Tesla’s Vertically Integrated Supply Chain

Subject: Case Studies
Pages: 8
Words: 2271
Reading time:
9 min
Study level: Master

Introduction

Effective supply chain management is one of the critical factors influencing the success of modern companies and their ability to evolve. The increased competitiveness in various markets, along with the sophistication of the production and manufacturing processes, promoted the increased complexity of the supply chain. Today, companies have multiple partners responsible for the provision and delivery of components needed to create the final product. Under these conditions, businesses make steps towards enhanced supply chain management and control. One of the possible methods to accomplish the task is the use of the vertically integrated supply chain, allowing organizations to become more effective and evolve. However, the given model has both advantages and disadvantages that should be considered when concluding whether it applies to a certain situation. The proposed paper investigates Tesla’s case regarding the vertically integrated supply chain, its central features, and possible alternatives, along with recommendations.

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Vertically Integrated Supply Chain

The increased number of components needed to assemble a single unit, the complexity of the process, and the growing quality demands introduce additional challenges for big companies. For this reason, today, numerous corporations try to control all aspects of the production process and ensure it remains effective and provides units with multiple benefits. It results in the emergence of vertical integration, which can be defined as the control over suppliers, distributors, or retail locations to improve supply chain management and generate competitive advantage (Lee, 2020). Following the given model, companies acquire the chance to strengthen control over the essential parts of the manufacturing process and focus on the aspects that are critical for clients (Lee, 2020). For this reason, the framework has become more popular today.

Companies can achieve vertical integration in various ways regarding their current position, goals, and available resources. One possible method is the partnership or acquisition of all parties involved in the supply chain to ensure the increased effectiveness of cost distribution, better transportation, and the absence of delays (Lee, 2020). At the same time, purchasing retail outlets can provide more opportunities for after-sale services and better cooperation with clients. Under these conditions, numerous corporations might be interested in shifting to this model and generating a competitive advantage.

Appropriateness for the Car Manufacturing Industry

Speaking about the vertically integrated supply chain in the car manufacturing industry, it is vital to mention several aspects. First, initially, the sphere was built around this concept as it helped to manage production costs and ensure a stream of components and their quality. However, because of multiple economic factors, various companies, such as The Big Three North American, might move away from the model to employ outsourcing practices and find new partners. At the same time, the model remains beneficial and attracts other corporations (Kotler, Kartajava, and Setiawan, 2021). For instance, in 2009, Toyota proclaimed its desire to become the first vertically integrated electric vehicle company (Dmillstoyota, 2017). The company planned to have solar charging stations for its batteries and plants to acquire the demanded supply of details (Dmillstoyota, 2017). At the moment, it follows the idea and minimizes the number of stages in its supply chain to improve cost management effectiveness and attain better results.

Tesla is another example proving the appropriateness of the vertically integrated supply chain for the car manufacturing industry. From the case, it becomes evident that the corporation plans to use its resources and plants to create electric vehicles and ensure their high quality (Wu and Yang, 2017). This approach guarantees the absence of overspending, better management of deliveries, and the ability to consider client needs and work with them. In such a way, the examples of Toyota and Tesla demonstrate that while some other corporations in the market might move away from the model, it remains attractive and applicable for the industry as it can help to generate a significant competitive advantage, which is vital regarding the fierce rivalry.

Benefits

The attractiveness of the model is linked to the benefits firms can acquire from employing it. First, the vertically integrated supply chain allows for better control through ownership. The companies using this method become less dependent on the solutions of their partners and will not share the responsibility for their actions (Lee, 2020). Possessing all plants or warehouses, they acquire the chance to plan, distribute, and deliver products regarding the current needs, which leads to more effective cost management. Moreover, the model provides a change to enhance quality control as the manufacturer becomes the only actor responsible for the final characteristics of designed items and their ability to meet clients’ expectations. Under these conditions, shifting priorities towards vertical integration provides companies with some advantages.

Furthermore, the benefits include the reduced chance of being caught by pricing hikes or changes in partners’ demands. For instance, Tesla produces accumulators for its cars and guarantees their quality (Wu and Yang, 2017). It means that there is a reduced risk of failure and reputational losses if the detail works inappropriately. At the same time, better decision-making because of the absence of other parties’ interests can improve strategic planning and empower companies’ positions. These benefits attract new companies and might precondition their shift to using the model as a way to acquire a competitive advantage.

