The insider's guide to the Jerome Fisher Program at the University of Pennsylvania

Director’s Corner: Why Tesla Can’t Ramp Up Model 3 Production

The below article is a repost from M&T Director Dr. Gad Allon’s original LinkedIn article. Gad was named one of the 9 Wharton Faculty to Follow on LinkedIn and one of LinkedIn’s Top Voice of 2017.


There was an interesting article a few days ago in the Washington Post about Tesla and their production delays.

“Model 3 production was less than anticipated due to production bottlenecks,” Tesla wrote in an investor letter. “Although the vast majority of manufacturing subsystems at both our California car plant and our Nevada Gigafactory are able to operate at a high rate, a handful have taken longer to activate than expected.”

Reading between the lines, there are multiple things are play here.

(1) Tesla is trying to ramp up production for its Model 3 which is running well behind schedule.

(2) Tesla is trying to ramp up production and capacity as a firm. For a firm that has never managed to produce more than 100K cars a year, the firm is gearing up to produce around 250K a year (and potentially more later on).

(3) The firm is changing the way firms scale up and ramp up production, skipping (possibly crucial) steps in the middle.

(4) Tesla is moving from selling cars at a price point of $100K to $35K, without changing anything significant in its operations strategy.

Each one of these is a challenge in and of itself, but the combination of these is fascinating.

Musk made the following statement in the Q2 earnings report on August 2: “Model 3 drive units as well as battery packs made with our proprietary 2170 form factor cells are being built on new lines at Gigafactory 1. We are now fine-tuning these manufacturing lines to significantly increase the production rate,” Musk said. “We wish we could do all of this faster and get everyone’s Model 3 to them right away. It’s important to understand that our production ramp will follow an S-Curve, meaning that it will begin slowly, grow exponentially, then start to tail off once we achieve full production.”

There are many important elements here and in combination of these two statements: By going without the traditional  Soft Tooling physical prototype step, Tesla relies much more on software design to speed up the time to market and reduce un-necessary waste in the process.  Model 3’s main innovation is going to be its price (some people refer to it as the Model T of our generation).

To be able to maintain a lower price the firm had to design the product so it can be manufactured in a relatively cheap way (at scale). This is not new, and usually referred to as “design for manufacturability.” Yet, skipping steps up front has usually significant cost implications later on. The terms “digital manufacturing” and “digital supply chain” are being overused these days, but this is an attempt to put them in practice and see whether they can achieve real benefits.

This brings me to the next step, which is the sharp S-curve. Elon Musk has referred to the first steps as “production hell” and promised it’s going to be less hellish than for previous products. In previous products employees were subjected to mandatory overtime and reports surfaced on higher than usual injury rates.

Furthermore, applying pressure early on through mandatory overtime and other measures, can result in quick ramp up, but the faster the ramp up, the more likely quality issues are overlooked, and then pop-up later on. Model 3 will have to deliver not only a lower cost, but it will have to be a much more reliable product at scale. It will also need to prove it is much more reliable than previous cars which were purchased as conspicuous consumption products rather than necessarily reliable mode of transportation.

Model 3 is an innovative product inching Tesla closer to being a “platform firm” (a company, like Facebook or Uber, that brings buyers and sellers together through a unique network where the “car” is the platform for offering additional digital services). One would argue that the hardware product in this case is not as innovative as previous models, allowing the firm to further innovate (and, in fact, to transform) the supply chain and manufacturing process behind it.

Can the firm achieve scale at the cost and quality expected from an everyday car? Like the Model 3 itself, the answer is still yet to be seen.

 

Gad is Director of the M&T Program and a professor in Wharton’s OIDD department. He is also co-founder of ForClass, an edtech designed for educators by educators. You can follow Gad on Twitter, @g_allon

 

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