Purchase and supply chain management
Tesla Model S
Ardin Dekker
IBMe3
18-04-2021
Ed Voss
INME
TIO Amsterdam
Week 1: Proposal organization
Company: Tesla
Product: Tesla Model S
Headquarter: Palo Alto, USA
Total Model S sales: 20,301
Product location
- Fremont, USA
For the production of the product, the company purchases the following products / raw materials:
-
Raw material 1: Aluminium
Raw material 2: Copper
Product 1: Lithium-Ion battery
Product 2: Outside Rear View Mirror (OVRM)
Purchasing budget total: 1.200.000.000
Total purchasing budget per car: 60.000
Purchasing budget per product:
-
2
Raw Material 1: Aluminium (400$)
Raw Material 2: Copper ($400)
Product 1: Lithium-Ion battery ($12.000)
Product 2: Outside Rear View Mirror ($80)
Table of Content
1.0 Company introduction
1.1
Company information
1.1.1 Company Procurement
Week 3: 4 primary tasks and responsibilities
Week 3: Substantiate how mature your company is in purchasing
1.1.2 Corporate Social Responsibility
Week 10: Describe the corporate social sustainability activities and
their importance
Week 10: describe the role of purchasing with regard to corporate
social responsibilities
1.2
Products
1.2.1 Tesla Model S
1.2.2 Raw Materials Chosen
Week 1
2.0 (– 4.0 ) For each Raw material / product
2.1
Market
Week 2a+ b: Investigate the purchasing market
Week 7: Categorise your goods to be purchased according to their market form
based on the number of buyers and sellers
2.2
Purchase process & Specifications
Week 2: Purchase process
Week 2: Purchase specifications
Week 3: Describe and elaborate on the e-procurement solutions for you 4
goods to be purchased
Week 3: Elaboration on the advantages of these e-procurement solutions
2.3
Supplier selection process
Week 4: Describe the supplier selection process for your 4 goods
Week 5: Describe the 5 important purchasing issues for your 4 goods to be
purchased
2.4
Sourcing
Week 6: Elaborate if your company applies single or multiple sourcing for your
4 goods
Week 6: Elaborate if your company applies local sourcing or global sourcing
Week 6: Elaborate if your company applies make or buy to produce for your
goods and/or the end product
2.5
Strategy & Risk
Week 5: Position the four goods to be purchased in the Kraljijc procurement
portfolio matrix.
Week 5: Strategy of the 4 goods
Week 5: Identify the purchasing risks for each time to be purchased
Week 5: Analyse the likelihood financial impact of these risks
2.6
Stakeholders
Week 9: Identify the stakeholders involved for your 4 goods
5.0 Structure & Performance
Week 7: Describe and substantiate the purchasing structure of the organization
Week 7: Elaborate on the choice for central hybrid
Week 8: Describe and elaboration on the operational KPI’s of your 4 goods
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1.0 Company Introduction
1.1
Company Information
Tesla, founded in 2003, is a US based electric car manufacturer. Next to that, they also manufacture
solar energy panels and energy storage installations. The CEO of the company is Elon Musk, known for
his innovative companies. Tesla is known worldwide for its electric cars, but more specifically for its
batteries (Tesla, n.d.a). Currently Tesla is the most valuable car company in the world with a market
value of 710 billion dollar (Yahoo Finance, n.d.). Tesla’s mission is to accelerate the world’s transition to
sustainable energy through increasingly affordable electric vehicles and energy products (Tesla, n.d.a).
The Tesla Giga factory was born out of necessity and will supply enough batteries to support Tesla’s
projected vehicle demand. Tesla broke ground on the Gigafactory in June 2014 in Nevada. The current
structure has a footprint of more than 1.9 million square feet, which houses approximately 5.3 million
square feet of operation space across several floors. Still the Gigafactory is about 30 percent done
(Tesla, n.d.b)
1.1.1 Company Procurement
According to van Weele (2018), the four primary tasks and responsibilities are; Operational excellence,
Cost control and reduction of all purchasing-related spend, Risk management, and Innovation and
continuous improvement. This is backed by looking at several procurement / supply chain jobs on the
Tesla career site. As those primary tasks are quite broad, the information of those several supply chain
and procurements jobs is used to indicate the primary tasks and responsibilities (Tesla, n.d.c; Tesla,
n.d.d)
¨
Operational excellence
Operation excellence refers to, in Tesla’s case, refers to four pillars. First of all, for a purchasing
department it is important of securing supply from reliable suppliers of a consistent quality (at a
reasonable cost). This means that the purchasing department need to manage relationship and
performance with the current suppliers. To measure the performance, Key Performance
indicators can be developed. It is also important to evaluate the industry/ market where the
suppliers are located, look at their position, and identify potential suppliers. When contacting
suppliers, several strategies have to be developed, like the negation and sourcing strategy. All
of this should be documented as well. Finally, the purchasing department should have a great
understanding and knowledge of the customers of the firm and internal customers, to find a
purchasing need for the department.
¨
Cost control and reduction of all purchasing-related spend
When evaluating the cost, Tesla looks both at the internal opportunities to reduce the total cost
of ownership, but at the same look at the prices of the current suppliers and find opportunities
to reduce it by or a new supplier or negotiating with the current one.
¨
Risk Management
There aren’t any specific job tasks / responsibilities in the job descriptions about risk
management. However, for almost every job, including the procurement, it is important when
evaluating the current suppliers, market, internal customers and the supply chain in general, to
identify the risk exposure and figuring out solutions to reduce it. Furthermore, it is lately very
important for the purchasing department to make sure the Corporate Social Responsibility in
the supply chain operates according.
¨
Innovation and continuous improvement
At Tesla, the innovation should include looking at the current market conditions and identify
challenges and opportunities. Furthermore, it is important to look at purchasing trends, evaluate
them, and see if they are applicable to be put into practice in the company.
1.1.2 Stage of development of purchasing and supply management
Tesla is in the fifth stage, which is external integration: cross functional purchasing. This is
characterized by the outsourcing strategy of Tesla, with extra attention to collaborate with supply chain
partners on product development. The suppliers are actively involved in new product development and
process improvement (Weele, 2018).
