Q2) Discuss the extent of Bullwhip effect generation in the Tesla supply chain from each of the generic causes of the Bullwhip effect [5 marks] [Max 500 words]. Refer the information given in the case study only.

Q3) Tesla’s (electric) car is an environmentally friendly product where there are no emissions and no usage of non renewable gasoline. However, are Tesla’s operations also environmentally friendly? Using the information given in the case study as well as available from other secondary sources, explain how each of Tesla’s outsourcing/sourcing, manufacturing, distribution/logistics, retailing, servicing and charging practices affoct company’s environmental sustainability? [5 marks] [Max 500 words]. Please correctly cite each of the external information sources used.

Q4) Consider alarge car company’s (competitor to Tesla’s) electric car operations. Gather information about it from secondary sources (company website, journal articles, practitioner articles/reports) with regards to outsourcing/sourcing, manufacturing technology and operations, logistics and distribution, servicing, retailing and charging practices and compare and contrast the same with Tesla’s given in the case stilð9 marks] [Max 800 words].

Please correctly cite each of the external information sources used.

Word file (that you will be submitting); you can insert an excel workbook into word by i) selecting Insert on the ribbon at the top in Word, ii) choosing and clicking on Object, iii) choosing Create from file option, iv) browsing and choosing file to be inserted and also clicking on Display as Icon.

Q6) What other factors should Suresh Krishna and his team consider when making the manufacturing location recommendation? [5 marks] [Max 500 words]

Tackling Supply Chain Challenges of Tesla Model 3

Lifang Wu

Xavier University, USA

Wei Yang

Long Island University, USA

Abstract. Tesla received 325,000 pre-orders for the Model 3 within one week after the company launched the mass market car in 2016. Despite the fact that Tesla•s stock price went up by 50% in the first half-of 201 7, Tesla was also the most shorted stock in the U.S. market at the time. To explain the situation. this case presents the entire Tesla Model 3 supply chain in detail. highlighting issues like product design. suppliers. manufäcturing, marketing and sales, service. and charging infrastructure. It appears that Tesla•s vertically integrated supply’ chain has been innovative, but not without substantial challenges.

Keywords: electric vehicle, supply chain management, sourcing, bottleneck- supply chain risk, process integration.

1.    Introduction

The main difference between a pure electric vehicle (E V) and a conventional car is the E V ‘s powertrain includes an electric motor and a battery pack, instead of an engine and a transmission. While the concept of the electric vehicle was not new, E Vs were entering the mainstream market only in recent years, thanks to the improved battery technology, longer range, faster charging, and lower production costs ^l . Based on the manufacturer specification information, most E Vs could travel between 80 and 320 miles on a single charge, depending on the vehicle type and the driving conditions. In 2016 there were about 30 different EV offerings in the U.S., with total sales of 159,139 vehicles² . The EV sales in the U.S. had grown at a 32% compound annual growth rate (CAGR) between 2012 and 2016 (however, it should be noted that the EV only accounted for 0.09% of the total vehicle sales in the U.S in 20 16). Globally, the growth was even stronger. Following a 72% jump in 2015, 2016 saw a 41% global increase in sales to reach 777,497 electric vehicles . In July 20 1 7, the Sweden-based Volvo announced that the new vehicles launched after 20 1 9 would be electric or hybrid vehicles-‘

Tesla Motors Inc. is an electric car manufacturer headquartered in Palo Alto, California. Co-founded by Elon Musk in 2003, the company mass-produces high end luxury electric sedans (Model S) and SUVs (Model X) and is widely considered to be the market leader in the segment⁴ . In February 2017 Consumer Reports named Tesla as the top

American car brand and ranked it 8th among global carmakers ⁵ . This was impressive since Tesla only produced over

https://www.edmunds.com/electric-car/, accessed on 09/08/2017.

2. https://www.fòrbes.com/sites/rrapier/201 7/02/05/u-s-electric-vehicle-sales-soared-in-20 16/#5becf8221 7fl . accessed on 08/26/2017.
3. Bomey, N. (2017). “Volvo Ditching Gasoline Engines för Electric, Hybrid Cars after 2019”. USA Today. July 5. 4. https://en.wikipedia.org/wiki/Tesla, Inc., accessed on 08/30/2017.
4. http://www.businessinsider.com/consumer-reports-tesla-top-america-car-brand-2017-2. accessed on 09/01/2017.

,Vfodel

84,000 vehicles in 2016⁴ . On March 3 1, 2016, the company launched its Model 3 vehicle and received over 325,000 preorders for the car within a week^[1] . As the average price for all cars sold in the U.S. in 20 1 6 was $33,560 ^[2], the $35,000 Model 3 was considered to be an affordable mass-market electric vehicle with huge market potential. Therefòre, a successful launch of the Model 3 meant that Tesla was ready to make the transition from boutique brand specializing in niche automobiles into a large-scale manufacturer with a much bigger market impact^[3]. Since 2003, Tesla had lost billions of dollars^[4], despite successful stories of the Model S and X. The Model 3 launch was expected to turn that around and would essentially determine the future viability of Tesla.