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Drawbacks

One of the central barriers to the mass implementation of the vertically integrated supply chain is the need for much higher capital investment. To create this model, a company should be ready to buy or build facilities to establish the supply channel. This task might be complex for organizations with a limited budget and the inability to devote a substantial amount of costs to such projects (Edwards, Ketchen, and Short, 2014). Furthermore, regarding the offered Tesla case, it is difficult to forecast the future demand as its visibility is complicated by the lack of experience (Wu and Yang, 2017). The pressing timeframe means additional complexities for managing this approach and creating demanded products in time (Wu and Yang, 2017). The need for additional training for all employees and improvement in their skills is another possible factor limiting the applicability of the model, as not all companies can afford it (Wu and Yang, 2017). It introduces new challenges for managers and the board of directors.

Additionally, the effectiveness of the supply chain depends on how all departments cooperate and meet current goals. In some cases, the vertically integrated supply chain is characterized by the emergence of issues with quality control and effective planning. The absence of suppliers means that the company, such as Tesla, should plan all manufacturing activities and establish a framework for enhanced collaboration between departments, which might be a complex task (Kotler, Kartajava, and Setiawan, 2021). In such a way, adherence to this model demands consideration of all current issues and well-thought-out analysis of existing trends.

Supply Chain Constraints

Any supply chain model employed by companies has specific constraints influencing strategic planning. For instance, following the discussed model, Tesla has a limited number of suppliers to control the whole manufacturing process. Along with multiple benefits, it reduces the ability to be agile, responsive, and flexible in the corporation (Wu and Yang, 2017). The case shows that most details come from the plants owned by Tesla; however, if some problems occur, the component cannot be replaced by another one produced by another supplier (Wu and Yang, 2017). It increases the risk of disruptions or issues with quality.

Furthermore, modern companies have a wide array of options to select suppliers. These include outsourcing, insourcing, offshoring, nearshoring, and right shoring (Kotler, Kartajava, and Setiawan, 2021). The central point of difference is the location of resources and facilities used to produce demanded products. For instance, nearshoring presupposes transfer to less expensive and closed companies to save costs (Kotler, Kartajava, and Setiawan, 2021). It also allows us to find the balance between customer demand and available resources (Kotler, Kartajava, and Setiawan, 2021). However, as in Tesla’s case, the employment of vertical integration demands better planning to ensure that the local facilities are sufficient enough to provide the required amount of supplies and details to fill the current need (Wu and Yang, 2017). Otherwise, the supply shortage can result in the inability to create the required number of products and growing customer dissatisfaction.

The model also introduces the issue of exclusivity as companies own all assets and remain the only units that can provide the demanded product. Tesla Factory in Fremont, CA, is one of the central providers of required components, meaning that its stable work is a key to the further rise of the corporation (Wu and Yang, 2017). It might introduce additional constraints that should be considered by management in their strategic planning.

Production Challenges

For Tesla, using the discussed model, production challenges become one of the central concerns. The idea of manufacturing cars regarding the number of orders introduces additional pressure for plants as they have to meet the demand. The case shows that in the past, the corporation experienced many production delays and complications with new vehicles (Wu and Yang, 2017). At the same time, the quality of some components, for instance, batteries, suffered because of the need to provide desired product in the short term (Wu and Yang, 2017). In such a way, the failure in one of the supply chain elements owned by Tesla might result in the collapse and inability to meet clients’ demands and growth of their dissatisfaction (Recker et al., 2017). For this reason, production challenges become a factor influencing the vertical model and demanding the constant improvement of all stages to attain desired outcomes.

Service Challenges

The case also outlines some service challenges peculiar to the discussed model and faced by Tesla. The company focuses on direct sales without using partners or middlemen (Wu and Yang, 2017). It means that the corporation acquires better control over sales; however, it also might face some service challenges because of the inability to meet clients’ demands. For instance, this model promotes better customer experience and product development; however, at the same time, it demands better training for the staff members and the creation of a premium image to attract new clients (Wu and Yang, 2017). It presupposes additional costs and promotion attempts to cultivate the feeling of exclusivity and guarantee that all services meet high-quality standards. Otherwise, the failure to attain this goal will result in the collapse and inability to achieve the desired level of sales.

