Producing the Tesla Model 3

Everybody knows that Elon Musk has a “problem” – how to ramp up production sufficiently to fill the nearly 400,000 orders for Tesla’s new Model 3 in a timely manner. The production rate increases required are comparable to Henry Ford’s “problem” –ramping up Ford Model T production a century ago.

One post from May 2016 compared Musk’s “problem” with Ford’s “problem”. A subsequent post elaborated on plans for Model 3 production. They are both reprised below, to provide some prospective when the hype builds up around the start of actual Model 3 production, expected in the third quarter of this year (2017).


Henry and Elon (From 1 May 2016)

I’m writing this post just one month after Tesla Motors’ Model 3 electric automobile was introduced and made available for advance orders. As you may have heard, in the first week following that introduction, Tesla received more than 325,000 orders, with $1,000 deposits – reportedly a record for any product, ever! Now, a full month from launch, the order book reportedly totals around 400,000.

The question now is “can Tesla produce enough cars to fill those orders before the folks in the queue get tired of waiting and demand their fully refundable deposit back?” Sounds like a fair question, especially considering: (a) that Tesla produced only about 52,000 cars in all of 2015, (b) that Tesla will want to continue to produce their existing Model S and Model X cars, presumably in increasing volumes, and (c) that lots of additional Model 3 orders will keep rolling in. As a practical guess, let’s rephrase the question this way: “can Tesla deliver a cumulative 400,000 Model 3 automobiles by the middle of 2019 without retarding growth of their other product offerings?”

Henry Ford’s Model T

Let’s start to answer the Model 3 production question by considering Henry’s Model T of a century ago. Ford introduced the Model T as a practical and affordable automobile for everyman in late 1908 and started deliveries in the 1909 – 1910 model year. Here are the production figures:

Ford Model T Production Figures

1910 Ford Model TStarting at zero, it took Ford about four and a half years to produce the first 400,000 Model T Fords. Unlike Tesla, Ford did not start with 400,000 orders in hand. Henry Ford had no idea, from the start, how many he would be able to sell: “everyman” had not even dreamed of owning an automobile in 1908. So, Ford didn’t know how much manufacturing capacity he would need, nor did he know how raw materials would be sourced in sufficient and timely quantities.

For Ford, it was necessary to vertically integrate from iron ore deposits to metals castings all the way through finished vehicles in order to assure adequate supplies of all of the components necessary to keep production going. Tesla has integrated vertically to build a “gigafactory” sufficient to mass produce batteries in the quantities that Model 3 production will require. The “gigafactory” is already in operation, although far from full capacity.

Compared to Ford and his Model T, Tesla has a century of manufacturing technology to draw on, along with the infrastructure that supports an industry that can produce about 15 million vehicles annually. With 400,000 orders in hand (and the $400,000,000 from the deposits), Musk and Tesla are certainly in a much better position to find financing for the facilities and capital goods necessary to produce the Model 3 than Ford was in 1908.

Building and operating a 21st century automobile factory that can produce 400,000 automobiles by the middle of 2019 is a big job. The manufacturing technology is impressive, but it’s not rocket science. By the way, Elon Musk is a rocket scientist – he is the Chief Technical Officer of SpaceX, maker of 21st century rockets.

Will the Tesla Model 3 deliver fast enough? Bet on it!


7 May 2016 – Additional Comments

On 4 May 2016, Elon Musk and Tesla’s management team held a conference call for business analysts and the financial community. Model 3 production planning was a primary area of discussion. Here are a few points that build on last week’s post:

Production Rate: Musk announced that Tesla intends to reach the 500,000 cars per year rate in 2018, instead of 2020 as previously indicated. I take that to mean total production of all three models, not Model 3 alone. The blue line on the graph labeled Model T Production indicates that Ford significantly exceeded the half million cars per year production rate in the 1914 – 1915 model year. The production rate in 1910 – 1911 was 53,192. So, within four years Ford increased production by more than ten times. Now, Tesla says they will do almost exactly the same thing – from about 52,000 in 2015 to about 500,000 in 2018 – in three years rather than four.

Operating Leverage: In a discussion on costs, Elon Musk mentioned that “our operating leverage means fixed cost relative to variable cost is going to improve dramatically”. How much is “dramatically”? The red line on the graph labeled “Model T Production” indicates the per vehicle selling price. For the 1910 – 1911 model year, Ford charged customers $780 for a Model T. The price was reduced to $550 for the 1914 – 1915 model year. That 29.5% price reduction was made possible through Ford’s increase in operating leverage.

Ford was selling the Model T into an entirely new market. Each time he reduced the price, he created an entirely new customer segment. Ford used price to keep his production rates increasing and the improvement in operating leverage funded the price reductions – with some left over for Ford and his Company.

 “Hell-bent on becoming the best manufacturer on earth”: Musk pointed out:

“Thus far, I think we’ve done a good job on design and technology of our products. The Model S and Model X are generally regarded by critical judges as technologically the most advanced cars in the world. We’ve done well in that respect. The key thing we need to achieve in the future is to also become the leader in manufacturing.”

Excellence in manufacturing operations results in high product quality levels and high throughput rates – hence strong operating leverage. It worked for Ford a century ago. It is working for Tesla today.