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1.1.3 Corporate Social Responsibility
The Corporate Social Responsibility (CSR) will be dealt with on the basis of people, planet, and profit.
Currently more and more attention is paid one how sustainable a company is, therefore it is extremely
important to focus on this. As seen below, Tesla is doing it well.
¨
People
For Tesla, the employees are the most important asset in the firm. However, as Elon Musk is
not so conventional, neither is their employee handbook. It had the following quote: “If you’re
looking for a traditional employee handbook filled with policies and rules, you won’t find one.
Policies and rules tell you where the bottom is—they tell you how poorly you can perform
before you get shown the door. That’s not us.” Tesla’s handbook can be described, like its
founder as no-nonsense, direct and to the point, holds people accountable and sets forth the
requirements clearly and concisely.
¨
Planet
The whole company of Tesla is based on the mission is, as mentioned above, to accelerate the
world transition of sustainable energy. They do this by making electric cars and electric energy
products, which are better for the environment. Furthermore, their Gigafactory is fully run-on
solar energy. Finally, they write every year an impact report to show their stakeholders exactly
what kind of impact they had.
¨
Profit
When look at economic effects, also called profit, Tesla takes great consideration in tackling the
use of child labour or slavery at suppliers. This is, as mentioned above, necessary for the
outside world to keep the customers happy, as more and more people are choosing
sustainable products over less sustainable products.
1.2
Products
As said in Section 1.1, Tesla operates in two different industries; Automotive and Energy generation
and storage. Its automotive products include Model 3, Model Y, Model S and Model X. Model 3 is a
four-door sedan. Model Y is a sport utility vehicle (SUV) built on the Model 3 platform. Model S is a fourdoor sedan. Model X is an SUV. Its energy storage products include Powerwall and Powerpack
(Reuters, n.d.).
1.2.1 Tesla Model S
For this report, the Tesla model S is chosen to research the supply chain of. The Tesla Model S was
the first best sold electric car worldwide, and really set Tesla in the market. As most car manufactures,
several parts will of the car will be bought at other companies, as Appendix 7.1 shows, and other parts
are made by Tesla themselves. The parts that Tesla made themselves are split of in five parts: Body
and Chassis, Interior, Wheels, Induction Engine, and the Battery.
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¨
Body and Chassis
The Tesla Model S body and chassis are built almost entirely from aluminium, which comes
from bauxite ore. Aluminium is lightweight, which helps to maximize the range of the battery
beyond that of other EV’s. Furthermore, high-strength boron steel is used to reinforce the
aluminium at critical safety points. Boron steel is made from iron boron, coking coal, and other
additives. Finally, the underbody of the Tesla Model S is made from ultra high-strength titanium,
which protects the battery from nearly any roadside force or piercing (Desjardins, 2016).
¨
Interior
While Tesla engines and batteries do not use rare earth metals, most high-end car speakers
and other electronics use rare earth elements such as neodymium magnets. Other interior
products that are used, plastic, leather, silicon, and carbon fibre (Desjardins, 2016).
¨
Wheels
The aluminium alloy wheels are made from bauxite ore. Also ,rubber is used for the tires
(Desjardins, 2016).
¨
Induction Engine
Tesla’s high-performance copper rotor motor delivers 300 horsepower. The stationary piece of
the engine, the stator, is made from both copper and steel (Desjardins, 2016).
¨
Battery
The most important part that Tesla build themselves is the Battery, however they do this in
cooperation with Panasonic through a joint venture. The reason for this is that Panasonic has a
lot of experience in batteries, and thus has more advanced knowledge in comparison of that of
Tesla (Denton, 2020). This battery is a lithium-Ion battery (Desjardins, 2016). The difference
between Lithium and Lithium-Ion batteries is that the latter one is rechargeable (Powertron,
2019), which is important for Tesla. The Lithium-Ion battery weighs 540 kg (26% of the car’s
total) and contains 7,104 lithium-ion battery cells. Each cell contains a Cathode, Anode, and
Electrode. For the Cathode Tesla has a NCA formulation with the appropriate ratio of 80%
nickel, 15% Cobalt, and 5% aluminium. The anode consists of graphite. Finally, the electrode is
made of Lithium Salt (Desjardins, 2016).
1.2.2 Raw materials / parts chosen
For this report, a total of two raw materials and two parts are chosen to investigate; Aluminium
(Bauxite Ore), Copper, Lithium-Ion Battery and Outside Rear View Mirror. In the following chapters,
those four will be looked at on the basis of the market they are located in, purchase process &
specification, supplier selection, sourcing, strategy & risk, Key performance indicators, and the
stakeholders. Below a small description amount each of the raw materials.
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¨
Aluminium (Bauxite Ore)
As mentioned above, the Aluminium, made from Bauxite Ore, is used in the Wheels, Body and
Chassis, and thus forms an important raw material for the Tesla. A total of 190 kg of Aluminium
is used per Tesla Model S (Desjardins, 2016).
¨
Copper
A total of 45.4kg of copper is used for the induction engine of tesla (Desjardins, 2016).
¨
Lithium-Ion Battery
Next to focussing on the lithium-Ion battery as a whole, there will be a focus on two
components, nickel and lithium, As both are the most important, and most used parts in the
battery. There is a total of 58,7kg of nickel and 63kg of lithium used in the Model S battery
(Desjardins, 2016).
¨
Outside Rear View mirror
The reason for this one is because safety becomes more and more important for consumers,
and mirrors are an important of that safety (Desjardins, 2016).
2.0 Aluminium (Bauxite Ore) & Copper
2.1
Market
The aluminium price in April 2019 was USD 1,887 per (metric) ton. Then during the pandemic the
aluminium price at the London Metal Exchange (LME) went to USD 1,455 per (metric) ton (LME, n.d.a),
because of less demand of the metal that makes aircraft bodies and parts, power lines, beer cans, cars
etc (Editorpen, 2021). In April 2021 it is USD 2,212 per (metric) ton (LME, n.d.), this has firstly has to do
with an increasing demand because the Covid-19 virus is going away slowly, and more airplanes are
build again. Furthermore, as inflation rises it is expected that commodity prices, including aluminium,
will rise as well to hedge it (Editorpen, 2021).
