A recent meeting of the Council of Supply Chain Management Professionals' San Francisco Roundtable (http://www.cscmpsfrt.wildapricot.org/) featured two capable speakers on the timely topic of offshore manufacturing. But the star attraction was parked outside.

It was a Tesla Roadster (http://www.teslamotors.com/roadstersport/), the all-electric sports car that its maker touts as "quicker than a Porsche, greener than a Prius." That's no exaggeration; the car can go from zero to 60 in 3.9 seconds, has a top speed of 125 miles per hour, and consumes no gasoline. But the sleek lines of this beauty conceal an awful lot of pain.

Evelyn Chiang, vice president of supply chain and enterprise resource development for Tesla Motors Inc., sketched a gripping story of vision, ambition and hard lessons through years of trial and error. Born in 2003, the company originally planned to outsource most of its production to Asia. A contract manufacturer in Western Europe would ensure quick access to the U.K. market.

It was always about more than making a profit, Chiang said. The company was out to "change the perception of corporate responsibility." Tesla Motors would be a good citizen of the planet that just happened to make snazzy cars.

As with any high-tech start-up, the early years were focused on getting the technology right - "to enable an electric vehicle to compete with any vehicle on the road," as Chiang said. Employees were mostly engineers; it wasn't until 2006 that supply-chain and manufacturing personnel were brought in, "almost as an operational afterthought."

It wasn't a supply chain to be proud of. In fact, many of the suppliers that Tesla contacted at the outset hung up on the company. "We wanted to launch a product that most people thought was a joke," said Chiang.

Asia looked good, though, promising labor savings of up to 40 percent, so offshore manufacturing was the way to go. Tesla also turned to outsiders for the car's design, hiring a firm that relied heavily on the Lotus Elise. For its part, Tesla focused on the powertrain engineering. That crazy quilt of choices was bound to lead to disaster. As Chiang put it: "The product wasn't designed with cost, quality or manufacturability in mind."

It was her job to ask the hard questions: How do you know you're making a profit? What's your margin? Scrutinizing the bill of materials, Chiang discovered that the cost of parts was more than the price of the car. She delivered the bad news to the company's directors. "It was the first tine that I heard swearing at a board meeting."

Two major suppliers failed. There were problems with the body panels, the gearbox and the transmission. But Tesla couldn't turn back; it had to come to market. Finally, said Chiang, the company saw the light: "We decided we had to design it ourselves."

Initial production was kept deliberately low, to buy time to fix the problems. Purchasers of the first 39 cars - thank heavens for early adopters - were told that the original gearbox would have to be switched out within six months. Model 1.0 was launched in March 2008. But Tesla's supply chain was still too costly, and had to be adjusted on the fly. One key lesson, said Chiang, was to go with a supplier "that wants to grow with us, that understands our challenges. It's not about offshoring or onshoring."

Answers lay not in the individual supplier choices that the company was making, but in an examination of basic principles. Tesla knew it wouldn't be the only producer of all-electric vehicles for long. Its uniqueness had to come from a commitment to constant innovation - to be "at least two generations ahead" of its rivals. But how could it achieve that goal, when its battery packs were being made by a company in Taiwan that had previously manufactured only barbeques? Tesla's own engineers would have to spend months in Asia working out the design and engineering kinks. In the process, the company would be teaching someone else how to make its cars. So much for market differentiation. And the extra costs ended up wiping out the savings from cheap labor.

Tesla brought powertrain manufacturing back in-house. Final assembly was relocated to Northern California from the U.K. Contract manufacturing was limited to the non-power elements of the vehicle. The supply base, more than 85 percent of which consisted of vendors producing a single part, was slashed. Two more models of the Roadster were released, version 1.5 in September 2008 and 2.0 in June 2009, each representing an improvement in quality and A reduction in costs. The company is now on track to produce the Model S, a sedan with a base price of $57,000 (the Roadster costs $109,000), in early 2012. The car already has a waiting list of around 2,000.

The trials of Tesla earned the company some hard-won wisdom. A few of the lessons learned:

- Make sure that supply-chain, corporate and product strategies are tightly aligned. Today, Tesla's supply-chain managers sit with engineers and jointly evaluate costs, working with a targeted number of trusted suppliers.

- Evaluate carefully the many external drivers, including global and economic trends, customer preferences, proximity to markets, labor costs, supplier quality, regulatory requirements, environmental sustainability, community responsibility and geopolitical shifts.

- Don't offshore manufacturing until your product has matured and stabilized. Enough said about that.

Tesla is still a young enterprise, but it's beginning to achieve a velocity that's in keeping with the nature of its product. If the company doesn't succeed, it won't be the fault of its engineering or supply-chain procedures. Not if Tesla can come up with a brand new vehicle in two years, when the rest of the industry takes four or five. Or can refine that product four times in the space of a year, and still have customers clamoring for the right to buy it.

In my next post, I'll feature another speaker from the CSCMP San Francisco Roundtable event - and more insight into why offshore manufacturing isn't always a slam-dunk.

- Robert J. Bowman, SupplyChainBrain

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