Everybody in manufacturing should read (or re-read) Henry Ford’s autobiography. The parallels between what Ford said and did with what Musk is saying and doing are truly remarkable. Of course, it goes without saying that a century does make a difference and a Tesla Model 3 isn’t a Ford Model T. Learn from Ford anyhow.

By the way, last week Elon Musk’s SpaceX recovered (landed) a rocket on a barge at sea, at night. SpaceX designed and manufactured that rocket. SpaceX will reuse the rocket, reduce the price for future satellite launches, and increase their throughput and their operating leverage. Musk and his crowd do know how to do things well.

Chuck & Joan in ParisThoughtful comments are always welcome.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

Model T Photo: Creative Commons via Wikipedia

 

Idiocy Squared?

15 January 2017

Yesterday (14 January 2017), I watched SpaceX launch a cluster of ten communications satellites into precise orbits, while returning the launch vehicle to an autonomous barge in the Pacific Ocean. I’ve been following rocket launches since I saw the first Vanguard rocket self destruct on its launch pad in December, 1957, to the chagrin of the entire nation.[1] Yep, I’m a technology buff. Technology fascinates, amazes and delights me. Maybe that’s why I became an engineer.  — C.H.


Elon Musk and the Vision Thing

Elon Musk is an interesting man. He envisions the future. Then he acts on that vision in a systematic (and courageous) manner. Actually, he goes beyond “systematic” – he insists on thinking from first principles,[2] rather than on starting with the present art. At the same time, he remains focused on his vision, to the consternation of many.

This post focuses on two of Musk’s businesses – SpaceX and Tesla — and examines the visions they embody, with examples of initiatives in place to realize those visions.

SpaceX’s Vision:

SpaceX designs, manufactures and launches advanced rockets and spacecraft. The company was founded in 2002 to revolutionize space technology, with the ultimate goal of enabling people to live on other planets.

That’s right – Musk’s vision for SpaceX is nothing less than colonizing Mars.[3] The purpose of SpaceX’s commercial launch program is to fund the development of the technology necessary to do so. That technology is complex and its development will be enormously expensive. Keep in mind that SpaceX is already doing things that only governments have done before (and some that nobody has done before). Also remember that the Apollo program that sent astronauts to visit moon – but not live on the moon – was, at its peak, consuming about 4% of the entire federal budget!

Here is some of the technology currently under development:

>> Advanced rockets and spacecraft: The Falcon rocket and the Dragon spacecraft are both original designs, developed from first principles as steps on the way to Mars.[4]

>> Reusable launch vehicles: Yesterday’s SpaceX launch vehicle was safely landed, joining launch vehicles from about a half dozen earlier SpaceX launches. The objective is to reuse them. Reusable launch vehicles are the key to sharply reduced costs. Imagine the cost of an airline ticket if the airplane could only be used once. Look for a SpaceX launch using a previously used rocket within this year.

>> The Falcon Heavy: With three times the lift capacity of the current Falcon 9, the Falcon Heavy is scheduled to test launch this year. Trips to Mars will require massive lifts into orbit.

>> The Raptor engine: SpaceX has test – fired a new rocket engine that will burn liquid methane instead of kerosene. Liquid methane will provide considerably more thrust per unit of mass than does kerosene. Methane is also available on Mars, so methane refueling on Mars could facilitate return trips!


Tesla’s Vision:[5]

The point of all this was, and remains, accelerating the advent of sustainable energy, so that we can imagine far into the future and life is still good. That’s what “sustainable” means. It’s not some silly, hippy thing — it matters for everyone.

So, Tesla is about accelerating the advent of sustainable energy. Wind energy, solar energy and hydroelectric energy are all potentially Sustainable, but none of these are directly applicable to vehicles. However, if the vehicle is powered by electricity, all of them are applicable. So, Tesla makes electric vehicles. Tesla also recognizes that it cannot, of itself, make enough electric vehicles to make electric vehicles the world’s standard. There are many constraints to doing that.

Here are a few of them:

>> Vehicle performance: Drivers expect electric vehicles to perform at least as well as petroleum fueled vehicles. Hence Tesla’s emphasis on acceleration, comfort, handling, safety and related matters.

>> Style: Drivers like cool, classy, functional cars. Tesla vehicles turn heads.

>> Range: Drivers expect electric cars not to strand them. That requires that vehicles have a range between fueling that compares their current vehicles, and that refueling be available almost anyplace. That’s why Tesla cars have 250 – 300 mile range between recharging, and why Tesla is so intent on building recharging facilities worldwide. Tesla is not waiting for somebody else to do it for them.

>> Batteries: Over 15 million new cars were sold in the U.S. in 2016, and several times that many worldwide. For electric vehicles to become a substantial portion of those numbers, a ready, reliable source for suitable batteries is necessary. That’s why Tesla is building a giga-factory – the largest factory in the world – to produce the batteries. Again, Tesla isn’t waiting for somebody else to do it for them.