According to several news articles and research reports, the price will go down to a more stable level.
For example, Fitch Ratings expects that the average LME aluminium prices will be at USD 1,950 for
2021. The reason that it is higher than in April 2019, has to do with the strong demand recovery in
China, particularly from the automation and solar energy sectors, and re-stocking outside of China,
particularly in Europe. However, Fitch expects a production surplus outside of China to persist, casing
prices to soften modestly once pent-up demand is satisfied (Fitch Ratings, 2021).
The main aluminium supplier of Tesla is Nikkei, a major Japanese aluminium group (Lambert, 2017). It
is unclear how the partnership with both parties, Nikkei and Tesla, is constructed. If there is a fixed
price for a certain number of years then Tesla wouldn’t have struggles with the prices internally.
However, if the prices would go down, it could effect Tesla’s competitive position against other car
manufacturers, if the other car manufactures would have a partnership with the current prices. Vica
Versa if the prices go up. On the other hand, 1 metric ton is equal to 1000 kg, so the price of 2,212 per
metric ton, is $2,21 per kg, times the amount of kg of aluminium in a tesla (190kg) is a total of 400$.
Looking at the price of the cheapest version of the tesla model S (Tesla, n.d.a) a total of 80,000$ is
paid, so if the price would go up or down with 25%, means a price increase or decrease of 100$,
wouldn’t be that hurting to the competitive position of Tesla.
The copper price went, according to the LME, from USD 6,481 per (metric) ton in April 2019, to USD
4,754 per (metric) ton in April 2020, to USD 8,981 per (metric) ton in April 2021 (LME, n.d.b). Thus a
similar cycle as aluminium. Copper will benefit from increasing electrification, and not just in the
transport sector. According to an article on Bloomberg (Bullard, 2021), the global copper demand in
both clean power and clean transport sectors will double in the next decade. Similar to Aluminium,
copper currently enjoys the momentum in the market of fear of rising inflation and the fear of not
enough supply from China (Yao, 2021). It is expected that also the copper price will become lower
during 2021, with an average price of USD 7,716 per (metric) ton (Warwick, 2021). The Tesla Model S
contains 45.4 kg of copper, meaning that around 400$ of copper goes into the Tesla model S, similar to
aluminium. The main supplier of Copper to Tesla is unclear, so there couldn’t be further looked into
that.
2.1.1 Buying situations
Purchasing decisions can be differentiated in terms of the expected change and adaptions that need to
be made as a result of new products that are bought or new suppliers that are introduced. According to
Fischer, in order to do this you need to differentiate between product complexity and commercial
uncertainty. If these two aspects are combined statements can be made about what disciplines will be
involved in the decision-making process. When looking at aluminium & copper there can be stated that
the product complexity is low, as both aluminium and copper is not a complex product. Second, the
commercial uncertainty per car is limited, as mentioned above, it only accounts for 400$ of the car.
However, when looking that there are large quantities to be bought, which can state that commercial
uncertainty is high. Therefore, there is chosen that there will be a partnership between the purchasing
department and Finance and Administration department. Whereby both have a prominent role in the
buying process.
2.1.2 Market form
There are four market structures: Pure competition, Monopolistic competition, Oligopoly and monopoly
(Weele, 2018). When looking at the number of buyers of Aluminium & copper, there can be stated that
there are a lot of buyers. Examples include Airplane and car manufacturers, but also daily uses like
aluminium foil (for aluminium). When looking at the sellers, there are a lot of sellers as well worldwide.
However, the largest aluminium country is China, accounting for more than half of the worldwide
production of aluminium, in comparison to ‘only’ the 1,5% of the USA (Brown et al, 2020). With tensions
rising between China and the USA, and possible restrictions of supply could therefore influence the
price enormously. For copper, on the other hand, China isn’t a large dependency. So, currently the
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market form can be states, for aluminium and copper, as a Pure Competition, as this market structure
is characterised by a large number of buyers and sellers, and there is no differentiation between the
products (maybe the quality). However for aluminium, when supply of China restricted, there could be
changed to an oligopoly, meaning a lot of buyers, but a limited amount of sellers. With a Pure
Competition, neither the individual supplier nor the individual buyer can influence the price of the
product. However, with a Oligopoly, the suppliers does, which increases their strength in the negotiation
process.
2.2
Purchase specification & e-procurement
There are several steps in the purchase process, as mentioned in 2.1.1, the purchasing process for the
aluminium & copperwill be done with a partnership between the Purchasing Department and Finance
and administration department. One of the things that should be made is a purchase specification of
aluminium & copper.
2.2.1 Purchase specification
The purchase order specification consists of four categories: functional, technical, quality and logistical
specifications.
¨
Functional specification
The functional specification for aluminium & copper must be that is easily changeable for Tesla.
As Tesla makes car parts out of it, the aluminium & copper must be that Tesla can easily make
it to something else.
¨
Technical specification
The technical specifications for aluminium that there needs to be a favourable strength to
weight ratio. Both copper and aluminium must be recyclable and there shouldn’t contain
harmful substances.
¨
Quality specification
The supplier should guarantee that the raw material meets the specification as stated the
purchase order. Also, the supplier should have an ISO quality management system.
¨
Logistics specification
Based on the JIT principles the seamless supply of the raw material must be guaranteed.
Furthermore, it should be able to be transported by boat and train, and the supplied packaging
units must correspond to the order unit.
2.2.2 E-procurement
E-procurement solutions can be defined as all web-enabled solutions aimed at supporting the
purchasing process and all electronic data exchange that re needed for efficient transaction processing.
