supply agreements. In the case of Tesla, that equates to the critical supply of not just battery cells, but the metals and compounds that go into the production of such cells.

A glance at Tesla’s recently filed Form SD, Specialized Disclosure Report with the U.S. Securities and Exchange Commission (SEC) related to adherence to avoidance of conflict materials can give one a sense of how important metals supply is for Tesla.  The Annex lists 41 different global suppliers of Tantalum, 51 suppliers of Tin and 35 suppliers of Tungsten. The scope is truly global in-nature.

Bob Ferrari

 


Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for More Active Planning – Part Two

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It’s the last Monday in June and as we pen this part two Supply Chain Matters advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. Our part one posting of this series addressed our initial perspectives and recommendations regarding Brexit. In this part two advisory, we will address yesterday’s formal opening of an expanded Panama Canal.

Yesterday, after nine years and in excess of $5 billion in investment, the Panama Canal Authority formally opened new locks on both the Pacific and Atlantic Ocean facing entries to accommodate the transit of far larger ships. The first ocean container ship to transit the expanded canal, the renamed Cosco Shipping Panama, operated by Costco Shipping Lines traversed an expanded canal from the Atlantic to the Pacific side.   PanamaCanalExpansion_2_450

The opening of this well-known expanded waterway was completed after nearly two years of delay, and considerable cost overruns. At one point in 2014, a stalemate raised doubts as to whether this huge infrastructure project would ever be completed.  Container vessels with capacity in excess of 12,000 TEU’s are now expected to be able to take advantage of the widened canal with promised faster direct transit times from Asia based ports directly to eastern United States ports, thus avoiding inter-modal movements across the United States. The other opportunity is for east coast based regional shippers to now have a direct transit route to East Asia.

There has been much anticipation as well as speculation regarding the benefits of an expanded Panama Canal. About a year ago, The Boston Consulting Group (BSC) and C.H. Robinson released a joint study-How the Panama Canal Expansion is Redrawing the Logistics Map, and predicted that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. East Coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing Ports of Savannah and Charleston. The study concluded that this container routing shift will permanently alter the competitive balance among U.S. East and West Coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing. The BSC study concluded that time-sensitive cargo may continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings.

Since then, other studies have pointed to new opportunities in logistics and transportation related to direct Asia to U.S. and converse goods transit, including the operation of new inland ports.

However, the one current gating factor is that many of the key U.S. East Coast ports are still working on infrastructure projects that would allow larger vessels to call on such ports. The ports currently best prepared to handle these larger vessels are the Ports of Miami and Savannah. Both the Ports of Baltimore and Charleston have active dredging projects underway while the combined Ports of New York and New Jersey still have significant infrastructure requirements yet to be overcome including a bridge near Bayonne New Jersey.

As we noted in a previous Supply Chain Matters commentary, a current boom in distribution and warehouse development includes large investments in east coast regions. The State of South Carolina is aggressively positioning its logistics and distribution infrastructure to be an economic beneficiary of the new routing. Over six million square feet of warehouse space is under construction in the Greenville- Spartanburg region mostly being attributed to the ability to support direct ocean container movements from Asia to the U.S.  An inland port at nearby Greer South Carolina is connected by rail to the Port of Charleston. From the Greenville- Spartanburg area, trucks can transit goods to the rest of major eastern U.S. cities or to U.S. Midwest manufacturing regions within a day’s drive. Thus, an alternative option opens up for direct transit and distribution of goods.

A lot will depend on active analysis and modeling by logistics and transportation as well as S&OP teams on the various cost and service options related to ocean movements to U.S. West Coast ports with intermodal truck and mail inland vs. direct ocean transit to U.S. East Coast ports with adjacent inland distribution and transit. A factor in modeling will be assumptions on port and infrastructure readiness as well as direct labor environment. Another uncertain factor is the all-important long-term cost of fuel, which is currently still hovering at unprecedented  low levels.

Needless to state, global supply chain logistics and distribution routing has no changed. Active global supply chain network modeling and assessment has become an all-important necessity followed by capability elements for ensuring broader supply chain wide visibility. The expanded Panama Canal now opens a long anticipated new opportunity but comes with differing and changing assumptions.

Be prepared with people, technology and more informed decision-making capabilities.

Bob Ferrari

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


Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for Active Planning- Part One

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It’s the last Monday in June and as we pen this advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. The other is yesterday’s formal opening of an expanded Panama Canal. Supply Chain Matters features two commentaries related to both developments. We begin with the Brexit vote.

