Collaborative Supply Thinking Outside of the ‘Giga’ Box

Has your organization considered entering into a highly collaborative supply relationship?

Some organizations are moving in this direction. Let’s take Tesla Motors and Panasonic for an example. On July 31st, Tesla Motors announced details about their plan to build a lithium-ion battery factory (Tesla Gigafactory) with their primary battery supplier, Panasonic. The factory will most likely be located in the Reno, Nevada area and is being hailed as the solution to Tesla’s lithium-ion battery supply constraints. According to current plans, the factory will be completely operational by 2020, cost $5B to build and make operational, and employ as many as 6,500 workers.

Although the factory’s scale is interesting, the more captivating angle on this story is the collaboration that must take place between buyer and supplier in order to make the new factory a reality.

A press release issued jointly by both companies said, “Tesla will prepare, provide and manage the land, buildings and utilities. Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery, and other manufacturing tools based on their mutual approval.”

In this relationship, Tesla will become Panasonic’s landlord as well as their primary customer, but there will be other collaborative players as well.

As explained in an August 1st USA Today article about the factory, “Tesla is going to pick up about half of the cost of the factory, with Panasonic contributing about 30%, the state chipping in 10% and the rest shouldered by suppliers.”

The suppliers referenced in the remaining 10% of the cost breakdown are part of a network that will supply the materials required by the factory’s production. Even the state and local governments that may be affected have an incentive to participate in the effort. With the hefty $5B price tag for the factory, the decision to invest could not have been taken lightly by any of the parties. Although the investment of $1.5B-$2.5B is intimidating, the potential benefits are significant enough to make the associated risk worthwhile.

Tesla has not been able to secure a sufficient battery supply to meet the current demand for their electric vehicles. Access to the output from the factory not only provides them with a way to meet demand and reduce uncertainty, but also simultaneously improves conditions for consumers and shareholders alike.

From Panasonic’s perspective, they will have access to a state-of-the-art factory with a built-in buyer and innovation partner. According to an article on Triple Pundit by Leon Kaye, “Tesla, with Elon Musk at the helm, insists improved economies of scale can help bring the cost of lithium-ion batteries down by 30 percent.” In addition to the savings, which will likely increase consumer demand; the location of the factory in North America relieves concerns associated with supply chains that extend into Asia.

As appealing as the arrangement sounds and as collaborative supply arrangements continue to grow in popularity, there are also some very real concerns the parties will have to work through. Panasonic may have to agree to meet Tesla’s supply requirements before they can supply other customers – which may at some point include competitive electric car manufacturers. There are also likely to be trade secret or intellectual property concerns that will need to be addressed before Panasonic allows other companies to see the factory. As long as the potential return outweighs the possible risks, this relationship will move forward – leading the way for many others to follow.

Do you think these types of collaborative relationships make sense in your business? If you were to pursue, what responsibilities would procurement have to take on?

Share your thoughts by commenting below or tweeting @BuyersMeetPoint.

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