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Recommendation

Considering current Tesla’s demands and peculiarities, it is possible to recommend a leagile hybrid system to attain better results. Using postponement, the company can manufacture cars in a lean and cost-effective way up to a certain stage and perform remaining actions when the demand emerges (Atari and Prause, 2019). It will result in improved customization and adherence to agile ideas (Gawade, 2021). At the same time, following lean principles, Tesla would remain environmentally friendly as it focuses on waste reduction and improved sustainability (George et al., 2004). The introduction of the agile elements will promote better control over different production stages. Toyota’s example of using lean proves its effectiveness and applicability to such cases (Gawade, 2021). For this reason, it can be recommended to use leagile to improve supply chain management and remain one of the leaders in the market.

Furthermore, lean demands a better supply network development to ensure the company can meet the current need. For Tesla and the vertically integrated model, the focus on supporting and improving the model will result in the future development of facilities as they are owned by the corporation (Wu and Yang, 2017). The enhanced supply chain also implies stable and high performance on all stages, demanding effective cooperation, problem-solving, and control (Rothaermel, 2021). For this reason, using lean principles, the company can improve its current infrastructure and have control over most of the activities performed it. At the same time, the agile elements introduced into the model will contribute to the increased effectiveness and the ability to overcome challenges linked to the unusual model of sales.

Benefits and Drawbacks

The central advantage of using the leagile system is the increased productivity, quality of products, and better response to customer demands. Tesla will take advantage of cost-efficiency and waste reduction traditionally associated with lean management and the higher flexibility of the agile framework, which is essential regarding its focus on providing clients with products that meet their diversified demands (Deuse et al., 2020). At the same time, the approach will help to improve relations with clients through a more effective communication and drawback system.

Nevertheless, leagile has some weaknesses that should be considered. First, the combined method does not offer the same level of flexibility as the agile system. The central reason is the necessity to produce a certain number of components demanding costs, resources, and time. These details should be used to avoid extra expenses, which reduces the company’s opportunity to reconsider the production process completely and focus on other parts (Nagaaba and Avebale, 2019). Furthermore, the use of the agile model demands specific investment to combine both approaches and create the desired environment.

Conclusion

Altogether, Tesla’s case shows how the vertically integrated supply chain can be used in the modern car manufacturing industry. Owning most facilities and controlling suppliers, the company can become less dependent on other partners and plan its future activities. However, the model has some drawbacks, such as the demand for high investment initially, some production and service issues, and the need to avoid supply delays to meet clients’ demands. The use of a leagile system can also be a beneficial option for companies as it would help to improve flexibility and save costs by a better approach to planning.

Reference List

Atari, S. and Prause, G. (2019) ‘Lean intrapreneurship for networked manufacturing enterprises’, Journal of Entrepreneurship and Innovation in Emerging Economies, 5(1), pp. 10–21.

Deuse, J. et al. (2020) ‘Systematic combination of Lean Management with digitalization to improve production systems on the example of Jidoka 4.0’, International Journal of Engineering Business Management.

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Dmillstoyota (2017) Vertical Integration by Toyota. Web.

Edwards, J., Ketchen, D. and Short, J. (2014) Mastering strategic management. Vancouver: BCcampus Open Education.

Gawade, D. (2021) ‘Agile supply chain in manufacturing and service industry: bibliometric and content analysis’, Vision.

George, M. et al. (2004) The Lean Six Sigma pocket toolbook: a quick reference guide to 100 tools for improving quality and speed. New York, NY: McGraw-Hill.

Kotler, P., Kartajava, H. and Setiawan, I. (2021) Marketing 5.0: technology for humanity. New York, NY: Wiley.

Lee, Y. (2020) Vertical integration and technological innovation: a transaction cost approach. London: Routledge.

Nagaaba, N. and Avebale, D. (2019) Lean, agile and leagile manufacturing and plant performance of SMEs. Beau Bassin: LAP LAMBERT Academic Publishing.

Recker, J. et al. (2017) ‘How agile practices impact customer responsiveness and development success: a field study’, Project Management Journal, 48(2), pp. 99–121.

Rothaermel, F. (2021) ISE strategic management: concepts. New York, NY: McGraw-Hill.

Wu, L. and Yang, W. (2017) ‘Tackling supply chain challenges of Tesla Model 3’, Operations Management Education Review, 11(1), 5– 34.