>> Update 1/19/2017 : Tesla just announced that it will increase its investment in the giga-factory by $350 million in order to manufacture electric motors and drive trains for Tesla automobiles. Yet again, it appears that Tesla sees a need to produces hundreds of thousands of 200 – 400 horsepower motors that meet their requirements, rather than wait for somebody else to do it for them.

>> Price: In order to sell enough vehicles to even begin to make a difference, Tesla has to produce vehicles that sell at mass market price points. Hence the coming Tesla Model 3.

>> Production Technology: In order to meet drivers’ expectations at a mass market price while generating a reasonable profit, Tesla is re-inventing vehicle production technology from first principles. It will be interesting to see just how the Model 3 is produced.

>> Marketing and sales: Tesla regards the existing authorized dealer model of vehicle sales as inefficient. Instead, Tesla wants to use Amazon – style sales methods. Not surprisingly, existing dealerships are resisting fiercely.

>> Self-driving vehicles: In 2015, there were 35,092 people killed in traffic accidents in the U.S. alone.[6] Tesla believes that self driving technology can reduce that figure by at least a factor of ten. Accordingly, all Tesla vehicles produced right now come equipped with the necessary equipment to do this. As self driving technology becomes more commonplace (and traffic regulations change), insurance costs most drop sharply, not to mention the reduction in human suffering. This technology addresses the human side of triple bottom line Sustainability, as electric power addresses the environmental side.

>> Critical mass of vehicles: To make a real difference, electric vehicles have to become a significant fraction of the world’s fleet of vehicles. Tesla cannot even hope to produce anything close to the number of vehicles needed to do that. That’s why Tesla made its large body of patents available without charge to all manufacturers that want to produce electric vehicles.


Elon Musk says that starting an automobile company in the U.S. is “idiotic”, and that starting an electric vehicle company is “idiocy squared”. Chuck says that if Tesla is idiocy squared, then SpaceX is exponentially so. But I like the way Elon Musk thinks. He reminds me of Henry Ford. The world needs people like them — people whose vision and actions transcend accepted bounds. Musk may be idiotic, but I do own some Tesla stock.

Chuck - Red RocksThoughtful comments and experience reports are invited and appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] For those who were not around in 1957, the U.S. and the U.S.S.R. were heavily engaged in the Cold War. The U.S.S.R. shocked the U.S. by launching the Sputnik 1 satellite in October 1957. The clear implication was that the U.S.S.R. was ahead of the U.S. in rocket technology, hence had an important military advantage. Catching up with the Soviets was so important that the Vanguard launch attempt was televised live.

[2] Nobel Prize winner Daniel Kahneman explains thinking from first principles and why it is so uncommon in his bestselling book, Thinking, Fast and Slow, Farriar, Straus and Giroux, New York (2011)

[3] For more and SpaceX and for a presentation on the Mars project, see SpaceX’s website at https://www.spacex.com

[4] In contrast, the Atlas V launch vehicle, which is used to compete with SpaceX for commercial launch business, is the latest in a series of Atlas rockets that began in 1957. The original Atlas was, in turn, a descendent of the German V-2 rocket from World War Two.

[5] For more on Tesla and on Elon Musk’s vision for Tesla, see: https://www.tesla.com/blog/master-plan-part-deux

[6] Traffic fatalities figure from: https://en.wikipedia.org/wiki/List_of_motor_vehicle_deaths_in_U.S._by_year

The Next Killer App – Part 2

“Killer App”?

“Killer App” is a computer industry term. It refers to the software that creates the value that makes people buy the hardware – lots of hardware. In this post, I use “killer app” rather loosely, to mean a whole genre of software that breathes life into new hardware platforms.

The Next Killer App – Part 1 reprised the idea of an electro – mechanical continuum in equipment design. As design emphasis moves past electric to electronic, software becomes increasingly important, such that the equipment increasingly becomes a means by which the software creates value. That’s why I think that the next killer app will be will be electric automobiles, and the value that sells them will lie in safety, convenience, comfort, efficiency and entertainment.

 Electric Vehicles: Why?

The global vehicle industry has been evolving rather slowly since about the year 1900. The rate of evolution has accelerated in the last few decades, such that today’s vehicles powered by internal combustion engines are remarkable machines by almost any measure. Today, however, there is a convergence of technical and social factors that make electric vehicles much more desirable – so much so that electric vehicles may well become our vehicles of choice over the next few decades. Here are a few of those “technical and social factors”:

>> There are persistent concerns with importing and burning huge quantities of petroleum every year. These concerns include a pernicious deficit in America’s international balance of trade figures and accumulating levels of atmospheric pollutants from combustion.

>> Highway safety figures have improved significantly over the years, even while the number of miles driven has increased. Still, 32,675 people died in vehicle accidents on American roads in 2014. Compare that to commercial airline figures, which are consistently near zero, never mind travelling 500+ miles an hour, six miles straight up.

1903 Studebaker Electric

Thomas Edison in 1903 Studebaker Electric Automobile

>> Battery and electric drive technology has improved dramatically, especially over the last decade or so, vastly improving an idea – electric automobiles – that is as old as the automobile industry itself. (Mrs. Henry Ford is said to have owned an electric car).

