Abstract
In present times, competition is gradually shifting from organizational performance to supply chain performance. While several studies have been conducted on the concept of supply chain and its relation to business performance, limited research is available on the applicability and management of supply chain processes in contemporary business entities. As such, the study below aims at investigating how Tesla Inc manages its supply chain and areas within its business processes that demonstrate competitive advantage. Findings from the research reveal that Tesla’s supply chain is managed through vertical integration. The study also shows that the organization indulges in global sourcing and supplier relationship management to boost its business performance. Furthermore, it is established that Tesla uses a hybrid supply chain strategy for its business processes and product segments. The research recommends that Tesla should diversify the capacity of its suppliers to minimize disruptions of its supply chain.
Purchasing And Supply Chain Management Written Assignment
In present times, competition is gradually shifting from organizational performance to supply chain performance. Notably, the competitiveness of the company’s today is gauged by its ability to effectively manage supply chain activities to facilitate on-time delivery of quality products to end-users. For this reason, the study of purchase and supply chain management has sparked interest among scholars as they strive to shed light on the meaning of some key concepts in supply chain management and how they relate to business performance. While several studies have been conducted in the field of supply chain management, very few scholars have delved into further analysis of how various processes of supply chain management are integrated into companies today and their practical effect on business performance. The existing gap in the literature serves as the basis of the current research, which aims to investigate how Tesla manages its supply chain, areas in its business activities that demonstrate competitive advantage and processes that may require improvement to enhance the venture’s competitiveness in the automotive industry.
Literature review
Several previous scholars have analyzed various aspects of purchasing, supply chain, and supply chain management to determine how they affect business performance and competitive advantage. According to Asare and Prempeh (2016), the supply chain is a network of autonomous business entities involved, through upstream and downstream links, in various activities that produce physical goods and services to customers. On the other hand, supply chain management is defined as the integration of vision, culture, processes, and strategies to organize and facilitate an optimal flow of raw materials from reliable suppliers and ultimately providing customers with high-quality products (Agus, 2015). Ibrahim and Hamid (2014) further argue that the successful implementation of supply chain management enhances the relationship between upstream suppliers and downstream customers, thus increasing customer satisfaction and firm performance.
Many studies dig further into practices that constitute supply chain management. According to Ibrahim and Hamid (2014), some of these sets of actions in supply chain management include partnerships with suppliers, the process of sourcing, and compression of cycle time. Scholars have developed a significant interest in the process of sourcing, attributing it to the success of supply chain management. In particular, Essila (2019) argues that strategic sourcing, which is a subset activity in procurement, is vital for a successful global supply chain management. The scholar further adds that purchasing has a significant impact on business performance in terms of cost, quality, reputation, and reliability.
Further studies have also been conducted on dimensions of purchasing and their impact on the performance of organizations. In their work, Karjalainen and Salmi (2013) explore three types of purchasing; domestic, regional, and global procurement. According to Fynes et al. (2015), global purchasing differs from the rest of the sourcing strategies in that it involves the procurement of a significant quantity of production components outside the firm’s home continent. Fynes et al. (2015) also aver that global purchasing is beneficial to firms as it facilitates product innovation. Nonetheless, the researchers also acknowledge that such an advantage can only be derived from adequate proficiency in supplier integration. Karjalainen and Salmi (2013) also observe that global outsourcing can affect the agility of firms to meet customers’ needs on a timely basis due to transportation and environmental risks.
Apart from global sourcing, supplier relationship management and its impact on business performance is also a significantly researched theme in supply chain management. Nobel argues that strategic supplier partnerships can be a critical component of a leading-edge supply chain (cited in Gharakhani et al, 2012). Ibrahim and Hamid (2014) also observe that supplier relationship management has a positive impact on process innovation and incremental product innovation.
While a significant fraction of research is dedicated to the study of supply chain management, very few studies have been conducted on supply chain strategies and factors that determine the selection of each approach. However, the existing literature defines supply strategy as “operations, logistics, and sourcing” that is expected to do better than the competition (Kohlberger et al, 2012). Scholars further classify supply chain strategies into three; agile, lean, and hybrid (Rana et al, 2015). According to Rana et al (2015), an agile supply chain strategy helps firms become flexible and responsive to customer needs and is most suitable for products that have uncertain demand. The scholars also argue that the agile supply chain enables firms to respond to changing market environments.
On the other hand, Rana et al (2015) state that lean strategy focuses on the elimination of waste and cost and assembly of products based on demand. Furthermore, scholars argue that the use of lean and agile supply chains constitutes a hybrid strategy (Rana et al, 2015). Many of the scholars agree that the best supply chain strategy that can facilitate profits in a venture is one that aligns with business processes and product segments.