The results of the Brexit referendum took many by surprise, including this author.  On Friday, alone investors wiped away nearly $2 trillion in market value from various global equity markets in reaction to the news.

By voting to exit the EU, British voters have set off a series of events that many are describing as unprecedented.  The most cited analogy seems to be- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the U.K., but on the EU alliance itself if other select countries take a similar course. Some fear the unwinding of Europe itself, which seems somewhat extreme at this point.  However, it will add more political and governmental dimensions to this ongoing crisis, along with building pressure to accelerate Brittan’s exit to stave-off other efforts at similar separation.

Many of the implications currently reflect such uncertainty and caution. After all, the timeline of Brittan’s exit would likely span two or more years. None the less, there will be short and longer term industry supply chain impacts and various supply chain and S&OP teams need to begin thinking about and educating management on certain strategy scenarios. We view these impacts coming from specific industry, trade and transportation as well as people related dimensions.

Two major industries dominating UK based manufacturing are automotive and aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing.

Two of the most dominant stakeholder brands of autos in the UK are Volkswagen and Tata Motors, The latter is currently the leading car maker in sales of various VW, Audi and Porsche branded vehicles and has a significant manufacturing presence in these brands as well as that of Bentley. For VW, the news is especially troubling given its current crisis for dealing with the financial and brand fallout stemming from the diesel emissions scandal across Europe and the United States. It adds yet another challenge to protecting its market interests. Tata Motors is the producer of Jaguar and Land Rover branded vehicles and the U.K. represents its single biggest market and source of profits. The shares of both of these manufacturers were impacted by the news of the exit EU mandate.

According to published business media reports, most global auto manufacturers seem to be collectively in reassessment mode regarding their current UK based operations. Concerns center on impacts on tariffs, uncertain currency fluctuations and the local market, as U.K. consumers themselves deal with new uncertainties and any economic consequences related to exit. According to a published report by The Wall Street Journal, registrations for new autos amounted to 18.5 percent of all European registrations last year. The WSJ cites forecasting firm data indicating that there could be as much as an $8.9 billion hit to auto OEM earnings and a nearly 14 percent decline in U.K. new car registrations in 2017. With the broader European auto industry coming off multiple years of retrenchment and downsizing as a result of the past global financial crisis, news of the UK exit, coupled with potentially other subsequent impacts, has many industry executives at-pause.

According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. From our lens, the most significant company to watch will be that of Rolls Royce which was already struggling with growth and profitability challenges.  Many of these providers exist in supply chain ecosystems being challenged to ramp-up production but at the same time, reduce overall costs. With such presence from many component manufacturers and actual commercial and military aircraft producers the open question is whether the reliance on a local currency and broken ties with EU trade policies will have an impact on the economics of the local industry. Only time will tell if they do.

From the independent trade and transportation lens, we had already predicted at the beginning of the year that major geopolitical developments centered on global trade agreements would present new concerns and challenges for industry supply chains. With a U.K. exit from the EU, industry supply chains need to factor another border crossing in their logistics and transportation plans, not to mention the potential for different tariffs or duties to emerge.

With major trade pacts such as the Trans Pacific Partnership (TPP) and the Transatlantic Trade Investment Partnership (T-TIP) still in ratification stages, a new unknown is entered, namely the U.K. as a separate negotiating party.  With many pushing for quicker ratification because of the current anti-trade political environment, these agreements could be faced with having to factor the U.K. as an unknown until exit is achieved and new trade policies adopted, not to mention a possible change in political leadership. The implication extends to product labeling, country of origin, intellectual property protection and other unknowns at this point.

Finally there is the issue of people, both in talent attraction and retention. An advisory from CBI Insights notes- “The free movement of workers between the U.K. and the EU arguably made London into a top tech startup talent pool in all of Europe. The decision to leave the EU may cause a brain drain that could hamstring innovation in London.” Some others take issue with the notion of brain drain.  However, multiple industry supply chains have already been impacted by the need for new talent and as supply chains become deeper invested in new technology needs and requirements, UK based producers, service firms and tech companies will need to assure that workers will find the U.K. economically and workplace attractive.

Brexit has ongoing implications beyond the U.K. that could conceivably impact other geographic regions, specific countries and industries. We advise supply chain and line-of-business teams to take on a precautionary approach towards any impacts brought about by Brittan’s exit from the EU. Rather than alarm, now is the time for active supply chain modeling and scenario planning to advise senior management of various business or financial implications, if any? Clearly, with overall global supply chain activity levels already trending toward contraction, and with this new politically active and vocal electorate, the global economy and global markets are becoming less uncertain.  This is a time of constant strategy awareness and attention to needs for contingency planning with added visibility to ongoing global events. We highly recommend that industry teams be vested in market and industry intelligence, supply chain risk mitigation and technology that brings added intelligence and insights to both customer-facing and supply-facing operational, financial and global trends.