Tesla made 50 Model 3 cars in July of 2017 and delivered 30 of them to its employee customers on July 28 ^[5] . The remaining 20 cars were going through further technical validation processes. Tesla’s goal was to produce 20,000 Model 3 cars in December of 2017 and then reach 40,000 cars per month at the end of 2018 ¹⁰ . That meant the production capacity fòr the Model 3 needed to be increased by about 40,000% within a matter of several months. “The major challenge we faced with the Model 3 is not really the product,” Elon Musk noted ^[6][7] . “We’re going to go through six months of production hell.” Musk stressed the production challenges repeatedly, in fact, noting that “the manufacturing volume is bound to occur on an S-curve,” and that “there are 10,000 unique components in the car,” with “production speed ultimately bound to move only as fast as the slowest one. “The biggest challenge that we face here is ‘S Curve’ manufacturing,” he said, describing “a ramp up of production that starts slow, then increases dramatically before tapering o X. „12 Musk even joked about this challenge at the launch event by calling it a “production hell. ¹² To help make the production ramp easier, Tesla made some specific decisions about simplifying the vehicle design, including using big touch screens to replace almost all the traditional control buttons on the dashboard ^{I l} . A dedicated production line for the Model 3 was also developed by Tesla. Although Musk was confident Tesla would eventually achieve the Scurve in producing Model 3, he admitted that it was very difficult to predict the exact shape, given many risky factors involved in the supply chain12

Financially there had been significant enthusiasm and skepticism about Tesla within the market. In mid-2017, Tesla was the most shorted stock in the U.S. stock market ^lö . At the same time, the stock price had been rising by more than 50% in the first half of 201 7 ^[8][9] . Apparently, much of that increase could be attributed to the market’s expectations for the Model 3. In fact, on April 10, 201 7, Tesla passed General Motors as the most valuable American automotive manufacturer, measured by its market capitalization15

Tesla had burned through billions of dollars — $1.2 billion in cash in the second quarter of 2017 alone ^[10] . With its focus on production, in May 2016 Tesla raised $1.46 billion in stock, of which $1.26 billion was used to prepare for the production of the Model 3 scheduled for late 201 7 ^[11] . Furthermore, Tesla raised $ I .8 billion in its first high-yield eightyear junk bond offering on August I l , 2017, to accelerate production of its Model 3 cars ^[12] . This shows Tesla’s commitment to reaching its goals, but it also leads to concerns regarding Tesla’s cash flow. Investors were indeed expecting profitability from Tesla’s more affordable Model 3. The question is, can they deliver?

2.     Market Competition

The worldwide automotive market, particularly for alternative fuel vehicles, was highly competitive. Tesla’s Model 3 not only competed with small to medium-sized engine-based cars from manufacturers including Audi, BMW, Lexus, Mercedes, Honda and Toyota, but also competed with other electric vehicles. Compared with combustion-based vehicles, The E Vs had the following relative competitive advantages and disadvantages.

Competitive Advantages19.

• Operating electric vehicles does not produce any air pollutants. The E Vs also typically generate less noise pollution than the engine vehicles. Of course, how to produce the electricity energy itself (using a conventional way or a green approach) is not considered here. The E Vs are much more environmentally friendly if renewable sources are used for generating electricity, but not so much if older coal-fired power plants are involved.
• Electric motors are mechanically simple (with far fewer moving parts than engines). The structural simplicity could translate into high operational reliability and low maintenance cost (e.g., avoiding oil changes and engine tune-ups).
• The E Vs are highly efficient in converting energy into mileage. The EV “tank-to-wheels” efficiency is about a factor of 3 higher than the internal combustion engine vehicles20
• Electric motors are easy to control and provide high torque from rest. Tesla E Vs provide an impressive acceleration performance.
• Electricity could be produced from a variety of sources including coal, natural gas, nuclear, and solar, therefore it gives EV the greatest degree of energy resilience. The overall efficiency of the entire electrical energy supply chain could make a big difference in increasing or decreasing the efficiency of the EV ecosystem though.

Competitive Disadvantages19.

• All battery-based E Vs have limited driving ranges, due to the low energy density of batteries. The E Vs also often have long recharge time compared to the relatively fast process of refueling a tank. This was further complicated by the current scarcity of public charging stations. These factors resulted in a specific consumer concern labelled as “range anxiety. However, it must be noted that Tesla was the top performer in providing longer ranges and high availability of charging stations in the market. This could be Tesla’s competitive advantage when competing with other rivals.
• In cold climates, considerable energy is needed to heat the interior of an EV and to defrost the windows, which causes energy loss. The engine-based cars usually use heat waste to do the jobs.
• There were concerns about the safety of the E Vs, given the tendency of the li-ion battery to overheat, possibly leading to fires or explosions, especially when damaged in a crash.

