Our last Supply Chain Matters commentary concerning electric automotive manufacturer Tesla highlighted a candid admission of the importance of design for supply chain practices, as well as a new dilemma relative to the need to more dramatically scale its supply chain and manufacturing cadence.  Tesla Model X SUV

Earlier this week, in an address at Tesla’s annual meeting of shareholders, founder and CEO Elon Musk further addressed these challenges including a plan to revolutionize factories. Hearing the passion of Musk and his executive team, we believe that there may be some substance to these efforts, worthy of ongoing monitoring.

In addition to reiterating the fascinating history of Tesla, Musk shared with shareholders various lessons learned along the way. Among them was an admission that the Model X design was over complicated, perhaps too much to accommodate initial production volume needs. “We have great ideas, The smart move would have been to table those for version 2 or version 3.”

He reiterated that going forward, particularly with the new Model 3 design, Tesla teams will have a tighter integration loop among product design and manufacturing.

In his address, Musk indicated Tesla will “completely re-think the factory process.

The last time similar words were communicated was when Tesla developed the strategy to source all of its supply requirements for lithium ion batteries from a massive production facility or “gigafactory” to be located in the United States. The long-term core mission for Tesla has been to build very high performance vehicles that could be affordable for consumers. The core component of an electric vehicle is its batteries. As Musk explained the situation, it was a revelation that the company’s needs for such higher performance batteries would exceed current existing global capacity, so why not build it in the U.S. The other revelation was that most existing battery manufacturing techniques stemmed from consumer electronics companies with different design principles. This, Musk challenged his internal and external supplier teams to literally re-invent the way batteries can be produced including the adoption of more vertically integrated value-chain principles.

On July 29, a grand party is scheduled to celebrate the culmination of such vision in the operational opening of this gigafactory located in northern Nevada.

When addressing the future, 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 further 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 indicated to shareholders that his team now realizes that in re-thinking the challenge for the ability to support output volumes of 500,000 or more vehicles per year the same principles, “you build the machines that build the machine” apply. 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.

To that end, Tesla is now calling on existing product design engineers who constantly labor to achieve vehicle performance enhancements, to now turn their attention and efforts into building far more efficient production capability. Musk himself indicated that he is very confident that improvements in a factor 10x can be achieved in these ongoing efforts. Then again, having already amassed 400,000 pre-orders for the newly announced Model 3, there is somewhat a sense of urgency for the need to fulfill these orders in a timely manner.

We at Supply Chain Matters continue to admire the supply chain and manufacturing thinking that exists at Tesla.  This is a company that literally challenged the notions that one could source owned internal manufacturing directly in Silicon Valley. As noted, they challenged existing notions of lithium ion battery design and high volume manufacturing. Similarly, the company challenged the industry norm of established dealer networks and instead has a direct sales and service relationship with its customers.

Tesla is always challenging established thinking and now, has expressed a renewed belief that the supply chain does indeed matter. We expect even more supply chain innovation from this innovation driven organization and would not at all be surprised that during the next five years, Tesla will be cited as one of the top five supply chains.

Readers can view the more than two hour address to shareholders by visiting this Tesla Investors web link.

Bob Ferrari

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