Fifty years ago, a newspaper ad for a used car might read something like “1956 Dodge 4 door sedan, 48,000 miles, excellent condition, R&H” The “R&H” meant radio and heater, which were extra cost options. Since then, add automatic transmissions, air conditioning, power steering, seat belts, fuel injection, stereo entertainment systems, GPS and more. The long term trend in the features that people want badly enough to pay for is clear enough.

Tesla Leads a Revolution

Tesla Motors, of course, is current leader in electric vehicles. Their cars define the current state of the art. But Tesla isn’t just about spiffy new cars. Tesla has stated that their intention is to lead a revolution – a revolution in how we think about transportation. Tesla recognizes that it needs to create an electric vehicle industry for electric vehicles to become more than a side show in the very large global vehicle circus.[1]  To that end, Tesla opened its considerable cache of patents, license and royalty free, to any firm that seriously attempts to build electric vehicles.

Tesla Model SFurther, Tesla hasn’t shied from confronting the external barriers to the general acceptability of electric vehicles. For example, Tesla continues to construct what is already an impressive number of electric vehicle recharging locations in the U.S. and elsewhere. Also, in July of this year, Tesla will hold the Grand Opening of a huge gigafactory which will produce the vast number of lithium ion batteries that Tesla expects to require (on the hurry-up).

The Business Model Continuum

The 360,000+ orders Tesla booked in a few weeks for their new Model 3 confirmed that demand for vehicles like Tesla’s does indeed exist. That’s good, because over a dozen serious prospective mass market electric vehicle manufacturers have already emerged globally. At least initially, there appears to be a continuum in the approaches these firms take toward electric vehicles. On one extreme, some existing global vehicle manufacturers seem to regard electric vehicles as a line extension, as hybrid vehicles are. I call this the Detroit view, although Nissan may prove to be the best example. Toward the other extreme, Tesla represents what I call the San Jose view, where the vehicle is viewed as a conduit for technology that provides new value in transportation.

Here are some examples:

>> Faraday Future has broken ground for a $1 billion manufacturing facility near Las Vegas where “we are eager to start production of the vehicles of the future that will embrace the increasingly intrinsic relationship between technology and mobility.” Like Tesla, Faraday Future is headquartered in Silicon Valley (physically and in mindset). Their initial products are expected to be high performance premium vehicles. Any firm that invests a billion dollars in a grass roots manufacturing facility is worth taking seriously. The firm is reported to be closely linked to the Chinese equivalent of Net Flix.[2]

>> There have been strong rumors of a coming electric vehicle from Apple (yes, that Apple). Apple has spent about $5 billion in additional R&D from 2013 to 2015, which, along with a $1 billion investment in a Chinese ride sharing service, suggests that Apple has a strong interest in shared mobility, expressed through shared, rather than owned vehicles. Driverless vehicles might well provide a new vessel for Apple software functionality, as Apple’s iPhone provides a vessel for personal communications software technology. It is interesting that Apple does not manufacture iPhones, or anything else that I know of. It is reasonable to suppose that an Apple car will be designed by Apple but built by somebody else.

>> There was a recent ad in the Phoenix newspaper for a Manager for Google’s driverless car operations in the Phoenix area. Google’s cute driverless vehicles are being widely road tested (more than 1.5 million self driving miles to date).[3] Google has been working on self driving cars since 2009, so now has a lot of experience with the necessary software. It seems likely that Google will partner with established automakers to provide self driving technology, rather than building their own vehicles.

>> The June 2016 issue of Fast Company magazine lists Mark Fields as #13 in its ranking of the 100 most creative people in business in 2016. Mark Fields is the President and CEO of Ford. Fast Company is not the sort of publication that normally associates “creative” with Detroit executives. The brief Fast Company listing notes that Ford has been conducting extensive road testing on driverless vehicles. Fields is quoting as wanting driverless technology for mass market vehicles that is “true to (Ford’s) brand”.

Incidentally, Ford recently announced a coming electric version of the mid-sized Ford Fusion model, featuring a 200 mile range. Sounds like a line extension to me. So, maybe Ford is still closer to Detroit than to Silicon Valley.

For Smaller Manufacturers

The automotive industry is obviously in a state of transition, perhaps disruptive transition. A lot of new competition is coming on several fronts. In situations like this, existing supplier relations are at risk. Bad, if you are an incumbent supplier. Not so bad if you have been on the outside, looking in. Better yet, there is room for new faces and new ideas as the distance between Detroit and Silicon Valley diminishes.

Chuck - VancouverThoughtful comments and experience reports are always appreciated.

 

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly. 


[1] How big is that “very large global vehicle circus”? Statista reports over 72 million vehicles sold in 2015, while projecting 100 million for 2020! http://www.statista.com/statistics/200002/international-car-sales-since-1990/

[2] For more on Faraday Future, see www.ff.com

[3] Google offers a video on its driverless prototypes at: https://www.google.com/selfdrivingcar/

 

 

The Next Killer App – Part 1

“Killer App”?

“Killer App” is a computer industry term. It refers to the software that creates the value that makes people buy the hardware – lots of hardware. In this post, I use “killer app” rather loosely, to mean a whole genre of software that breathes life into new hardware platforms.