In general, the E Vs were advocated by the governments in many countries to replace the traditional engine cars. China said it would eventually ban the sale of gasoline- and diesel-powered cars at an unspecified date while some other nations including Britain and France had explicitly pledged to do so by 2040 in an attempt to cut vehicle emissions22 General Motor laid out plans for 20 new all-electric vehicles by 2023 including two within the next 1 8 months, and Ford decided to invest $4.5 billion by adding 1 3 E Vs over the next few years^2D . Volvo announced its commitment to eliminate solely gasoline-powered vehicles in its lineup by 2019³ . As a slow mover for E V, Volkswagen also set an ambitious production goal of making 30 EV models and increase sales to a million a year by 2025 ²⁴ It seemed this was going to be a long-term trend for the auto industry.

19. https://www.conserve-energy-füture.com/advantages-and-disadvantages-of-electric-cars.php. accessed on 09/0 1 /20 17.
20. https://en.wikipedia.org/wiki/Electric_vehicle, accessed on 08/26/2017.
21. https://en.wikipedia.org/wiki/Range anxiety. accessed on 09/01/2017.

https://www.nytimes.com/201 7/09/1 0/business/china-electric-cars.html. accessed on 1 0/3/2017.

20. https://www.nytimes.com/2017/10/02/business/general-motors-electric-cars.html. accessed on 10/3/20 17.
21. http://www.businessinsider.com/volkswagen-electric-car-in-china-2017-7?r=U K& I R=T. accessed on 08/ 1 0/2017.

Mode/

Table l: Model 3 Main Competitors (Price befòre any incentives)

(Source: –        )

When looking at which EV to purchase, customers would consider many relevant factors and Tesla Model 3 stood out easily in the current marketplace27.

• Design and styling: The Model 3 was stylish from outside, and simple, yet elegant from inside. Tesla cars made most other electric vehicles look like toy cars.
• Performance quality: Tesla offered a long one charge range (see the above table), with an excellent 0-60 MPH acceleration. Tesla vehicles also came with an advanced autopilot system (optional) and over-the-air software updates.
• Consistency quality and reliability: This might be one of the key weak areas for Tesla, as the Model S and X reportedly had some consistency quality issues. With the Model 3, the likelihood of having similar reliability issues was estimated to be relatively high, particularly considering the fact that Tesla was scaling their production so quickly and the product as well as the assembly processes were entirely new. The good news was that Tesla did simplify the design of the Model 3 as an effort to simplify production and improve reliability.
• Features: interior panels, knobs, and gauges were replaced by a big touch screen with a digital control system. The car had the best storage room in its class — 15 cubic feet of trunk capacity.
• Safety: Tesla developed its proprietary battery protection and management systems to ensure safety on the road.
• Service: The Tesla Model 3 came with an 8-year or 100,000-mile warranty. The company also provided the best highway charging availability in the industry.
• Price: The basic version of the Model 3 had a starting MSRP of $35,000, which was very close to the average vehicle price paid in the U.S. in 2016 (before additional federal and state tax incentives).
• Technological innovation: Tesla was known as the technology leader for E Vs and was considered to be the “Apple” of the auto industry by some people. To spur wider development of E Vs, Tesla announced in 2014 that all their patented technologies could be used by “anyone in good faith. ⁷⁸ By granting access to its technologies, the company was hoping that more vehicle manufacturers would adopt its technologies, thereby expanding the market for EVs. At the same time, Tesla’s technologies, being used by more and more car makers, could likely become the industry standard. That piece alone would become a critical competitive advantage in the long run.
• Brand perception: Tesla arguably had the best brand recognition in the EV industry.

25. https://www.cnbc.com/2017/08/01 /here-are-5-alternatives:to-teslas-model-3.html, accessed on 08/01 /20 1 7.
26. http://www.fleetcarma.com/2017-battery-electric-cars-reported-range-comparison/. accessed on 08/08/201 7.
27. https://www.bloomberg.com/news/articles/2017-07-31 /driving-tesla-s-model-3-changes-everything, accessed on 08/ 1 5/20 17.
28. https://www.fòrbes.com/sites/greatspeculations/2014/06/ 1 6/what-tesla-stands-to-gain-from-sharing-its-patents/#5d3256c2665d. accessed on 08/28/2017.

3.     Product Design

Among the electric powertrain components, the electric motor represents a mature technology with very high reliability and other attractive features. For example, electric motors run quietly and have strong torque output at different speed levels, entirely eliminating the need for installing transmissions on E Vs. Furthermore, the electric motor could act as a generator to collect the regenerative braking power29

The major limiting factor is the battery as the most significant component for an EV in terms of weight, cost, safety, and functionality^D0. The electricity energy stored in the battery pack directly determines how far the car can go with one full charge. Most electric vehicles used the lithium ion batteries, which had higher energy density, and longer lifè span than most other technologies. But even with that, the li-ion battery packs were still pretty heavy and bulky which restricted the driving range of the E Vs. For example, Tesla’s 85 KWh battery pack weighed 1,200 lbs and contained more than 7,000 li-ion battery cells in 16 modules wired in series ^Dl . Furthermore, the cost of producing the EV battery packs was still high. Tesla indicated in 2016 that their battery packs costed less than $190/kWh, which represented the lowest cost for the electric car batteries^D2 . Based on that, the replacement cost for the entire 85 KWh battery pack was estimated to be $ 1 6,000, which was not cheap. On the other hand, the battery cost had dropped significantly from $ 1000 per KWh in 20 1 0 ³² and was expected to continue declining in the foreseeable future.

