I have been arguing for the importance of examining Tesla as a Supply Chain. Viewing Tesla solely as a tech company (or a battery company that makes other things), misses out on the key factors that affect Tesla. In fact, as Musk himself often argues, the biggest operational challenges for Tesla will emerge as they become more successful and as their vehicles multiply on the roads.
A recent article in WSJ (subscription required) covers exactly this problem: Tesla Is Cranking Out Model 3s—Now It Has to Service Them. Here’s more from the WSJ article:
Tesla customers in recent months have been venting on social media about trouble getting repair appointments, long waits for those fixes and flaws in newly delivered vehicles, whether they are the paint job or cracks in windows. In interviews, several Model 3 buyers recounted their frustration with waiting for parts to arrive at body shops.
Some of these hiccups are indeed natural for new firms that have a short history in spare-parts supply chain.
In future, as Tesla matures, Product + Service bundles will become increasingly important. In other words, what Tesla sells is not just a car, but all the services associated with the usage of the car.
Service Operations are key to the Positioning of Luxury Goods
Tesla positions itself as a luxury good. Therefore, it is important for itself to differentiate from other cars. How does a firm differentiate its products as high quality? Price signaling is only one part of the it. I argue that a superior service is perhaps even more important than high quality engineering. A product + service bundle is what differentiates a superior product from its imitators.
You can see this playing out as Apple moves more and more towards increasing its service quality.
It is almost a necessity to have service network for a firm making a high-quality consumer good. In fact, as the article states, the purported advantage of the Tesla model (not having dealerships & supply chain centers), is precisely the solution to those service issues.
Part of the problem is that Tesla, unlike other auto makers, doesn’t have a network of hundreds of franchise dealerships to sell and service its vehicles. Tesla has long touted this as an advantage, giving it more control over the customer experience. But it means Tesla has to pay for service centers and to staff them.
In class, I often use Toyota and Lexus as examples to show vertical differentiation in products from the same “firm”. The higher quality product is often differentiated in the service provision. In fact, Toyota and Lexus cars often share several interior components – they may even come out of the same line, made by same machines.
However, what often differentiates Lexus models (in addition to marketing logos, etc) is the exterior design and service supply chain. The dealerships and service supply chains are quite differentiated.
Tesla has 85 service centers sprinkled around the U.S., according to the company. Ahead of bringing out the Model 3, it invested in mobile technician teams that could visit customers, freeing up space at its own facilities.
Compare this with the number of service centers Lexus has. At Lexus centers, there is a suite of guest experience themes: There is not just wifi, but also free shuttle service, complimentary car wash, pick up & delivery, loaner cars, spa services and golf
Pain point of DTC Business models.
The lack of service proximity to consumers is the often the pain point of Direct to Consumer (DTC) business models.
Right now, Tesla is running ahead full speed on production. Very soon, the time will be here, when they would need to dedicate a significant proportion of their efforts into offering such services.
Being close to consumers, is why many pureplay firms to open stores.
It is easy to sell the product to consumers, but a firm needs a network of trained employees and convenient locations to service its customers.
The higher the quality of your product is, the more durable the product is, the more likely that one needs to invest in such services.