Seventy-five years ago, the “killer app” was military software, such as code breaking, that financed the first truly digital computers. Today, it is social media and entertainment software that powers smart phone sales. Tomorrow, look for safety, efficiency and entertainment software that sells electric automobiles – especially electric vehicles that drive themselves.

This post – part 1 of 2 – reviews the idea of an electro – mechanical continuum in equipment design. This provides background for a discussion of electric vehicles and their consequences The Next Killer App – Part 2, next week.


The Electro – Mechanical Spectrum – From 15 November 2014

The Evolution of Machinery

Four Change DriversIt is increasingly clear — if not painfully clear — to most manufacturers that those who cannot embrace change are ill-prepared for the realities of operating in the 21st century. Manufacturers today face a convergence of many change drivers, which this blog rather arbitrarily groups as Globalization, Sustainability, Technology, and Demographics & Trends. To further complicate matters, some change drivers interact with others. Some emerge seemingly instantaneously, like 3D printing. Others reflect a trend over time.

This post looks at a trend in machinery, from almost entirely mechanical to extensively electrical (or electronic). One can imagine a continuum with mechanical devices at one extreme and electrical (or electronic) devices at the other.

As a familiar example, consider a continuum with a fine mechanical wrist watch at one extreme and the Apple Watch,[1] which was recently announced for 2015, at the other. It is easy to see a trend over time from pure mechanical watches to Bulova’s Accutron (electric tuning fork) watch, to quartz crystal watches, to all digital watches, to digital watches that keep time and do an increasing number of other things as well. In my view, the tipping point – the point where watches became more electrical than mechanical – fell between quartz watches with analog faces and hands, and quartz watches with digital displays.

Automobiles provide another example. Early cars were mechanical devices. They made little use of electricity, other than firing spark plugs – a hand crank started the engine. Electrification increased over the years to include lights, starter motors, electric windshield wipers, seat warmers and so on. Almost all of today’s cars make extensive use of electric power and computerization.

The Tesla Model S automobile may be close to a tipping point. Electric motor(s) propel the car — there is no combustion engine. Almost everything else is electric (or electronic) as well. Computers extensively monitor and regulate internal functioning and performance. The latest version of the Model S has two drive motors and all-wheel drive. The performance monitoring and feed-back in distributing power to the wheels is such that the much more powerful two motor version draws less current than the single motor version, extending – rather than reducing — the effective range between battery charges. The Model S also comes equipped with collision avoidance radar and sonar devices which also feed autopilot capabilities, not unlike a commercial airliner.

In the Factory

Equipment used in manufacturing isn’t exempt from this trend in technology. Newer machinery almost always makes more use of electricity and electronics than the machinery it replaced. Increased electrification (especially electronics-fication) improves the reliability and efficiency of the machine itself. It also improves the consistency of the products the machine produces.

Even more important, the information generated can be used outside the equipment in a multitude of useful ways – equipment maintenance, production throughput, energy consumption and materials utilization come quickly to mind. So, there are two advantages: (a) monitoring, feedback and corrective actions within the machine itself, and (b) information collection, analysis and utilization of the same information outside of the machine. Information collection can be through an industrial network, or through the internet.[2]

Production information available through the internet – the Internet of Things – is fraught with possibilities – multi-plant operations, remote maintenance, customer service and interfacing with transportation, for starters. When your firm’s products include “smart” internet accessible capability, the potential for adding value mushrooms.

This isn’t all smoke and mirrors. A McKinsey Global Institute report[3] projects that the Internet of Things will produce $0.9 trillion to $2.3 trillion in annual economic impact to manufacturers globally by 2025. Further, the McKinsey report projects that 80% – 100% of all manufacturers will be affected.

For Smaller Manufacturers

The evolution of machinery presents serious areas for concern for smaller manufacturers. Manufacturers that take advantage of this technology can expect significant gains in internal operating efficiency and in customer – facing areas. Smaller manufacturers, as a group, already lag larger manufacturers in productivity.[4] Smaller manufacturers, as a group, are less likely to have the technical capabilities necessary to exploit this technology. Smaller manufacturers, as a group, also find capital to be more expensive and harder to access than do larger firms.

These are serious concerns. Smaller manufacturers can address them by: (a) understanding and appreciating the disruptive potential for this technology within their industry, (b) continuing to focus their business, and (c) building joint actions with equipment suppliers, through trade associations, through technical societies and with customers.

Chuck - Austrian AlpsThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about confronting the realities of 21st century manufacturing … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] If you are curious about the Apple Watch, see http://www.apple.com/watch/films/#film-design

[2] For more on connected machines and products, see Smart Connected Products, a recent report from Oxford economics: http://www.ptc.com/File%20Library/Topics/Smart%20Connected%20Products/Oxford-Economics_Smart-Connected-Products-Report.pdf?l9=EN&src=Button&utm_campaign=SCP%20IoT%20SCP%20Oxford%20Report%20%e2%80%93%20IT%20B&utm_medium=email&utm_source=Eloqua

[3] See Disruptive Technologies: Advances that will transform life, business and the global economy, http://www.mckinsey.com/insights/business_technology/disruptive_technologies

[4] For more on the productivity gap between larger manufacturers and smaller, see Confronting the Productivity Gap, this blog, http://jerasustainabledevelopment.com/2012/11/29/confronting-the-productivity-gap/

The Importance of Zooming Out

Zoom Lens Thinking

Last week’s essay, The Diesel Dilemma [1] , took a zoomed out view of Volkswagen’s situation with diesel engines. That zoomed out view provides context that may affect any manufacturing firm that directly or indirectly supplies the automotive industry, or that may wish to in the future. This essay takes a zoomed out view of three current news items that, like the diesel situation, may affect your business, sooner or later.