Battery was normally subject to deterioration over its lifetime. Certainly, the longevity of the battery pack was critical due to its high monetary and environmental significance. The data showed for an average driver, the Tesla battery pack lost about I %- I .5% of its capacity annually over the time ^öö . CEO Elon Musk once said that “the company had simulated over 500,000 miles on it and that it was still operating at over 80% of its original capacity. Therefòre although the battery capacity loss was a major concern for the industry, it was probably not a big issue for the Tesla E Vs.

Disposal of used battery packs was often an environmental headache as they contain heavy metals and other toxic materials. Tesla reused about 10% of each battery — mostly the casing and electrical components. The company worked with its partners to recycle metals like cobalt and nickel, but not lithium•). Tesla currently converted the lithium waste into cement used in the construction industry. The company predicted that lithium “would be actually recycled in IO15 years if electric cars were selling at good rate.

The operating cost for E Vs could be significantly lower than that of conventional cars. For example, for Tesla Model 3 vehicles, one charge of 85 KWh electricity energy (which costs less than $15 in many places in the U.S.) could travel 3 10 miles. That would need 12.4 gallons of gasoline (assuming 25 miles per gallon) for engine-based cars, and the gasoline cost would be $3 1 (assuming $2.50 per gallon). Moreover, renewable energy such as solar and wind power could be used as the source of electricity, making EV an even better option for transportation.

Since the battery pack was so critical to E Vs, various new battery technologies were under development. To ease 2 Y p concerns of resource scarcity, Samsung and LG were developing new power packs that used more nickel and less cobalt^D6. Zinc-based battery technology was also developed to utilize the plentiful supply of zinc on the earth37 Furthermore, Toyota announced in July 2017 that it made a main breakthrough in developing the solid state li-ion battery which could revolutionize the battery industry. The improved battery technology would make it possible to “create smaller, safer, more lightweight lithium-ion batteries with longer life for use in E Vs.

While Tesla admitted the Model S and X were complicated to manufacture⁹ , they learned lessons and redesigned the Model 3 to facilitate the simplification of the assembly and efficient manufacturing. For example, the Model S had two screens, the Model 3 had one. The Model S was stuffed with three kilometers of wiring, the Model 3, I .5 kilometers. Furthermore, the glass roof on the Model 3 “wasn•t-there just to look cool. It also enabled robots to reach into the car from the top, befòre the glass was installed, taking over duties that humans would otherwise have to perform.„40

29. https://en.wikipedia.org/wiki/Traction motor. accessed on 08/27/2017.
30. https://en.wikipedia.org/wiki/Electric-vehicle battery. accessed on 08/30/2017.

3 1. https://en.wikipedia.org/wiki/Tesla Model S. accessed on 08/30/2017.

37 https://electrek.co/201 7/0 1 /30/electric-vehicle-battery-cost-dropped-80-6-years-227kwh-tesla-190kwh/. accessed on 08/06/2017.

33. https://www.greencarreports.com/news/1 1 10149 tesla-model-s-battery-litè-what-the-data-show-so-fär, accessed on 09/01/2017.
34. https://electrek.co/201 6/1 1 /0 1 accessed on 08/02/2017.
35. A. (201 6). KUNR news. http://kunr.org/post/what-do-we-do-all-teslas-lithium-ion-batteries#stream/0
36. https://www.theguardian.com/environment/2017/jul/29/electric-cars-battery-manufäcturing-cobalt-mining. accessed on 09/01 /2017.
37. https://arstechnica.com/science/201 7/05/a-zinc-battery-that-could-compete-with-your-favorite-rechargeables/. accessed on 08/30/201 7.
38. https://techcrunch.com/2017/07/25/toyotas-new-solid-state-battery-could-make-its-way-to-cars-by-2020/. accessed on 08/16/2017.
39. http://www.businessinsider.com/elon-musk-the-model-x-is-so-advanced-we-probably-shouldnt-have-built-it-2015-9. accessed on 09/01/

2017.

