How would you estimate the cost of improvements?
Supply Chain Improvement
1) Please read the articles and watch the videos (see links below). https://insideevs.com/news/350057/video-reasons-tesla-acquired-maxwell-technologies/
- https://insideevs.com/news/378928/tesla-new-battery-line-cost-savings/
- https://www.cnbc.com/2021/10/20/tesla-switching-to-lfp-batteries-in-all-standard-range-cars.html
2) Write 4 pages about: (See the notes for the cost/benefit analysis)
THE NOTES/NUMBERS at the end of these instructions MUST be added to the writing.
- Performance improvement AND to invest to make that change.
- How would you estimate the cost of improvements?
- Reduction in lead time
- Improved part quality
- Any carrying cost savings
- Effect on manufacturing
- Effect on inventory
- Effect on Logistics
- Effect on production demand
- How would you estimate the benefits? (See the notes for the cost/benefit analysis)
- Cost vs Benefit Analysis
3) Cite MLA style
- Please note that this is a TEAM project. Some of my team members have already worked on their parts; therefore, I need to complete mine. See their parts below, so you have an idea of what we are doing.
- I added my notes for the project at the end; please include them in the writing.
The improvements are: changing raw materials and increasing production by 4x
Tesla’s Supply Chain Improvement
Introduction:
Tesla is a diversified technology company with strong positioning in the electric vehicle, solar energy generation, battery storage, and even space transportation segments with a vision “to accelerate the world’s transition to electric mobility”. Tesla is also ranked as the world leader in Electric Vehicle brands, and its 157% growth in 2021 makes it the fastest growing brand worldwide.
Even though electric vehicles are cleaner than gasoline or diesel fuel cars and trucks, their batteries depend on toxic metals. The mining and improper disposal of these products contribute to environmental degradation and other issues, including child labor. Tesla has been trying to address some of these problems by beginning to recycle batteries at its Gigafactory in Nevada. The company plans to recover some of the raw materials, such as lithium, cobalt, and copper, and reuse them in the manufacturing process of new batteries. Additional cost savings can be realized by eliminating the need to ship the batteries overseas, “where many of the third-party recyclers are located” (Evarts, par. 5). Although this recycling process will help the environment, and also reduce the dependence the US has on overseas mining for earth minerals and other battery raw materials, it is complex and expensive, and therefore, alternative solutions need to be evaluated.
Tesla faces high manufacturing costs and supply chain issues for critical components, especially batteries and microchips, preventing Tesla from meeting aggressive production goals for their electric vehicles. Insufficient charging infrastructure, predominately in urban, remote, and developing country locations, are additional contributors preventing Tesla from expanding its market share.
By collaborating with strategic partners in the battery storage market to find processes and technological improvements that can reduce the cost of this critical component, drive down manufacturing costs and increase production, Tesla would be able to mitigate the obstacles it faces. (Team’s member#1 part end)
Problem:
As previously mentioned, we live in a world that continues to evolve rapidly where the changing global auto industry continues to face many challenges in terms of high demand for EV cars and increased production which includes the shortage of lithium-ion batteries. Keeping up with high demand and maintaining a smooth supply chain process given recent events has been difficult and very costly (Young, 2022). Other challenges involve heavy competition in the market where coming up with new products, maintaining innovation, and customer satisfaction is a key element to continue growing the business successfully. Moreover, people have expressed their concerns and complained about Tesla’s cars being too expensive for the middle class and driving range between charges was too short which has put pressure on the company to find ways to manufacture batteries in a cost-efficient way while improving efficiency.
In order to evaluate all the different issues and challenges, we need to understand how current batteries function. “Batteries are solid-state devices that store and release electrical current, powering an array of consumer electronics, cars, home utilities, and other devices. Lithium-ion (LiOn) is the key ingredient in most batteries. LiOn is also the main component of most rechargeable batteries. Rechargeable batteries have become widely used in many applications. Different variations of them can now be found in everything from mobile phones and tablets to laptop computers and electric vehicles” (Young, 2022).