As is evident from the literature review, many authors have researched the concepts of purchasing and supply chain management. However, very few have investigated how these processes are managed in contemporary organizations and their relation to business performance, an aspect that forms the foundation of this research.
Aim and objectives
The research aims to investigate how Tesla manages its supply chain, areas within its business performance that demonstrate competitive advantage, and those that may require improvement to boost the firm’s performance in the industry. In light of this, the objectives of the research include analyzing various themes of procurement and supply chain management in the organization such as supply chain sustainability, global sourcing and supplier relationship management, and how they serve to the advantage of the organization.
Findings
Tesla Inc. is one of the most prominent and reputable brands in the automotive industry. The company designs, develops, manufactures, and sells high-performance fully electric vehicles and energy generation and storage systems globally (“Tesla Inc.”, 2017). While a majority of the components used in the production process of Tesla vehicles and energy storage systems are built in-house by its team of experts, Tesla has a network of independent entities involved in various activities that facilitate the production of physical goods and services to customers.
Supply chain
Tesla’s supply chain comprises a network of businesses that facilitate the provision of end products and services by the organization. Based on the company’s annual report, it is evident that Tesla’s supply chain is vertically integrated (“Tesla Inc”, 2017). Notably, the venture owns and controls the supply chain to its specifications. Tesla critically selects and establishes long-term contracts with suppliers who fully qualify for the provision of various components. An instance of the company’s vertical integration is evidenced by its long-term agreement with Panasonic, an entity that manufactures and supplies Tesla’s Gigafactory 1 with battery cells (“Tesla Inc”, 2017). The ability of Tesla to control the activities of suppliers such as Panasonic guarantees the venture availability and constant access to quality battery packs for use in the production of energy components required in its electric vehicles.
The venture’s supplier network is also vertically integrated with that of the consumers to enhance flexibility in meeting the latter’s demand request and lower operational costs. Notably, Tesla sells its vehicles directly to consumers through its international network of company-owned stores and galleries (“Tesla Inc”, 2017). The sales strategy enables the firm to remain responsive to demand as a majority of its sales are based on customized orders. The integrated supply chain enhances flexibility as Tesla can quickly source production components from its suppliers on an as-needed basis to meet the customized orders by customers. The integrated supply chain also lowers the company’s operational costs by minimizing its inventory holding costs. In particular, Tesla’s ability to own and control the supply chain helps its production team manufacture a small inventory of vehicles that are available for immediate sale (“Tesla Inc”, 2017). As such, the organization manages its inventory effectively, minimizes real estate costs of owning large warehouses, and meets consumer demand as it arises through the vertical integration of its processes with those of the suppliers and customers.
Sourcing
Literature also reveals that global sourcing is an essential process of supply chain management in Tesla, as it facilitates the acquisition of parts required in the manufacture of final products. The organization’s annual report shows that Tesla sources its vehicle parts from hundreds of suppliers globally (“Tesla Inc.”, 2017). Among the factors that likely drive the venture’s decision to source globally is the need to have access to innovative products. The enterprise strives to manufacture and sell high-performance, fully electric vehicles, which implies that constant innovation is key to its operations. Some of the areas that require frequent modification in Tesla’s production activities include vehicle engineering capabilities, powertrain system, and over-the-air software utilized in its auto-pilot functionality and energy systems. Global sourcing enables the firm to have access to a wide variety of up-to-date innovations that are used to upgrade the performance of its electric vehicles to meet customer’s range and performance expectations.
Other than facilitating a constant supply of raw materials, Tesla’s sourcing strategy also demonstrate a competitive advantage for the organization. As is evident from its annual reports, Tesla’s energy battery architecture and components used in energy storage products are similar to those used in the vehicle’s battery pack. As such, the firm enjoys economies of scale by sourcing its product globally and from a single supplier (“Tesla Inc”, 2017). Tesla’s sourcing strategy allows it to outperform other industrial competitors who rely on multiple suppliers for the purchase of manufacturing components in terms of cost leadership. Notably, by sourcing in bulk from a single-qualified supplier, the venture can cut back on its operational costs, which are then translated to customers in the form of relatively lower prices for the end product. Besides, the strategy enables the firm to maintain consistency in product design as all its components are procured from the same supplier.