E-procurement solutions basically can be divided into three types: Electronic marketplaces, electronic
auctions (e-auctions) and electronic catalogue, order and payment solutions (order-to-pay solutions)
(Weele, 2018). The latter one, electronic catalogues and ordering systems is the solution most
suitable for Tesla. This type offers buyers greater opportunities for more efficient order handling,
improved logistics, a full tracing and tracking of deliveries, and improved and better controlled
payments. The IT that is available today allows Tesla to manage impressive number of transactions
without any human interference. By using it, Tesla can buy more purchasing transactions can be
bought under contract, which as a result will reduce the percentage of maverick buying. Furthermore,
the number of contract moments between buyer and seller will be decreased, which is timesaving and
eventually cost saving. The main disadvantage lies in that this type of procurement solution requires
considerable sophistication and expertise. For Tesla to consider this, there should be looked at one that
is applicable for the raw materials.
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2.3
Supplier selection process
After the purchasing specifications have defined the supplier selection process can start. The supplier
selection process consists of four steps: (I) Determining the method of subcontracting, (II) preliminary
qualification of suppliers and drawing up the ‘bidders’ list, (III) preparation of the request for quotation
and analysis of the bids received and (IV) selection of the supplier.
¨
Step 1: Determining the method of subcontracting
For Aluminium and copper there is chosen to not make use of subcontracting, as this can be
done internally.
¨
Step 2: Preliminary qualification of the suppliers and drawing up the bidders’ list
Based on the purchasing requirements there are several criteria summarized an put in
Appendix 7.2. Those are criteria that the supplier who are approached for a quotation should
meet
¨
Step 3: Preparation of the request for quotation and analysis of the bids received
After the Request for Information (RFI) are sent to the long listed suppliers, a short list of
suppliers will be made. These short-listed suppliers will be contacted through a Request for
Quotation (RFQ). To get the best price for Tesla, a tender could be set up. A tender is a
situation where a buyer asks for bids for different suppliers, creating a level playing field. This
will result in better prices for Tesla.
¨
Step 4: Selection of supplier
When reviewing the bids of the Tender, the purchasing department will take the bids into
account and will choose the one which is the best for the company. A possibility is that there
could be several bids accepted, in this case Tesla would use a multiple sourcing strategy. If this
is applicable in this case, will be discussed in Section 2.4, Sourcing.
2.3.1 Purchasing issues
There will always be purchasing issues, the most important purchasing issues for Aluminium (Bauxite)
are discussed below.
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Slavery and child labour
During the mining of the Bauxite & copper, and making it into aluminium, the supplier must
guarantee that slavery and child labour is not used. Especially in the times we are living, this is
very important.
¨
Expertise, papers, and permits
The supplier must have the correct expertise, papers and permits for mining the Bauxite &
copper, and then, for Bauxite, making it into aluminium. This is important to ensure the quality
of the product.
¨
Transport issues
There are two different issues which could occur during the transportation phase; a late deliver,
and damage during transport. Looking at the important schedule of Tesla, it is extremely
important that the deliveries are delivered on time, if not, contact should be made with Tesla as
soon as possible. If damage occurred during the transport, there should be done in the contract
who the responsible party of it is and how to confirm it. This is done to make sure issues are
cleared as soon as possible.
¨
Consistency of the supplier
It is extremely important that the supplier regularly, as stated in the contract, delivers the goods.
If the supplier is not capable of that, this should be communicated as soon as possible.
¨
Contract
If one, or multiple of the above issues are violated, the contract between the supplier and Tesla
can be terminated or interrupted at any time.
2.4
Sourcing
Now the supplier sourcing is done, there should be taken a look how the sourcing will look like. This will
consist of three decisions / parts: Single or multiple sourcing, local or global sourcing, make or buy to
produce.
2.4.1 Single or multiple sourcing
Single sourcing is often pursued with the intention of reducing material costs – by place all purchasing
requirements with one supplier it is often possible to negotiate substantially better conditions. However,
this policy certainly has its price in that it will lead to increased supply risk or dependency on one
supplier. Therefore multiple suppliers (multiple sourcing) could reduce risk, however the cost will go up.
For Tesla it is recommended to use multiple suppliers, especially with tensions between the USA and
China (see Section 2.1) it is recommended to reduce the supply risk. Even though copper doesn’t
notice any tensions, raw materials in general could be done with multiple sources to reduce the supply
risk. Together with the fact that the Aluminium and copper industries are a pure competition (see
Section 2.1.2), the price difference of multiple sources will not be extremely high.
2.4.2 Local or global sourcing
For Tesla it is recommended to make use of global sourcing. This is because the aluminium and copper
are standardized products, and large quantities can be bought in order to benefit from transport
economies.
2.4.3 Make or buy to produce
Aluminium and copper are raw materials, at least it is for Tesla. Tesla buys the aluminium and copper,
and then gives the added value in the factory of theirs by reforming it or making car parts out of it.
Therefore, it would be recommended to use the make to produce, as it would be unwise to let that be
done at the aluminium or copper supplier, as there is not their expertise.
2.5
Strategy & Risk
Now the suppliers are known, and the sourcing is done, there can be taken a look which strategy is
best and which risks are associated with it. For the Strategy the Kraljic Specification will be used. For
the Risk, a risk assessment matrix will be used.
2.5.1 Kraljic Strategy
Both the demand and supply of aluminium and copper is high. This means that supply and demand are
roughly equal. If the current supplier of aluminium (Nikkei) suddenly goes bankrupt, Tesla can switch to
another supplier. The risk on financial result for aluminium and copper is high, as it represents quite an
important part of the raw materials pricing. However, as there are many other aluminium and copper
suppliers makes the supply risk low. This categorizes aluminium and copper in in the Kraljic portfolio
matrix as Leverage products. For leverage products a purchasing strategy based on the principle of
competitive bidding or tendering will be pursued. Since aluminium and copper is interchangeable there
will be, as a rule, no long-term supply contracts. Long-term contracts and annual agreements will be
combined with ‘spot’ purchasing. This combines perfectly with the multiple sourcing strategy of
Aluminium and copper discussed in Section 2.4.1. Buying at a minimum price while maintaining the
required level and continue of supply will take priorities here.