40. R. (2017). “More Factory Problems as Elon Musk-•s Tesla Starts Producing the Model 3.” Los Angeles Times. July 3.

Model ^[13]

4.     Tesla Suppliers

Tesla relied on different suppliers in more than nine countries for metals, chemicals, electronics and other raw products for its automobile and electric battery production⁴¹ . Tesla had developed close relationships with several key suppliers particularly in the procurement of cells and certain other key system parts. As of April 2016, approximately 40% of the company’s suppliers were located in the United States, and about 30% were located in Switzerland, Japan and China^[14][15] While Tesla obtained the components from multiple sources in some cases, many of the components were purchased from a single source. In particular, Tesla currently fully qualified only one cell supplier for the battery packs: Panasonic, which was one of the largest battery suppliers in the world. “Not only did Panasonic bring world class li-ion battery technology, it also brought significant financial resources to the table. It was estimated that Panasonic invested up to 40% of the total $5 billion required for the Gigafactory I in Nevada

Tesla sourced various raw materials including aluminum, steel, cobalt, lithium, nickel and copper⁴¹ . For example, cobalt was critical for the production of lithium-ion batteries, and it was in short supply. Although Tesla claimed that they had adequate supplies of the raw materials necessary to meet their manufacturing and supply requirements, battery makers were repofiedly struggling to secure supplies of key ingredients used in the large power packs — mainly cobalt and lithium ⁴). This might result in downstream supply chain headaches. The U.S. and Canada “accounted for just 4% of the world’s overall cobalt production. 500,000 Model 3s would require 7,800 tons of cobalt. In comparison, the United States mined 690 metric tons of cobalt in 2016. ^[16][17] A majority of the country’s cobalt demand was met by using secondary sources as well as imports. As much as “65% of the global supply came from the Democratic Republic of Congo (DRC), where cobalt production had been impacted by the local unstable political situation.

5.     Manufacturing

Tesla was considered to be the most vertically integrated auto maker in the world. While traditional auto companies typically outsourced most of the component production work to suppliers and focused on engine manufacturing and vehicle assembly, 80% of the production work for Tesla was completed in house where part manufacturing and assembly took place at the Fremont, CA facility and battery production was completed in the Gigafactory I located in Nevada^[18]. In 201 6, Elon Musk predicted 100,000 Model 3 units would be sold in 2017, but due to delayed production, production might reach only 20,000 in December 2017 (much less in November and October due to the S curve), in the best-case scenario12

The Gigafactorv I in Nevada

The Gigafactory I was Tesla’s most iconic facility which was developed as a factory to integrate battery material, cell, module and battery pack production in one location⁴¹ . The cost for Gigafactory I was $5 billion. Panasonic produced the 21-70 battery cells and Tesla made the battery packs and other power storage products under one roof. The annual — production target for the factory was 35 GWh by 2018 and it could reach 150 GWh of battery pack output once fully completed^[19] . Comparatively speaking, the factory was already producing more batteries than any other factory in the world. Tesla developed its own techniques to link the battery cells together and cool them. The battery cells were designed to “vent heat in a proprietary way and employ coolant running through the entire pack to maintain optimal temperature.

Tesla used the battery packs manufactured at the Gigafactory I for its vehicles, including the Model 3 and energy storage products. The firm also manufactured the Model 3 drive units including electric motors at the Gigafactory l . The Gigafactory I was “being built in phases so that Tesla, Panasonic, and other partners could begin manufacturing immediately inside the finished sections and continued to expand thereafter. ⁴¹ Currently the Gigafactory I was expected to attain flill production capacity by 2020, which was “sufficient for the production of approximately 500,000 vehicles annually as well as for other energy storage products.” The facility was expected to achieve a significant reduction in the cost of battery packs once in volume production with the Model 347

The Tesla Factorv in Fremont, CA

The Tesla Factory contained several manufacturing operations, including stamping, machining, casting, plastics, body assembly, paint operations, final vehicle assembly, and end-of-line testing⁴¹ . Tesla made extensive use of industrial robots in their production processes. While the typical auto factory robots performed one function, Tesla’s performed “up to four tasks on multiple models: welding, riveting, bonding, and installing a component.„48 In 201 6, the factory produced about 80,000 cars with 6,000 workers compared to a “typical” plant that might produce 250,000 cars with 3,000 workers⁴ . Tesla’s manufacturing productivity was seemingly lower due to several reasons: The Models S and X were very difficult to assemble, and too many self-made components (as a result, their true productivity might not be low at all, since almost all other car makers relied on outside suppliers for producing most of the components).

In some areas of the Tesla Factory, the processes were designed to accommodate multiple products 49. For example, the high-volume paint shop and stamping lines could support all three models. The Tesla factory would start production and deliveries of the Model 3, in the second half of 20 1 7, with a new body assembly shop and a dedicated Model 3 final vehicle assembly line)⁰

It seemed Tesla was envisioning an innovative new production line for Model 3. Musk emphasized that the first version of the Model 3 production line will only be a “version 0.5” of the “alien dreadnought”, but the line will get updated with more automation and he envisioned a “version 3” in a few more years) ⁰ . He said, “By version 3, it won’t look like anything else. You can’t have people in the production line itself, otherwise you drop to people speed. So there will be no people in production process itself. People will maintain the machines, upgrade them, and deal with anomalies.” The CEO had been focusing on the speed of production. He said that “the Model S and X production moved at about five centimeters per second on the line”, but he saw “an opportunity for a 20-fold increase in production speed for the Model 3” — or “at least one meter per second.