Supplier relationship management
Supplier relationship management is also a critical component of Tesla’s supply chain as it shapes the company’s business performance. While Tesla boasts a dynamic in-house technological capability, it partly leverages the supply chain process for its energy storage components and vehicle parts. To achieve this, Tesla has been developing close relationships with several key suppliers in areas such as procurement of cells and other essential system parts (“Tesla Inc”, 2017). Supplier relationship management in Tesla is vital as it guarantees the venture of an adequate supply of sources necessary to meet its manufacturing requirements. In turn, Tesla can boost its business performance by meeting consumer demand as it arises.
Supply chain strategy
Tesla operates in an industry characterized by demand uncertainty; thus, it employs a supply chain strategy that is oriented to responsiveness. Notably, unlike cars that utilize fossil fuel, the demand and use of electric vehicles in the globe is still insignificant (Rezvani et al., 2015). Some scholars argue that despite electric cars being cost-effective in terms of running cost, the initial purchase cost is relatively high, creating a barrier to their adoption among consumers (Rezvani et al., 2015). Others also consider the non-availability of charging infrastructure as impediments to the adoption of electric vehicles (Khurana et al., 2019). Arguably, Tesla’s recognition of the demand uncertainties in this segment of its product portfolio drives the firm to adopt a supply chain strategy that is oriented to responsiveness.
Mainly, Tesla’s supply chain strategy can be classified as a hybrid model as it focuses on both the elimination of waste and assembly cost and the manufacture of goods based on demand. As the literature suggests, a hybrid supply chain strategy possesses the attributes of both agile and lean models (Rana et al, 2015). On the one hand, Tesla’s energy and storage segment has a lesser demand uncertainty compared to its automotive sector as evident in its 2017 annual report. Notably, the management acknowledges that since 2006, it had installed solar energy systems for hundreds and thousands of customers (“Tesla Inc.”, 2017). Customers in this segment comprise both residential and commercial entities and individuals in search of renewable energy, which implies that the demand is not only significantly high but also predictable. As such, the organization employs a lean strategy in this segment by ensuring that assembly costs and waste is reduced during manufacturing. For instance, Tesla purchases its component systems from vendors and maintains multiple sources for each major component to ensure competitive pricing and adequate supply of materials for its solar energy systems (“Tesla Inc.”, 2017). The practice of multiple sourcing and pursuant to competitive pricing is a blatant indication that a lean strategy is utilized in this product segment.
On the other hand, an agile supply chain strategy is employed for the organization’s automotive segment to facilitate responsiveness to the uncertain consumer demand. Notably, Tesla maintains a small inventory of vehicles in its store to meet immediate sales, in addition to customizing cars as per the orders placed by consumers (“Tesla Inc”, 2017). Given that this segment of its product portfolio has an unpredictable demand, agility becomes the source of competitiveness for the company. In particular, the firm employs a make to order decoupling point by customizing the cars after receiving the customer’s purchase order. The agile supply chain model enables Tesla to avoid manufacturing components that may lack uncertainty in terms of future sales.
Discussion and analysis
The research identifies three core themes related to supply chain management that shapes Tesla’s operations; global sourcing, supplier relationship management, and hybrid supply chain strategy. Notably, findings from the research indicate that each of these components of the supply chain aligns with the venture’s internal processes and product segments. For instance, Tesla employs a global sourcing strategy to facilitates the purchase of innovative products, which are critical inputs in its automotive, energy generation, and storage segment. This finding correlates with previous literature, which suggests that global sourcing facilitates product innovation. Also, the firm focuses on supplier relationship management, which is critical to its overall business performance. In particular, Tesla develops close relationships with its key suppliers, a practice that facilitates consistent and timely delivery of core products required in the manufacture of final products.
Furthermore, findings from the research suggest that Tesla’s competitiveness in the industry can be attributed to the nature of the supply chain strategy the firm employs its product portfolio. The study reveals that the organization uses a hybrid supply chain model for its two segments. Notably, a lean and agile model is used in its energy generation and storage and automotive segment, respectively. The strategy utilized by the organization is ideal as it aligns with the core business process and product segments. For instance, the agile strategy suits the automotive segment, whose success is heavily reliant on the ability of the venture to meet customer demand as it arises. Similarly, the lean strategy suits the energy segment, whereby companies compete on cost leadership.