2.5.2 Purchasing risks
Due to the fact that both parties, the supplier and Tesla, will engage in a long-term relationship, many
aspects should be taken into consideration. There are four different sorts of risks: (I) Technical Risk, (II)
Commercial Risk, (III) Contractual risk, and (IV) Performance Risks.
¨
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Technical risk
It may happen that the quality of the aluminium or copper decreases, as the products are made
abroad, or at least in many different places, due to the multiple sourcing strategy, it is
impossible to always check the quality on every moment. To manage the risk good contact
should be maintained with supplier. Furthermore, as it is a raw material, the technical risk is not
that high as the quality can always be checked when arriving in the factory.
¨
Commercial Risk
The price of the aluminium and copper, as mentioned in section 2.1 can fluctuate a lot. As in
the last paragraph, for a leverage product, long-term contracts with spot pricing will be applied.
With the usage of spot pricing the firm has quite a lot of risk of the aluminium and copper, this
risks could both be positive and negative.
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Contractual Risk
When the aluminium and copper doesn’t meet expectation then there should be contractual
very clear who is responsible for it. This must be in contract. If not, it can lead to major
problems which will not only cost money for example for the legal time, but it will also be time
consuming for both parties which will affect the relationship negatively. However, the solution is
fairly simple, with just a very good contract.
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Performance risk
The performance risk lies in the capacity and flexibility of the manufacturer. As the nature of
Tesla companies, still in a growth phase, it is important that there is enough capacity to scale
up, but at the same time the flexibility to have more in one month and less in another one, as
the sales are not that consistent yet.
2.6
Stakeholder management
Stakeholders can be defined as all the parties that have interest or affected by the product / business
(Fernando, 2021). There will be a difference made between internal and external stakeholders.
2.6.1 Internal stakeholders
The internal stakeholders for the aluminium & copper are the employees of the firm who work with this
product. There are several sorts of teams within Tesla that work with it. First of all, you have the
manufacturer employees, who use the aluminium & copper with the car. Most likely are they affected
the most when something’s wrong with the aluminium & copper. Second, the purchasing department
have also interest in aluminium & copper, as they are the ones who actually buy it and need to make
sure that the suppliers deliver on time, and that the quality is high. Eventually, a lot more people are
affected by it if the aluminium & copper, one of the most important parts of the car, is not delivered.
Then the sales team needs buy clients to say that the car cannot be delivered on time, then the finance
department need to make sure that the cashflow is good without a certain amount of cars no sold, the
legal department needs to have contact with the supplier who no delivered, and eventually the CEO of
the firm needs to tell to its investors why the cars are not delivered. Therefore, as shareholders have
stakes in the firm, are also internal stakeholders.
2.6.2 External stakeholders
Suppliers and customers are the two most important external stakeholders of the firm. For example, if
the quality of the aluminium & copper in the car is not good, it will greatly affect them. Just like internal
stakeholders, there are many people affected in external stakeholders as well. For example, the
government, the families of the customers, the familisies of the employees, and the people of the town
where the tesla ‘gigafactories’ are located in.
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3.0 Lithium-Ion battery
3.1
Market
As explained in part 1.2.1, the battery used for the Tesla Model S is made in partnership with
Panasonic. Looking at the market, there will be focused on Nickel and Lithium, as that are the most
important parts. Similar to copper and aluminium, the lithium market moved similarly and for the same
reasons. Lithium batteries are Electric Vehicles (EVs) like Tesla, but also in (rechargeable) batteries
mobile phones, laptops, cameras etc. (RSC, n.d.).
Panasonic sources Nickel form Sumitomo Metal Mining Corp who gets most of their nickel from the
Philippines. Both the Philippines and Indonesia have nickel laterite ore which requires expensive acid
extraction process resulting in acid waste. That’s why Tesla is looking for new Nickel suppliers, in order
to avoid this source of waste (Bohisen, 2020).
Tesla has four main lithium suppliers, and designate them to its battery suppliers (Mckenna, 2019). One
of them is Gangfeng Lithium Co., China’s top producer of lithium (Bloomberg, 2018). Another one
Kidman Resources, based in Australia. Pure Energy Minerals, based in Canada, and a JV with
Candence minerals and Bacanora Minerals, form the top 4. Pure Energy minerals has the only
producing lithium mine in the US (McKenna, 2019).
3.1.1 Buying situation
When looking at the buying situations, the Lithium-Ion battery will be discussed and not its components.
The lithium battery can be described as a product complex product. As said in the part above, Tesla
uses partnerships / Joint Ventures with battery makers, as they have the technology for it, meaning that
it will a complex technology. Currently the Lithium-Ion battery costs between 10,000 – 12,000, which is
around 12,5% of the selling price of the car, which can be stated that it is quite a lot. Therefore, the
commercial uncertainty Is high as well. With both the commercial uncertainty and product complexity
high, there should be a cross-functional decision-making. This means that it will call for active
engagement of business leaders and financial managers. Therefore, the purchasing department will
have more a support role.
3.1.2 Market form
Looking specifically at Lithium, for a long time, most of the world’s lithium was produced by an oligopoly
of producers often referred to as the “Big Three”: Albemarle, Sociedad Quimica y Minera de Chile, and
FMC. They had for a long time together a market share of 85%. However, the list of the world’s top
lithium-mining companies has changed. Even though the companies mentioned above still produce a
majority, now 54%, China accounts now for a large chunk as well, around 40%, that’s why that moved
now more towards a Pure Competition. Also, Nickel has a pure competition, as there are a large
number of buyers and sellers. This is important, because when looking at the Lithium-Ion batteries
manufactures, there should also be looking at the main sources which are in those batteries. Looking
specifically at the Lithium Ion manufacturers there can be stated that they are in an Oligopoly. As there
are a large number of buyers, but as said before, only a limited number of sellers have the knowledge
in creating very good batteries. This technology can’t just be for any new entry competitor.
3.2
Purchase specification & e-procurement
As mentioned in section 3.1.1 there will be making use of the cross-functional decision-making
discipline in the purchasing process. The first step is the purchase specification of the lithium-Ion
battery.