It was clear that Tesla was attempting to automate car manufacturing. In comparison, almost all other major car makers heavily relied on labor as well as robots for assembling vehicles. To give an example, the Toyota Georgetown plant had an annual capacity of 550,000 cars (including Camry, Avalon, and Lexus ES350). The plant employed about 8,200 employees and the main assembly line for Camry had a process cycle time of 54 seconds) ^l . While many robots were employed for certain steps such as painting and welding, most of the assembly jobs were done by human workers (with appropriate tools, of course). It was clear that the moving speed of the Toyota line was much slower than what was envisioned by Elon Musk (one meter per second). Yet the Georgetown plant did achieve the 500,000-annual production capacity goal Tesla tried to achieve.

Scaling production is the essential way to sell more for cars like the Model 3 and it is also one of the most efficient ways to reduce unit cost as auto production facilities often cost billions of dollars to build. Elon Musk not only promised 500,000 units by the end of year 201 8 ^{1 0}, but also had a vision to produce I million units per year) ² . Musk believed that “a car should exit the facility at walking speed, or approximately 1 .5 meters per second, and the best factories in the industry manufactured at a rate of 0.2 meters per second.

6.     Marketing and Sales

Unlike other car manufacturers selling through franchised dealerships, Tesla used direct sales to eliminate the middlemen. It had created an international network of company-owned stores and galleries, mostly in prominent urban centers around the world (265 locations as of December 3 1 , 2016)^{4 1} . Tesla carried a small inventory of vehicles in stores which were available for immediate sale. Walk-in customers would see a few sample Tesla cars plus an exposed version of the car’s chassis near the back of the store. Customers could order a car from the store or online, and it would be directly delivered to their home. In fact, the majority of Tesla’s customers customized their vehicle by placing an order via the Internet4

With direct sales, customers only dealt with Tesla-employed sales and service staff which likely resulted in a better customer buying experience, faster feedback collection, and better product development^{4 1} . After all, traditional dealers were the middlemen between the car makers and final consumers, and their interests were not necessarily aligned with

48. https://www.forbes.com/sites/innovatorsdna/2015/08/20/teslas-high-end-disruption-gamble/# 19a733dc77ed. accessed on 09/07/2017.
49. https://en.wikipedia.org/wiki/Tesla Factory, accessed on 08/16/2017.
50. https://electrek.co/201 7/07/07/tesla-model-3-production-line/. accessed on 08/ 1 5/2017.

5 1. http://toyotanews.pressroom.toyota.com/t•act-sheets/toyota-motor-manufäcturing-kentucky-inc-tmmk-fact-sheet.htm. accessed on 08/02/ 2017.

52. Thai. ••Data Analytics tbr ManuPacturing: The Tesla’s Case Study (Part I r. TRG (2017. April 30) <http://blog.trginternational.com/ data-analytics-tbr-manufhcturing-the-tesla-motors-casestudy
53. Charles. (2016). ••Musk’s Manufacturing Math: Cars Should Be Able to Exit the Factory at Walking Speed” (2016. June 8) > https:/

/chargedevs.com/newswire/musks-manufacturing-math-carsshould-be-able-to-exit-the-factory-at-walking-speed/

^Model

other supply chain partners. Selling directly also enabled Tesla to better control inventory and pricing, manage warranty service, and maintain the Tesla brand) ⁴ . In ter:ns of marketing, for vehicle sales, “media coverage and word of mouth had been the primary drivers of Tesla sales leads and had helped Tesla achieve sales without traditional advertising and at relatively low marketing costs.

On the other hand, since Tesla was selling multiple models, it was not clear if the lower cost Model 3 could cannibalize the demand for other higher end models such as the Model S and X, which would eventually have an adverse impact over Tesla.

7.     Service

The service requirement for an EV is quite different since the E Vs have fèwer moving parts compared to the conventional cars 19. For example, regular engine oil changes as well as transmission service are not necessary. The electric powertrain is generally more reliable than the traditional mechanical powertrain. Consequently, the maintenance job requirement for an EV is relatively lower. Other servicing work concerning body and wheels is assumed to be similar to that of the conventional cars.

One unique feature for Tesla was the vehicles were “designed with the capability to wirelessly upload data via an on-board system with cellular connectivity, allowing Tesla to diagnose and remedy many problems before seeing the vehicle.„41 Like iPhones, the software system upgrades could be done automatedly. When maintenance or service was required, a customer could schedule the service by contacting one of the service centers. Tesla Rangers could also perform “an array of services from the convenience of a customer’s home or other remote locations.„41

Tesla had combined many sales centers with service centers in their newly expanded retail concept called “Service Plus.” Customers could charge or service their vehicles at the service centers or the Service Plus locations. Tesla owned and operated 135 service locations as of December 31, 2016⁴¹ It was unclear how Tesla could provide sufficient service capacity when the Model 3 becomes a mainstream car with a massive number of units sold. It was reported Tesla worked with some outside auto shops for expanding the related service as it was deemed necessary for servicing the Model 3 ⁴¹