Supply chain performance
Based on the findings from the research, it can be argued that Tesla has a sustainable supply chain management tactic. The performance of its supply chain can be assessed based on two primary processes, planning, and operations. First, Tesla’s planning strategies appear to be working to the benefit of all entities and individuals in its supply chain, as is evidenced by the organization’s stock turnover, which is a crucial indicator of supply chain performance. Notably, Tesla boasts a small inventory of vehicles that are available for immediate sale. Additionally, through its hybrid supply chain strategy, Tesla can make stock available when the need arises. The availability of adequate stock to meet current demand is an indication of the capacity of the firm’s supply chain activities to deliver performance responsively
The firm’s order lead time is also a key indicator in its operations that reveals the adequate performance of its supply chain. As is evident from the firm’s annual report, the majority of the venture’s customers place orders through the internet to have their vehicles customized (“Tesla Inc”, 2017). Fortunately, Tesla maintains long-term working relationships with its suppliers, making it possible for the venture to purchase components on an as-needed basis at prevailing prices to meet customer orders (“Tesla Inc”, 2017). The ability of Tesla to respond promptly to such orders, meet the deadlines, and deliver quality designs is a significant indicator of the exemplary performance of its supply chain.
Conclusion
The synthesis of evidence from the research reveals that Tesla’s supply chain is managed through vertical integration. The study also shows that the organization indulges in global sourcing and supplier relationship management, which facilitates the agility of the venture to respond to customer demand and enjoy product innovation. Furthermore, the study shows that Tesla’s ability to align its business processes and product segments with a hybrid supply chain strategy fosters its competitiveness in the industry. While Tesla has a significant market share in the automotive industry, there are various ways in which the firm can improve its operations to enhance its competitiveness in the industry. Notably, it would be essential for the organization to diversify its capacity of suppliers to avoid disruptions in its supply chain in instances where one supplier fails to meet the demand for raw materials. The action would boost the company’s competitiveness by equipping it with the capacity to meet customer demand in the face of market disruptions.
References
“Tesla, Inc.” (2017). Annual Reports. Retrieved from http://www.annualreports.com/HostedData/AnnualReportArchive/t/NASDAQ_TSLA_2017.pdf
Agus, A. (2015). Supply chain management: the influence of SCM on production performance and product quality. Journal of Economics, Business and Management, 3(11), 1046-1053. https://doi.10.7763/JOEBM.2015.V3.332.
Asare, E.N., & Prempeh, K.B. (2016). The state of supply chain management practices within SME’s in Ghana: A case study of selected agrochemical companies Kumasi. International Journal of Economics, Commerce and Management, 4(4), 678-716. Retrieved from https://www.researchgate.net/publication/308119682_THE_STATE_OF_SUPPLY_CHAIN_MANAGEMENT_PRACTICES_WITHIN_SME’s_IN_GHANA_A_CASE_STUDY_OF_SELECTED_AGROCHEMICAL_COMPANIES_KUMASI
Essila, C. J. (2019). Managing operation throughout global supply chains. IGI Global, Business Science Reference. ISBN: 152258157X
Fynes, B., Coughlan, P., Von Haartman, R., & Bengtsson, L. (2015). The impact of global purchasing and supplier integration on product innovation. International Journal of Operations & Production Management, 35(9), 1295-1311. https://doi.org/10.1108/IJOPM-03-2015-0128
Gharakhani, D., Mavi, R.K., & Hamidi, N. (2012). Impact of supply chain management practices on innovation and organizational performance in Iranian companies. African Journal of Business Management, 6(19), 5939-5949. https://doi.10.5897/AJBM11.1136
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Karjalainen, A.S., & Salmi, A. (2013). Continental differences in purchasing strategies and tools. International Business Review, 22(2013), 112-125. Retrieved from https://kundoc.com/pdf-continental-differences-in-purchasing-strategies-and-tools-.html
Khurana, A., Kumar, V.V., & Sidhpuria, M. (2019). A study on the adoption of electric vehicle in India: the mediating role of attitude. The Journal of Business Perspective, 24(1), 23-34. https://doi.org/10.1177%2F0972262919875548
Kohlberger, R., Engelhardt, C., & Gerschberger, M. (2012). Supply chain strategy- necessity of a structured method of deduction. International Conference of Economics, Business and Marketing Management, 29(2012), 29-39.
Rana, S.M., Haji-Othman, Y., Osman, A., Bahari, A.B., Safizal, A., & Solaiman, M. (2015). Supply chain strategies and retail supply chain efficiency. Australian Journal of Basic and Applied Sciences, 9(34), 67-73. Retrieved from https://www.researchgate.net/publication/289626415_Supply_Chain_Strategies_and_Retail_Supply_Chain_Efficiency
Rezvani, Z., Jansson, J., & Bodin, J. (2015). Advances in consumer electric vehicle adoption research: a review and research agenda. Transportation Research Part D: Transport and Environment, 34(2015), 122-136. https://doi.org/10.1016/j.trd.2014.10.010
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