#1 – Wal-Mart’s Earnings Forecast

Doug McMillan, Wal-Mart’s CEO, advised investors that earnings are forecast to decline by 6% – 12% next year. Apparently, sales aren’t growing fast enough to offset the billions of dollars that Wal-Mart will spend for employee wage increases (Wal-Mart employs about 1.3 million people). [2]

There are three zoomed out points here:

First, there is considerable political and economic pressure for employers to raise wages, never mind productivity, margins or sales volumes. Large employers like Wal-Mart will feel those pressures most acutely – but others will follow.

Second, the wages distinction between part time employees seeking incremental income and full time employees seeking a livelihood – that is, primary support for themselves and their families – is decreasing. The American economy is producing far too few new traditional livelihood jobs, as manufacturers are aware.

Third, this huge reduction in forecasted earnings calls Wal-Mart’s business model into question. This emphasizes that even very large, wildly successful business models may become obsolete in the rapidly changing 21st century economy.

#2 – Tesla’s Autopilot

Tesla announced that software version 7 had been downloaded to Model S automobiles. The new software version includes autopilot features that are a significant step toward self-driving vehicles. [3]

Here are the zoomed out take-aways from this:

First, the autopilot features offer a channel toward much safer driving. The software takes input from multiple optical, radar and sonar sensors which are constantly alert. The car’s computers can react and take evasive actions much more quickly than humans can. The combination is not unlike that in military aircraft. In 2013, there were 35,500 people killed in automobile accidents. Proactively safer cars promise to reduce that number considerably.

Second, the software download was conducted remotely, like Windows updates to your computer. Existing automobiles were significantly updated with new features, without visits to a shop.

Third, this instance emphasizes the trend toward increasing importance of electronics, computers, interconnection and software in equipment. This trend is increasingly apparent in industrial equipment. In industrial equipment, expect this thinking to lead to safer operation, lower product variation, improved uptime and less waste. Don’t disregard the Internet of Things.

#3 – Gasoline Price Prosperity

There are numerous reports in the news that speculate on the present and future price of crude oil. As everyone is aware, about a year ago the price of crude oil began to drop sharply. By the beginning of last year, the global price of crude had dropped by about half. As a consequence, a typical American who drives about a thousand miles a month at, say, 20 miles per gallon saved around $50 per month due to decreased fuel prices. Add to that the similar fuel cost savings in other forms of shipping and transportation and you have a bigger real cash stimulus to the economy than a major tax cut.

Wait – there is more. When the global price of crude oil drops by half, the number of U.S dollars spent on imported crude drops by half. Those shiploads of greenbacks stay in the U.S. economy instead of being shipped abroad. If you were wondering why the U.S. economy has improved over the last year or so, follow the money. The spending money that motorists discovered in their pockets, the shipping cost savings that everybody has seen and the lubricating effect of boatloads of additional greenbacks circulating throughout the American economy.


The real point to this post is the 21st century necessity for continuously zooming out. There is so much global change that can affect your business – for better or worse –that you have to see it coming. However, smaller manufacturers have plenty to keep them busy zoomed in on the factory, their customers, their suppliers and a thousand other things. Zooming out is every bit as important, but may appear to be less urgent than matters close at hand. Do it anyhow – have a Board member do it, get your trade association to do it, hire a consulting firm to do it or whatever makes sense in your situation. If Wal-Mart’s business model can go kaput, so can yours. Quickly.

Chuck in FranceThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

 

P.S: Contact me when your organization is serious about thriving in the globalized 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] For more about VW and diesel engines see: http://jerasustainabledevelopment.com/2015/10/10/the-diesel-dilemma/

[2] For more on Wal-Mart’s situation see: http://www.bloomberg.com/news/articles/2015-10-15/wal-mart-ponders-closing-stores-selling-units-to-revive-profit?cmpid=yhoo.headline

[3] For more on Tesla’s software see: http://money.cnn.com/2015/10/14/news/tesla-elon-musk-autopilot/index.html

 

The Empires Strike Back

Business Models at Risk

These essays frequently argue for innovation: product innovation, process innovation and, especially, business model innovation. Innovation affords true differentiation and true differentiation affords sustainable margins. However, Newton’s third law holds that actions spontaneously generate reactions. Innovations work the same way. Innovations often threaten existing business models and entrenched institutions. The threatened and the entrenched react – they strike back!

Here are some examples:

Tesla and the Car Dealers

Tesla Model STesla, The electric car manufacturer, certainly doesn’t think like everybody else. “Everybody else” sells to the public via a network of franchised dealers. The dealers sell new cars, buy and sell used cars, arrange buyer financing, while also providing maintenance and repair services (warranty and otherwise). Dealers also provide a huge capacity for carrying new car inventory.