8.     Charging

Charging an EV tended to be slow and charging stations were only available at select locations. Most Tesla customers selected to charge their vehicles at home (overnight charging). The issue is, without having the ability to charge on the go (similar to the concept of getting gasoline during long trips), electric cars face a huge obstacle to mass adoption. To tackle that, Tesla had developed a network of high-powered Superchargers located across North America, Europe and Asia for Tesla vehicles⁴¹ . The company also operated a Destination Charging program, under which shops, restaurants and other popular venues were offered fast chargers for their cust01ners41

The Tesla Supercharger was “an industrial grade, high speed charger designed to recharge a Tesla vehicle significantly more quickly than other charging options. Tesla created its own network of Supercharger stations — places where drivers could fully charge their Tesla vehicles for 175 miles in about 30 minutes, or get a full charge in 75 minutes. Superchargers were “strategically placed along well-travelled routes to allow Tesla vehicle owners the ability to make long distance travel with minimal stops. These self-service charging stations were located on major freeways and at locations near restaurants or malls so that customers could do other things while charging the car. As of May 12, 20 1 7, there were 848 Supercharger stations globally with 5,487 superchargers and the network was still under quick development) ⁶

Further, Tesla was working with a wide variety of hospitality locations, including hotels, resorts and shopping centers, to offer an additional charging option for customers⁴¹ . These destination-charging partners deployed Tesla wall connectors and provided charging to Tesla vehicle owners that patronize their businesses. As of December 3 1, 2016, over 4, 140 locations around the world had more than 7, 1 10 Tesla wall connectors installed41

While the charging capacity seemed to be adequate to existing Tesla cust01ners, it was unclear what would happen if the Tesla started selling the Model 3 at a massive scale so that there were queues at the supercharging stations. This could significantly increase customer waiting time to charge up which makes faster charging irrelevant as the total charging time is extended.

54. http://fòrtune.com/2016/01 / 19/why-tesla-sells-directly/. accessed on 08/02/201 7.
55. https://www.tesla.com/charging, accessed on 08/05/2017.
56. https://thebetter.wiki/en/Tesla Motors, accessed on 09/05/2017.

9.     Operational Risks

Tesla’s future business depends in large part on their ability to manufacture, market and sell the Model 3 vehicles. However, Tesla had no experience in manufacturing vehicles at the high volumes that was anticipated for the Model 3. In fact, Tesla only delivered 25,000 cars (Model S and X combined) in QI of 201 7 ³⁷ . Tesla clearly needed to develop more efficient, automated and low-cost manufacturing processes necessary to support high volumes (targeting at 20,000 Model 3’s in December of 2017).

Tesla’s production plan for the Model 3 was based on many key assumptions concerning timely completion and successful operations of their new dedicated final assembly line for the Model 3 and other supply chain constraints41 Also, the Gigafactory I would produce high volumes of lithium-ion battery packs in a timely manner. In addition, there were other constraints to be considered, for instance, sales and service capacity constraints including service stations and charging facilities. Any quality issue with the Model 3 could easily flood all Tesla existing service stations with cars needing service. Therefore, the risks were not limited to production itself, but also with quality control, sales, service, and charging experience.

In the past, Tesla had experienced manufacturing and production ramp delays or other complications in connection with new vehicle models and new vehicle features) ⁸. For example, after the launch of the Model X, Tesla encountered “unanticipated challenges, such as certain supply chain constraints, that fòrced the company to decrease the production of these vehicles from their initial expectations.” In addition, because most Tesla vehicle models “shared certain production facilities, problem for one model could also impact the production of other models.„41 Because of the significance of the Model 3, any significant delay or other complication could materially damage operating results, business prospects, and the Tesla brand.

Another issue within the Fremont factory had been the number of work related accidents. According to public sources, the Tesla factory had recorded workplace incidents 3 1% higher than the average auto plant) ⁹ . Such accidents could contribute to a number of issues including loss of capacity and cost increase. The decay of safe working conditions might be in part a result of Elon Musk’s ambitious production plans. In 201 7, Tesla added extra shifts and safety teams in attempts to improve conditions60

Historically, the transition to electric cars had been slowed by numerous obstacles, including range limitations, battery affordability, batteryobsolescence and durability risks. One final hurdle to adoption was related to E Vs as a new technology which has considerable uncertainty about longevity, resale value, and safety. Considering these factors, even with large pre-order numbers received for the Model 3, high demand is still not certain in the long run. In fact, the long-term demand (at least for Tesla vehicles) might also depend on how Tesla would handle the production, service and quality challenges for its Model 3 in 2017 and 2018.

57. https://www.cnet.com/roadshow/news/tesla-sets-delivery-record-in-q I -201 7-needs-to-keep-going/, accessed on 08/02/201 7.
58. http://tòrtune.com/2016/10/28/tesla-model-x-problem/. accessed on 08/ 12/20 1 7.
59. Louis. (201 7). “Tesla workers: Fremont factory less safè than established automakers” The Mercury News, (May 24 3:30pm) <http:/ /www.merc urynews.com/2017/05/24/tesl a-worke r-reportfhctory -less-safè -than-other-automakers/
60. http://www.mercurynews.com/2017/05/ I Wtesla-employees-raise-concerns-as-production-set-to-jump/. accessed on 08/25/201 7.

