What is Tesla’s Amazing Capability Hiding in Plain Site?
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Business and consumer news in today’s economy seems to leap from fad to fad all while often missing business basics – which are forgotten or at best under appreciated. As professional suppliers and practitioners of the “basics” of supply chain engineering and finance, we find an interesting case study or maybe metaphor in recent events at the now famous firm Tesla Motors.
First a disclaimer, we have no inside information or link to Tesla or its famous owner Elon Musk. We are however big admirers of entrepreneurial courage and Musk’s and his teams skill, track record , entrepreneurial courage and calculated risk taking with SpaceX which is enormously impressive. However, our finance and supply chain experience makes us believe the stock is priced way beyond perfection in the mid 180’s. Is Telsa’s one car product line with a current market cap of $20 Billion )a third the price of Ford’s $60 Billion ) as justifiable bet on an amazing rocket ship that will produce a mass market car or one ready to run out of fuel ? We believe an early clue of Tesla long term success may be in watching Tesla’s supply chain.
The Amazing Innovation Hiding in Plain Site
So back to what is the amazing capability hiding in plain site propelling Tesla ? Is it the batteries, the electric motor rear wheel drive system, the sleek sturdy body frame that was rated so high in DOT crash tests, maybe the big screen LED display, the upcoming model X gull wing doors, or the handling masterpiece of placing those heavy lithium ion batteries low in the frame to achieve a low center of gravity ? Has Telsa pushed battery technology to double in capability every 18 months like Moore’s law of semi-conductors ?
No – it is none of these . We hate to burst the dreams of green enthusiasts but we actually think the laws of efficient energy transfer and storage vs. true energy sources say the all electric car as a practical and inexpensive reliable form of transport for the masses, is still a decade or more away. In particularly the Tesla and Green believers’ attempted slight of hand trick magic trick inferring batteries will improve like Moore’s law is particularly misleading. No matter how much government subsidies are thrown at battery technology they will not change the laws of physics.
So what is the breakthrough hiding in plain site from Tesla ? To us at DCRA Inc. it is the process of how Tesla’s are sold and built. In contrast to the model US car makers deployed exclusively up to 2008 (when US car makers got caught with months of inventory of 12 MPG SUV’s vs fuel efficient low cost vehicles) because of a flawed process. This US flawed process was a top down decision on what to make, color, volume then somewhat arbitrarily allocating the production to dealers. Thus dealers were just forward inventory locations required to push what they have not listen to needs. Tesla appears to do “just the opposite”… they build to order, they have to listen. Amazingly Tesla listens to individual customers through web and kiosk ordering and thus can only the allocates production based on a $ deposit commitment of a build. This car guy has always believed the biggest flaw in domestic car production was this lack of a demand driven listening build to order process not lack of actual mechanical quality. We at DCRA would almost throw out the hypothesis that the Tesla all electric automobile still lacks the energy transfer technology fundamentals to be reliable transport for the average consumer – but the business model is excellent. In fact it is the business model that is making a not ready for prime time car product and company succeed. Time will only tell but I were Mr. Must I would add a less risky auto product into his terrific business model as today his constraint is product?
demand and supply 2
In our work at DCRA Inc we help clients design their supply chain for competitive advantage using a hybrid of solutions including consulting, finance, process, patented S&OP software and hard work. These efforts dramatically reduces working capital and create customer service competitive advantage (key to you finance and investment types). We do not see this demand driven business / supply chain model often used automotive manufacturing? Why we don’t’ really know but have heard all the excuses and find it exciting Tesla did not listen to the excuses and has DONE IT. . We see Tesla with its build to order model might just cause an explosion and a range of delayed final assembly from complete builds to minor final postponed assembly to meet customer’s diverse needs. Note that build to order is not necessarily the same as custom – more discussion on this to come our next article.
Maybe this Innovation Belongs in your company ?