But Tesla doesn’t think like “everybody else”. Tesla wants to sell to the public directly, rather than through dealers. Tesla wants to run their business on a “pull” system. Tesla wants to make to customer order, rather than building huge inventories.

Tesla is a very small part of the American automobile market. But Tesla’s cars do represent a real threat to the franchised dealer business model. Electric cars can be expected to require little maintenance and to last a long time. Tesla can provide customer financing at least as well as dealers can. So, it’s not just dealer mark-up on new car sales that is threatened: it’s almost all of the dealers’ revenue streams.

The franchised dealers are usually local business people, serving a local clientele. Many are active in state and local politics, individually or through dealer associations. Sufficiently so that the franchised dealer approach to selling new cars often enjoys political “air cover”. In fact, in three states (AZ, TX and CT) it is illegal for manufacturers to sell cars directly to the public. Now that’s striking back!

Solar City and the Power Utilities

Solar City is the national market leader providing distributed photovoltaic solar power systems (meaning solar panels on the roof) to residential and commercial customers. Distributed solar constitutes a tiny fraction of America’s electric power. However, distributed solar is growing fast, and distributed solar is highly visible. Rapid advances in battery technology are providing increasing feasible methods for making distributed solar power last around the clock. [1]

New building construction – residential, commercial and industrial – remains slow. Electric power utilization efficiency is improving rapidly, in new and existing structures, reducing per-square-foot electricity requirements. Accordingly, electric power utilities face a future of declining demand. At the same time, power generation and distribution facilities require capital for meeting environmental and other demands. Capital – usually meaning long-term debt financing.

Facing a weak outlook for future demand coupled with significant capital expenditure requirements, utilities are increasing wary of losing existing customers to distributed solar. So, the utilities are pressing regulators to discourage loss of revenues to distributed solar installations. The electric utilities can see all of the telephone service lines dangling unused from utility poles. Small wonder they strike back.

The Frackers and the Saudis

The widespread use of hydraulic fracturing drilling techniques (“fracking”) has resulted in a major increase in crude oil and natural gas production in the U.S. At the same time, high fuel prices and improvements in energy utilization efficiency have moderated demand. Some time in the autumn of 2014, reduction in U.S. demand – as seen by Saudi Arabia and other petroleum exporting nations – resulted in a sharp break in global crude oil prices.

In recent years, Saudi Arabia moderated global price fluctuations by varying their daily output, such that global supply and demand rebalanced at a level acceptable to them.

AEO 2015 Fig 23Not this time. The Saudis recognized three things: (1) With “fracking”, global supply was increasing too quickly to ignore; (2) In the 1970’s Saudi oil minister Sheikh Yamani commented that “the Stone Age didn’t end because we ran out of stones” (meaning, of course, that the Petroleum Age will likewise end before all of the wells run dry); and (3) the Saudis have by far the lowest cost of producing crude oil.

So, the Saudis struck back by holding crude oil production steady. The “frackers” – with their much higher cost – put the brakes on new drilling. Sharply. Global supply and demand began to rebalance and global crude oil prices began to increase.

For Smaller Manufacturers

For manufacturers, small or large, innovation is a necessary condition for surviving – let alone thriving – in the 21st century. It is a good bet that others, somewhere in the world, will view your innovations as potentially disruptive to their business models. Reaction is all but inevitable. The point here is that potential reactions to your innovations – and how to address them — need be considered when implementing innovations.

Chuck - Mt. HumphriesThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about prospering in the globalized 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.

Image credit: Crude oil net imports chart from U.S. Energy Information Agency, Annual Energy Outlook 2015, Fig. 23.


[1] For more on distributed solar and its implications, see William Pentland, PwC Survey Shines Light on Disruptive Impact of Distributed Generation, Forbes magazine on-line, http://onforb.es/1J5dO2U

Focusing Improvement Efforts

Everybody Can Always Improve 

Competing in today’s globalized economy is tough. Competing tomorrow will be even tougher. The need to constantly improve manufacturing processes, products and business practices is obvious enough. How to decide what should be improved next may not be so obvious. Removing the Blocks, a post from last year, provides the insight necessary to focus improvement efforts where they can do the most good.


Removing the Blocks

From: 6 March 2014

Sometimes, improvement doesn’t require innovation or invention. Rather, existing, perhaps even obvious paths to improvement can often be revealed by removing the blocks that obscure them. Consider the question: “why didn’t we produce one more (whatever you make, including dollars) last (shift, month, quarter, year)?” Regardless of how many you did produce, there is always some reason why one more didn’t happen.