The company was also increasing low-cost country (LCC) sourcing, almost doubling its LCC spend to approximately 24 percent in 2010.

To support its production capabilities in and around the northern United States, Polaris had three warehouse facilities in Minnesota for raw materials, export processing, and distribution. When demand for parts, apparel, and accessories exceeded the company’s warehouse capacity in 1997, a new distribution center was opened in Vermillion, South Dakota. In addition to its U.S. locations, Polaris also owned and operated regional sales and distribution centers in Winnipeg, Canada, and in Northern Europe and Australia.

Redesigning the Supply Chain

Krishna had to consider the tradeoff between manufacturing and transportation costs when redesigning the supply chain for Side-by-Side products. On one hand, manufacturing in markets with low labor costs could result in significant savings. Althou ^a h labor rates in traditional LCCs such as China were rising, U.S.-based labor was still more costly. On the other hand, with oil prices rising steadily, Krishna knew transportation costs would be far lower if he kept production close to customers.

Senior management at Polaris was also concerned about a manufacturing talent gap in the United States. Over the past twenty years, decreased funding for community colleges and trade schools had resulted in technical workers becoming increasingly difficult to find. Moreover, young trade school graduates were less interested in moving to the locations where Polaris operated, which were small towns with only one large employer. By comparison, well-trained technical talent was relatively easy to find in many South American and Asian countries.

Lastly, Polaris expected much of its future sales growth would come from overseas m arkets, particularly emerging markets. There were multiple ways to enter these markets, including acquisitions and joint ventures, but building a facility in an emerging market could potentially help Polaris capture futu re demand.

Choosing a Manufacturing Location

Krishna and his team considered several options for optimizing the manufacture of Side-by-Sides and the design of the supply chain. They concluded that the best options were either to continue production in existing American factories or to build a new plant in China or Mexico.

Beyond the specific pluses and minuses of each location, Krishna needed to consider the following in making a final decision:

• The majority of demand for Side-by-Sides was in the southern United States. The states with the highest share of sales volume in 2010 were Texas and California.
• Side-by-Sides were high volume-to-weight/low value-to-weight products, which meant that shipping costs accounted for a large fraction of their retail price.
• Polaris’s senior management placed a high value on ease of communication with its manufacturing plants and believed that in-person interaction among managers, design engineers, and production staff was a key driver of the company’s longterm product innovation.
• If Polaris moved production of Side-by-Sides abroad, the company planned to lay off sixty workers at its Roseau plant. Each worker would be paid a one-time severance of $20,000.
• Polaris assumed that demand for Side-by-Sides would remain flat for the next five years.

Data on labor costs, production costs, transportation costs, capital expenditures, and exchange rates for each location are included in Tables 15-9 through 15- 12.

China

Polaris’s senior executives were excited about the low costs in China, but labor costs had been rising in the manufacturing-heavy eastern region; over time the company would likely have to look further inland to find low-cost labor, which would further increase the length and variability of product transportation. Polaris also had concerns about its ability to successfully collaborate with a Chinese factory due to time-zone differences and cultural dissi milarities.

Operating a factory in China would require Polaris to hire sixty new employees on location. It also would result in a one-time charge of $10 million for capital expenditures, equ ipment movi ng costs, and startup costs. Polaris would have to pay a 5 percent tariff on all production and transportation costs when importing products into the United States.

Side-by-Sides made in China would be transported to the United States on container vessels, with each container holding twenty-six vehicles. The cost to ship one vehicle to the United States from China was $190 per unit, or $4,940 per  Although shipping companies claimed the containers would reach the United States in about twenty days, in practice shipping time was highly variable, with a range of nineteen to thirtythree days.

Mexico

Polaris’s senior management saw several qualitative advantages to operating a forei gn manufacturing facility in Monterrey, Mexico. Monterrey was relatively close to the United States, which would allow for easier in-person collaboration between the man 11 facturing facility and Polaris’s staff. In addition to geographical proximity, managers believed cultural familiarity would make collaborating with a Mexican workforce easy. Lastly, although Polaris believed that long-term sales growth would come from emerging markets in Asia, it also believed that near-term growth would occur in the United States—particularly in the southern United States, an area close to Monterrey.

A factory in Mexico would require hiring sixty new employees, the same as in China. Side-by-Sides would be shipped to the United States by truck in batches of twenty-six units at an average cost of $2.30 per mile per batch. Although trucking companies claimed they could cross the U.S. border and deliver the products in two days, in practice it took between two and seven days.

Capital expenditures, equipment moving costs, and startup costs for a Mexican factory would total $9.5 million. Under the provisions of NAFTA (North American Free Trade Agreement), Polaris would pay no tariffs on imports from Mexico into the United States.

TABLE 15-10 Operating Metrics by Plant Location

Cost per unit

Capital expenditures, equipment moving costs, and startup costs (thousands of US$)

TABLE 15-11 Demand Assumptions

Annual