In this case, one of Tesla’s challenges is to find ways to increase profit margins on its fully electric vehicles without increasing prices. They were thinking of changing their battery chemistry to a version with lithium-iron-phosphate (LFP) cathode. Tesla already makes and sells vehicles with LFP chemistry in its factory in Shanghai to China, the Asia-Pacific region, and Europe keeping in mind that 95% of LFP cathode is produced in China. Due to recent events and fears stemming from the Russia-Ukraine conflict, Elon Musk has forecasted battery supply constraints next year, making in-house production a key to growth (Jin). (potential challenges when trying to implement this, but costs savings…) R&D etc – Switching to LFP will reduce COGS by ~20% based on 2021 Income Statement
Another big challenge in implementing this process is switching US customers to the new version of batteries as it has advantages and disadvantages, with weather being a big factor in the process. The new version of batteries is cheaper, more stable, safer, and does not require nickel or cobalt. On the other hand, cold weather can affect them more and the cells are less energy-dense meaning they offer lower range for the same weight as other cells (Wayland). Therefore, if the weather is too cold, the reactions slow down, reducing performance. At the same time, if the weather is warmer the battery performs better, but if it gets too hot, reactions will speed up and degrade the battery.
As noted earlier, Tesla’s goal of mass producing its own batteries will generate cost savings, but the challenges of launching a new factory and developing a new way of battery manufacturing is a very ambitious plan, not to mention difficult to manufacture at a speed and at scale. However, it is a key process to achieving the goal of building less expensive, longer-range electric vehicles which also allows Tesla to remain competitive. Tesla has partnered with different companies for their car batteries, one of them is Panasonic whom they partnered with back in 2021, and although this is extremely beneficial for both companies, it also creates dependency as the company relies heavily on Panasonic for a great part of its battery manufacturing and car batteries. Additionally, costs estimates in terms of batteries have been based on what CEO Elon Musk has announced in previous years. Back in 2019, Musk stated that replacing battery modules would cost between $5,000 and $7,000. However, the Tesla model uses between four and five battery modules per vehicle, resulting in a complete replacement that will cost between $20,00 and $35,000 (Morales).
Furthermore, although Tesla seems to have a significant lead in terms of battery cell cost compared to the rest of the auto industry, battery cell and pack cost is often seen as the main target for optimization in order to lower the cost of electric vehicles. “According to Cairn ERA, Tesla pays an average of $142 per kilowatt hour (kWh) for battery cells purchased from its three suppliers: Panasonic, LG Chem and CATL. By comparison, GM pays an average of $169 per kWh for its battery cells while the industry average runs at about $186 per kWh. Paying far less than other automakers for lithium-ion battery cells allows Tesla to also lead the industry in the cost to manufacture EV battery packs. Cairn’s data estimates that Tesla’s battery packs cost, on average, $187 per kWh while GM’s packs cost $207 per kWh and the auto industry spends an average of $246 per kWh for battery packs” (Lambert, 2021). Although Tesla’s battery costs are about 20% below the industry average, driven by the company’s higher volume and battery chemistry, Tesla still faces many issues in terms of producing its own batteries, and manufacturing affordable cars. (Team’s member#2 part end)
Notes:
- Iron and Phosphate is a readily available resources found globally
- Lithium Iron Phosphate (LFP) is cheaper to manufacture than NCA/NCM batteries
- Cobalt costs $71,000 a ton
- Nickel costs $24,435 a ton
- Lithium costs $50,000 a ton
- Switch to – Iron costs $133 a ton
- Switch to – Phosphate costs $76 a ton
- Switching to LFP will reduce COGS by ~20% based on 2021 Income Statement
- Savings of $8,043,530,000 ($40,217,640,000 x 20%)
- An estimated additional 5% PP&E increase due to capital expenditures for new machinery/tooling/plant expansion
- PP&E increase = $94,200,000 ($18,884,000,000 x 5%)
- Assume no change in overall spending for Operating Expenses (Direct Labor, Overhead, SG&A, R&D, etc.)
- There is a 12% reduction in the per-unit cost for this based on the fact that increasing production by 4x will spread this expense across more units
- Current assumption is 16% OE at a current production rate
- Doubling to 2x production would reduce this to 8%
- Doubling again to 4x production would reduce this to 4%
- 16% – 4% = 12% reduction
The breakdown for unit costs for baseline battery with the total price to OEM of $2,600. The total cost to the OEM, including pack integration components, is $3,360
- Materials: 50%
- Purchased items not including cooling system:16%
- Direct labor: 4%
- Variable Overhead: 4%
- General, Sales, Administration: 4%
- Research and Development: 4%
- Depreciation: 9%
- Profit: 4%
- Warranty (includes battery pack only): 5%
- Possible additional savings of 4% per unit can be realized by finding manufacturing efficiencies such as combining/eliminating redundant steps, reducing the amount of testing required, and taking over the full production process from a third party (such as Panasonic).
- There will be an increase to inventory cost due to the increased production of the batteries but this could be offset by increasing the manufacturing of the EV product lines.
- Assuming a 50% increase to inventory = $2,878,500,000 ($5,757,000,000 x 50%)
- Inventory financing can also increase the cash flow that can be used to fund operations