The Primacy of Throughput

Eliyahu Goldratt’s Theory of Constraints provides a widely applicable method for addressing the “why didn’t we produce one more…” question. Theory of Constraints began with the familiar factory floor problem of getting orders out when promised. Theory of Constraints, as its name implies, focuses on locating, prioritizing and elevating constraints to throughput. Initially, “constraint” referred to some specific piece of equipment or work center that, for whatever reason, consistently limited the throughput of the entire facility. [1] [2]

Goldratt’s idea of throughput is worth considering. For Goldratt, “throughput” might be defined as a measure of progress toward achievement of the organization’s goal. Since a business unit is a system, that goal needs to reflect the throughput of the entire system, not the performance of various parts of the system. Goldratt originally defined the goal of a commercial enterprise as “to make more money now, as well as in the future”. [3] [4]

Be aware that “throughput” refers to products sold — to revenues, not to building (and valuing) inventories. Unlike conventional managerial accounting methods, throughput trumps operating costs as a managerial tool. [5] Simply put, costs cannot be reduced beyond zero, while throughput has the potential for increase without apparent upper bound.

“Zoomed out” Blocks [6]

As mentioned, Theory of Constraints was originally envisioned as a tool for factory floor improvements. However, as improvement progresses, the operative constraint zooms out from the factory floor to policy issues, or to the market, or to many other areas.

Tesla Motors is currently facing a numerous and diverse array constraints as they attempt ramp up throughput of their electric automobiles. Tesla’s current situation provides a rather extreme example of the sorts of constraints that must be prioritized and addressed in order to bring a new industry to global reality. Here are a few of them:

Quality: For a new product like Tesla to rapidly gain traction globally, product quality (and all that “quality” means) must be exceptional. Tesla has won prestigious awards for design, quality and safety. Still, when three Tesla automobiles were involved in fire situations, public reaction (fanned by the media, of course) was harsh, never mind that the fires were related to significant impact situations, that nobody got hurt in any of the fires, and that thousands of ordinary automobiles are involved in fires every year.

Tesla Model SRecharging: Since potential customers are reasonably concerned about recharging the Tesla automobile wherever they go, Tesla is building extensive networks of recharging stations in North America, Europe and China (Tesla’s biggest markets). Also, Tesla automobiles are equipped with GPS locators, so drivers always know where near-by charging stations are.

Dealer Networks: For sound reasons, Tesla prefers to market its automobiles directly to consumers, rather than through a conventional dealer network. However, several States have passed laws to require that automobiles be sold exclusively through dealers. Tesla’s preference for direct sales requires that Tesla provide satisfactory vehicle delivery, maintenance and service alternatives to local dealerships.

Supply Chain: In 2014, Tesla’s current manufacturing schedule will require almost half of the lithium ion batteries produced in the world. So, Tesla has announced that they will build a “gigaplant” to produce the batteries that will power Tesla vehicles, to be on stream in 2017. This in addition to the usual problems associated with locating and proving suppliers for any rapidly growing manufacturing business.

Surviving / Striving / Thriving

Firms in crisis — survival mode — may have little alternative to intense costs management — including cost reductions that are likely to have negative consequences in the future. Firms that are on a more solid footing, however, should emphasize throughput increase over operating costs reductions, as Theory of Constraints suggests.

This does not mean that operating costs controls are not important. It does mean that the opportunities for improvement through increased throughput usually far exceed those of costs reduction. It also means that emphasis on costs — especially allocated costs or costs that do not involve immediate cash expenditures — often lead to poor management decisions.

Chuck - California Coast 2Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about pursuing Sustainability … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] Information on Theory of Constraints, as cited in this post, relies primarily on E. Goldratt The Goal, Third Revised Edition, North River Press (2004) and on E. Goldratt, What is TOC?, Chapter 1 of J. Cox III and J. Schleier, Theory of Constraints Handbook, McGraw-Hill Professional (2010).

Note: Several individual chapters of the Handbook, including Chapter 1, are available for inexpensive download on Amazon.

[2] Wikipedia, referencing Goldratt’s The Goal, lists the steps in the Theory of Constraints program of on-going improvement as follows:

Assuming the goal of a system has been articulated and its measurements defined, the steps are:

  1. Identify the system’s constraint(s) (that which prevents the organization from obtaining more of the goal in a unit of time)
  2. Decide how to exploit the system’s constraint(s) (how to get the most out of the constraint)
  3. Subordinate everything else to the above decision (align the whole system or organization to support the decision made above)
  4. Elevate the system’s constraint(s) (make other major changes needed to increase the constraint’s capacity)
  5. Warning! If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint

(http://en.wikipedia.org/wiki/Theory_of_Constraints)

[3] Goldratt later rephrased this goal as “to become an ever-flourishing company” to emphasize the importance of building stability as the business grows. “(T)o become an ever-flourishing company” implies an emphasis on Sustainability. For more on this, see Beyond Red Curve, Green Curve, this blog: http://blog.jerasustainabledevelopment.com/2013/12/11/beyond-red-curve-green-curve/

[4] My personal choice for most manufacturing firms is to express this goal operationally as net sales dollars (revenues minus directly associated raw materials costs) and return on capital employed objectives.

[5] For more on managerial accounting and Theory of Constraints, see Thomas Corbett, Throughput Accounting, North River Press (1998) or Eric Noreen, et al, The Theory of Constraints and its Implications for Management Accounting, North River Press (1995).

[6]  “Zoom lens” thinking is a hallmark of this blog. For more on zooming in and zooming out, see Green and the Zoom Lens Mind, this blog: http://blog.jerasustainabledevelopment.com/2012/02/22/green-and-the-zoom-lens-mind/