Bob Ferrari

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


The State of U.S. Logistics in 2015- An Acknowledgement of an Industry In-Transition

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This week, The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney, published its 27th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions of this year’s report.

Before we begin, let’s take a step back.  MSC_Ship_2

For the past several years, we have raised a number of concerns and added perspectives regarding the state and overall costs of logistics across the United States. Our chosen editorial commentaries reflecting on the 2012 thru 2014 reports expressed concerns towards a continued trend for increased logistics, transportation and inventory costs and in 2014, we again cited our growing concerns regarding cost and service trends.  Regarding the 2015 report, our headline takeaway moved toward action, indicating that industry supply chain teams required to take attentiveness to the implications of what was occurring in various logistics and transportation channels.

We quote one of our Supply Chain Matters key takeaways from last year’s report:

With the latest (2015) report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.”

Similarly in our annual predictions for industry supply chains published prior to the beginning of every New Year, we have continually raised awareness to increasing forms of ongoing disruption occurring in various logistics and transportation sectors.

This year’s report was compiled by a different research partner, AT Kearney. Thankfully, the current report authors are finally acknowledging that change is occurring, with the main theme being- Logistics is in Transition. Other sub-headlines and takeaways in this year’s report include:

  • The logistics industry is entering a new era of disruptive forces that involve technology investments and operational constraints that will fundamentally change the rules of the game.
  • Growth in the parcel and express segment continues to be fueled by the ongoing explosion in online B2C E-commence and Omni-channel retail growth.
  • Overcapacity and buyer’s market state conditions continuing in the ocean container, air freight and now the U.S. rail segments.
  • Technology continuing to play a key role in the future transformation of the 3PL industry.

Regarding that latter headline, the CSCMP sponsored report indicates:

“The pace and breakthrough nature of technological innovation- and the rate of which it is adopted- will heavily impact supply chain assets, processes and people.”

A further perspective we urge are multi-industry supply chain readers to dwell upon is that according to this latest report, while business inventory growth flattened in 2015, it was countered by a 42 basis point increase in the weighted cost of capital resulting in a 5.1 percent overall increase in inventory carrying costs in 2015. Part of the explanation can be found in the Appendix section of the current report. The new authors elected to modify the calculation of inventory carrying costs because prior reports multiplied the total value of business inventories by a fixed percentage- 19 percent in prior years. The new authors elected to calculate the value by utilizing other matrices more reflecting actual values of weighted cost of capital.

The implication going forward is that pressures to add additional inventory to mitigate risk or respond to customer needs for same-day delivery will come with a stiffer financial cost beyond zero interest rate conditions.

Thus, if you chose not to consider what we have been pointing out in the last 18 months, you now have a renewed industry perspective. Therefore, we need not dwell in broader or different perspectives,, rather we urge our readers and followers to just read and absorb the report for yourself.

The latest report is available for download on the CSCMP web site.  Existing CSCMP members can download the report at no-cost, while non-members must pay a publication fee.

A few added comments related to the changes in this year’s report. We applaud CSCMP and AT Kearney for the changed methodology and added internal logistics industry and external multi-industry perspectives and insights brought forward in the new format. We encourage both organizations to continue that effort in future annual reports. Previous reports featured more added color and current data points in the current year and we trust the authors will take that into effect in future reports as well.

We re-iterate our ongoing key Supply Chain Matters takeaways:

The “new normal” of logistics and transportation is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of continuing data is to insure that the cost, service and inventory benefits derived by contracting or outsourcing logistics and transportation services outweighs the continuing pattern of increasing services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s and total logistics providers will have to invest more in technology and services, adding more motivation to increase fees or institute risk sharing methodologies.

If you require another proof-point- reflect on the actions that Amazon has been taking to take more control of its logistics and transportation capabilities for premium fulfillment services. If your organization spent billions on transportation and logistics, you would probably be just as motivated.

A final note:

At this year’s annual CSCMP conference being held in late September, this author will be collaborating with The Washington Post in moderating a specific panel discussion related to ongoing logistics and transportation industry trends and how specific industry supply chain organizations are responding to these changes. Stay tuned for further details.

Bob Ferrari

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


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