3.2.1 Purchase specification
The purchase order specification consists of four categories: functional, technical, quality and logistical
specifications.
¨
12
Functional Specifications
- Can be stored at temperate until 100 degrees
- Can be disposed conform the local law
¨
Technical specification
As mentioned in section 1.2.1 the battery is based on the NCA formula. Each cell should
contain a cathode of a appropriate ratio of 80% nickel, 15% cobalt and 5% aluminium. And with
the cathode of lithium salt. It should be a lithium-ion battery, and not just a normal lithium
battery, as the latter one is not rechargeable.
¨
Quality specification
- Lifetime: minimal 300,000KM
- Time to be fully charged: 4 hours
- Quality control test conform specifications
¨
Logistic specification
- Delivery time: within one month
- Minimum order quantity: 100,000
- Maximum order quantity: 500,000
- Loading unit: Container
- Labelling: Article Nr
3.2.2 E-procurement
Similar to copper and aluminium, the lithium battery will be making use of the electronic catalogues
and order system for the e-procurement within the firm.
3.3
Supplier selection process
After the purchasing specifications have been defined, the supplier selection process can start.
¨
Step 1: Determining the method of subcontracting
As mentioned before, there is a Joint Venture between Panasonic and Tesla, so its partly their
own company, but the other part is fully from Panasonic. Therefore the Turnkey subcontracting
will be used. This means that that the execution of the entire assignment is placed with the
supplier, in this case the JV.
¨
Step 2: Preliminary qualification of the suppliers and drawing up the bidders list
In addition to the preliminary qualifications named in Appendix 7.2, the knowledge and
experience with batteries will be added to the list and will have an high percentage of 30%
(whereby the other ones will go down equally). The reason for this is because, as mentioned
before, for batteries there is a lot of knowledge and expertise necessary in order to make it
work. Therefore it will be important for Tesla.
¨
Step 3: Preparation of the request for quotation and analysis of the bids received
Similar to copper and aluminium, a tender will be used
¨
Step 4: Selection of supplier
After reviewing the bids of the tender, a decision will be made with whom to choose. This could
be one or multiple, this will be seen in section 3.4, sourcing.
3.3.1 Purchasing issues
In addition to the purchasing issues “Slavery and Child labour”, “Transport issues”, “Consistency of the
supplier”, and “Contract” explained in Section 2.3.1, one additional purchasing issue is added.
¨
13
Insufficient quality
Issues could occur where the lithium battery doesn’t meet the criteria that were stated in earlier
sections. When this is the case, there should be looked at why it is not the case, and if this
consistent, there should be looked at another supplier.
3.4
Sourcing
Now that the supplier selection is done, there should be taken a look how the sourcing will look like.
The sourcing consists of three decisions / parts: Single or Multiple sourcing, local or global sourcing,
make or buy to produce.
3.4.1 Single or multiple sourcing
One the one hand single sourcing is recommended to decrease the cost of the battery and to ensure
the expertise and knowledge are applied correctly. However, as the lithium battery is located in a
oligopoly (Section 3.1.2), there is a limited amount sellers, which could complicate things when the
supplier goes bankrupt or something else happens. Therefore there is recommended to go with multiple
sourcing, however, with one main source, and the others functioning more for small amounts or as
backup. This is done to reduce the risk, and to make sure that company always has access to batteries.
3.4.2 Local or global sourcing
Looking at the components of the battery, Nickel and Lithium (most important ones), they could be
sourced globally, as those are standardized products. However, the battery itself, it is important that is
done with a lot of expertise as it is high-tech, and of the flexibility and precision in terms of delivery.
Therefore it is recommended to make use of local sourcing, however, it should make sure that it is
made locally, or assembled.
3.4.3 Make or buy to produce
There is chosen to make it, in a JV, for a end product that is already assembled by the supplier, and
then shipped for Tesla. This charges additional shipping costs, ordering costs and inventory holding
costs.
3.5
Strategy & Risk
Now the suppliers are known and the sourcing is done, there can be taken a look which strategy is best
and which risks are associated with it.
3.5.1 Kraljic Strategy
As mentioned before, even though there are multiple suppliers of the lithium-ion batteries, there is
specific know-how necessary for it, and changing of supplier wouldn’t go so easy. Therefore the supply
risk can be stated high. The purchasing impact on financial results are high as well, as it represents a
large share of the end product’s costs price. This categorizes the batteries in the Kraljic portfolio matrix
as Strategic products. Accordingly, the strategy that belongs with this is a (performance-based)
partnership. An essential aspect of this partnership strategy is the thorough selection of the supplier.
Early in the development, the market is scanned for the best-in-class’ suppliers. These suppliers are
screened on their references, financial stability, their present and future research and development
potential production capacities, their logistics and their quality system, and of course their research and
development and engineering capabilities (Weele, 2018).
3.5.2 Purchasing risks
Due to the fact that both parties, Tesla and the Supplier, will engage in a (long-term) partnership, many
aspects should be taken into considerations. One of those aspects are the risks that will be associated
with it.
14
¨
Technical risk
The technical risk could be that the quality of the batteries are not good, that the batteries don’t
deliver of the performance promised, for example life time etc. To manage this a good contact
should be made with the supplier but also internally, to make sure that if something is wrong
there will be done asap.
¨
Commercial risk
As mentioned in section 3.1, the main components of battery are Nickel and Lithium. And both
commodities enjoy a surge in prices in the past year. As Tesla uses spot prices, the firm could
feel the effect a lot if the material prices fluctuate, the risk could both be positive (if the price
goes down) and negative (if the price goes up).
¨
Contractual risk
When the batteries don’t meet expectation then there should be contractual very clear who is
responsible for it. This must be in contract. If not, it can lead to major problems which will not
only cost money for example for the legal time, but it will also be time consuming for both
parties which will affect the relationship negatively. However, the solution is fairly simple, with
just a very good contract.