So how or why has Tesla exploited this breakthrough hidden in plain site ? We actually think the old saying of “necessity is the mother of invention” may best describe what has pushed Tesla to build their cars more like Dell computers or Cisco routers and less and General Motors SUV’s. This is the breakthrough concept allowing dramatic reduction of working capital reduction and supply chain engineering model that all business leaders should study and deploy. Although we don’t know exactly why Tesla has adopted this model we like it. As an outsider we see many potential constraints that may have caused Tesla to deploy a build to order model. Tesla’s constraints (or has Eli Goldratt described in his book the Goal – as Herbies) are the areas any good supply chain design should focus on minimizing impact or elimination. These Tesla production constraints could range reasons from limited battery supplies to paper barriers like state laws preventing selling of cars without licensed franchise dealers or maybe a Silicon Valley based location and all electric vehicles makes it easier. Regardless these and other necessities may have created what we argue is the real Tesla’s innovation ? Who knows as only the Tesla insiders can tell us for sure but the physical model now in place is a marvel that should be studied and copied widely by other automotive manufacturers as well as all manufacturing / distribution firms. What are you constraints (your Herbies) ? You have to know what they are. Would it help manage your constraints with a new supply chain model ? Think about it as I am sure your competitors are.
We hate to disappoint the car guys (including us) that the Answer to this innovation question is the most valuable innovation from Tesla has nothing to do with the “car”. We think when you look back 5 years or 10 years from now it is this build to order model manufacturing distribution model that will be seen as Tesla’s major contribution. Particularly if they realize it and exploit it
A Look Forward to What is the Next Innovation
Now we are on to Chapter 2 which is how the engineering of the Teslas supply chain will be configured to successfully outmaneuver Nissan, GM, Ford and BMW’s massive global supply chains. We just watched a German news conference that Musk plans his Model E car prototype by first quarter 2015 with a price point under $40K and 200km range. If this is possible with battery technology will not BMW, Ford and GM have similar vehicles ? Has not BMW already released such a vehicle ? We see chapter 2 of this battle of David (Tesla) vs Goliath (entranced auto suppliers) will be all about the strategy and execution of the supply chain .
So Let’s hope Tesla has considered the supply chain constraint and has the next supply chain basic (innovation) in their back pocket. Or maybe just maybe they realize their biggest success is in the fulfillment model and introduce other less risky complimentary automotive product into their build to order fulfillment model. We are cheering for Tesla to succeed against the “Giants” as we see the Giants lack of listening to the automotive customer’s real needs for reliable and fund transport as the fundamental flaw Tesla has revealed. For example do you really need or want your new car to be as fragile as a new laptop ? Take a look these days and your new internal combustion engine or hybrid car is more akin to your laptop then the classic cars of the 50’s , 60’s and 70’s. Which of the two a new car vs. a classic car actually appreciates in value vs. depreciates ? If Tesla’s model E was equivalent to a new BMW or Ford but you ability to configure, select and order your car was personal and an a pleasant process and maybe just a bit less money what would you buy ?
So we are exited to watch the magicians show of hand movements (the electric car’s features show) while our team of supply chain engineers and automotive “car guys” will watching the build to order supply chain capability story to have clues to who really wins this high profile automotive battle – with some luck it just might be you the consumer.
Mr, Kirkegaard is President of a Texas corporation DCRA Inc. which holds patents on build to order supply chain capabilities involving Sales and Operations Planning (S&OP and real time S&OP). DCRA Inc. works daily to deploy these concepts to improve profitability and business competitive advantage for clients and has helped hundreds of clients use supply chain engineering to dramatically free up working capital and improve cashflow. Mr. Kirkegaard uniquely shares a car guy interest as also leads a subsidiary business SelectClassics that uses these concepts to builds to order “select” classic vintage BMW’s, Mustangs, Shelby’s for customers. Mr. Kirkegaard can be contacted through the following . DCRASolutions.com the supply chain engineering and solutions firm he leads, www.sopbook.com which servers to make these build to order, S&OP and real time order commitment concepts affordable for small and medium sized business. You can also see these concepts applied to the automotive market to make classic cars affordable for the masses at www.SelectClassics.com