¨
3.6
Performance risk
The performance risk lies in the capacity and flexibility of the manufacturer. As the nature of
Tesla companies, still in a growth phase, it is important that there is enough capacity to scal up,
but at the same time the flexibility to have more in one month and less in another one, as the
sales are not that consistent yet.
Stakeholder management
For the lithium batteries, the same stakeholders apply as mentioned in section 2.6.
15
4.0 Outside Rear View Mirror (OVRM)
4.1
Market
Vehicle safety in terms of side-view visibility is evolving as an important focus for customers and vehicle
manufactures. There is a growing integration of advanced functionalities integration of advanced
functionalities in automotive electronically adjustable ORVMs. With the integration of puddle lamps and
mirrors with auto-fold function, these mirrors aid in improving vehicle convenience. Companies are also
focusing on integrating electronically adjustable ORVMs with features such as heated mirrors and autotilt mirrors to improve their functionality (Maida, 2019). Due to these new technologies, the integration
with smart Glasses with embedded intelligence can open up new opportunities for market players and
new entrants (Smith, 2020).
Tesla’s suppler of the OVRM is Magna International Inc. (Appendix 7.1). Magna International Inc. is
the third largest car parts suppler (Hunkar, 2020). It designs, develops, and manufactures automotive
systems, assemblies, modules, and components. The company runs its operations through four
segments; body exteriors and structures, power and vision, seating systems, and complete vehicles.
Under the body exteriors and structures segment, the company offers automotive interior mirrors,
exterior mirrors, and actuators.
4.1.1 Buying situation
When looking at buying situation of the OVRM, there can be stated that the product complexity is high.
The reason for this is because the new technologies in the maybe so called smart mirrors, make it a
complex technology what once was a normal piece of glass. Furthermore, the commercial uncertainty is
low, as it is relatively small investment. Therefore it can be stated that the Engineering department is
dominant. Additional training to the engineering staff might be required, and most importantly, the
mirrors purchased must be approved by the engineers. The purchasing department will more have a
support role.
4.1.2 Market form
The global automotive electronically adjustable outside rear view mirror (ORVM) market is a highly
competitive with major vendors such as Ficosa International SA, Magna International Inc., Mitsuba
Corp, Murakami Corporation, and Samvardhana Motherson Group (Maida, 2019). As the difference
between the mirrors is rather large, due to the new technological advancements, the market can be
described as a Monopolistic market. As there are both a large number of buyers and sellers.
4.2
Purchase specification & E-procurement
As mentioned in Section 4.1.1 there will be making use of the Engineering department in the
purchasing process. The first step is the purchase specification of the ORVM.
4.2.1 Purchase specification
The purchase order specification consists of four categories: functional, technical, quality and logistical
specifications.
16
¨
Functional specification
The main function of the OVRM is that it is safe, and that the driver can look good in it.
¨
Technical specification
The technical specification is focused on the digital side of the rear view mirror. Unfortunately
there couldn’t be any information found on this.
¨
Quality specification
The supplier should guarantee that the raw material meets the specification as stated the
purchase order. Also, the supplier should have an ISO quality management system.
¨
Logistic specification
As will most components in the automotive industry the JIT principle is important so the supplier
has to demonstrate that he can deliver when Tesla requires it.
4.2.2 E-procurement
Similar to copper, aluminium, and the lithium battery, for the OVRM there will be making use of the
electronic catalogues and order system for the e-procurement within the firm.
4.3
Supplier selection process
After the purchasing specifications have been defined, the supplier selection process can start.
¨
Step 1: Determining the method of subcontracting
For the OVRM there will be making use of a turnkey subcontracting. The main reason for this is
because it is not the most important part of the car, due to the low commercial uncertainty, and
therefore there shouldn’t be extra work done to do in multiple subcontracts.
¨
Step 2: Preliminary qualification of the suppliers and drawing up the bidders list
In addition to the preliminary qualifications named in Appendix 7.2, there will be one other
criteria added, namely technology advancement and will get a 20% importance. The reason for
this, is as said above, that the mirrors are having a disruptive change with new technologies are
increasing in the mirrors, and that more customers are focusing on it.
¨
Step 3: Preparation of the request for quotation and analysis of the bids received
Similar to copper, aluminium and lithium batteries, a tender will be used.
¨
Step 4: Selection of the supplier
After reviewing the bids of the tender, a decision will be made with whom to choose. This could
be one or multiple, this will be seen in section 4.4, sourcing.
4.3.1 Purchasing issues
In addition to the purchasing issues “Transport issues”, “Consistency of the supplier”, and “Contract”
explained in Section 2.3.1, and “Insufficient quality” explained in section 3.3.1, there will be one other
issue added:
¨
4.4
Bad communication
If the communication between the engineering department of Tesla and the department of the
supplier, the product can’t handle it, as it is a very complex product. Which could lead to issues.
Therefore it is recommended to choose the supplier wisely.
Sourcing
Now that the supplier selection process is done, there should be taken a look how the sourcing will look
like. The sourcing consists of three decisions / parts: Single or Multiple sourcing, local or global
sourcing, make or buy to produce.
4.4.1 Single or multiple sourcing
Due the low commercial uncertainty and the high product complexity, there is chosen to go for single
sourcing. This is backed by the fact that OVRM is located in a competitive industry, which makes the
switching possible of one goes bankrupt.
4.4.2 Local or global sourcing
As it is a high-tech product, there is chosen to use local sourcing. However, if the local suppliers are not
up to date with the technological advancements, a switch to global sourcing would in that case be
possible.
4.4.3 Make or buy to produce
For the supply of OVRM for Tesla will ship the end product to one of tesla (giga)factories. Even though
this charges additional shipping, ordering and inventory costs, it is not Tesla specialty to assemble it
inhouse and therefore it will in the end be cheaper to do it like that.
17
4.5
Strategy & Risk
Now the suppliers are known and the sourcing is done, there can be taken a look which strategy is best
and which risks are associated with it.
4.5.1 Kraljic strategy
As mentioned before, the purchasing impact on the financial results is very low for the OVRM. The
market is very competitive, even though there are difference between them in technological
advancements, the supply risk is relatively low as are thus can be switched rather easy between the
suppliers. Therefore, according to Kraljic, it is a Routine product. For routine products, the purchasing
strategy is aimed at reducing administrative and logistic complexity. Buyers will have to work out simple
but efficient ordering and administrative routines with the suppliers in the form of electronic catalogues
through which employees can order directly from the preselected supplier. A few aspects relevant to the
policy for these products are standardizing the product assortment, reducing the number of suppliers.
But also, working with electronic catalogues, reordering through web-based solutions, and electronic
payment.
4.5.2 Purchasing risks
Due to the fact that both parties, Tesla and the Supplier, will go into a relationship, many aspects
should be taken into considerations. One of those aspects are the risks that will be associated with it.
¨
Technical risk
One of the technical risks is that smart technologies don’t work (properly). If this shows too late
in the process, customers could get hurt by not getting a good view of their safety. Therefore its
extremely important that the technologies are working accordingly, otherwise there could be
lawsuits and bad publicity.
¨
Commercial risk
The commercial risk is relatively low, as it is a very competitive industry, the prices will be
remain low. If the market prices will go up, wouldn’t be a big risk as well, as it is a very small
portion of the car.
¨
Contractual risk
When the mirrors don’t meet expectation then there should be contractual very clear who is
responsible for it. This must be in contract. If not, it can lead to major problems which will not
only cost money for example for the legal time, but it will also be time consuming for both
parties which will affect the relationship negatively. However, the solution is fairly simple, with
just a very good contract.
¨
Performance risk
The performance risk lies in the capacity and flexibility of the manufacturer. As the nature of
Tesla companies, still in a growth phase, it is important that there is enough capacity to scal up,
but at the same time the flexibility to have more in one month and lessi n another one, as the
sales are not that consistent yet.
4.6
Stakeholder management
For the mirrors, the same stakeholders apply as mentioned in section 2.6.
18
5.0 Performance & Structure
Now the suppliers are chosen, the strategy and risk are formulated and discussed, there can be take a
look at how the performance of those suppliers are measured and how the structure of Tesla will look
like.
5.1
Performance management
In order to analyse the performance of the suppliers, there will be made use of Key Performance
Indicators (KPIs). KPIs can be defined as a set of quantifiable measurements to gauge a company’s
performance. They specifically help to determine a company’s strategic, financial, and operational
achievements (Twin, 2020). For the suppliers of Tesla the following KPIs have been defined:
5.1.1 Ordering
¨
Number of orders issues per month
This will give a good indication of the number of order issued per supplier, in the past 365 days.
¨
Number of rejected orders per month
This measure indicates the number of orders that were rejected in the past 365 days.
¨
KPI: Percentage rejected orders related to the number of total orders made
This KPI will Tesla show how many orders were rejected in percentage of total orders. If the
percentage is too high, attention is required to solve it or to search for a new supplier.
5.1.2 On-time delivery
¨
Number of on-time deliveries
These indicate the number of on-time delivers per supplier.
¨
Number of orders issues per month
See above
KPI: Percentage of on-time deliveries related to the total orders made
This KPI will show Tesla how reliable the manufacturer is in terms of deliveries. For a company
as Tesla, a late delivery of a few days could mean that several thousands of cars are running
late, therefore it is recommended that this is as low as possible.
¨
5.1.3 Payment
¨
Average invoice value
This measures the average value per invoice for each supplier
¨
Average cost per invoice related to repair
For any order there might be a repair necessary. This is measured and tracked in the average
cost per invoice related to repair.
¨
KPI: Percentage of cost related to repair of incoming goods and services
This KPI shows tesla how much the cost of repair are per invoice value of each supplier. If one
supplier has a higher percentage than other ones, attention should be payd on understanding
why and otherwise it is recommended to search for a new supplier.
5.2
Purchasing structure
For Tesla it is recommended for a centralized purchasing organizing. Here, corporate sourcing
specialists at a strategic and tactical level. Decisions on product specifications are made centrally, often
in cooperation with R&D and engineering, which was especially important for the buying situations one
the materials. But the same counts for supplier contracts and supplier selection. This is because most
of the Tesla’s have the same type of parts, and therefore the same supplier. It would be inefficient if
there are multiple contracts for the same supplier. The disadvantage is that the management of the
business unit has only limited responsibility for decisions on purchasing.
19
6.0 Literature review
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Consulted at 02-04-2021.
https://www.industryweek.com/leadership/article/22026386/chinese-lithium-giant-agrees-to-threeyearpact-to-supply-tesla
Bohisen, M. (2020, October 20th). A Look At Who Might Win A 'Giant Contract' To Supply Tesla With
Nickel. Consulted 02-04-2021.
https://seekingalpha.com/article/4379895-look-who-might-win-giant-contract-to-supply-tesla-nickel
Brown et al (2020). World Mineral Production. Consulted at 01-04-2021.
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Desjardins, J. (2016, March 7th). Extraordinary Raw Materials in a Tesla Model S. Consulted at 01-042021.
https://www.visualcapitalist.com/extraordinary-raw-materials-in-a-tesla-model-s/
Denton, J. (2020, November 18th). Panasonic Is the Latest Company Betting on Electric Vehicles,
Powering Past Its Tesla Partnership to Explore a Venture in Norway. Consulted at 01-04-2021.
https://www.barrons.com/articles/panasonic-is-powering-past-its-tesla-partnership-with-an-expansioninto-europe-51605708627
Editorpen (2021, March 21st) . Here’s Why Aluminium Prices Have Crossed Two-Year Highs. Consutled
at 01-04-2021.
https://editorpen.com/economy/heres-why-aluminium-prices-have-crossed-two-year-highs/
Fernando, J. (2021, February 14th). Stakeholder. Consulted 01-04-2021.
https://www.investopedia.com/terms/s/stakeholder.asp
Fitch Ratings (2021, March 21st). Fitch Affirms Alcoa's IDR at 'BB+'; Outlook Stable. Consulted at 0104-2021
https://www.fitchratings.com/research/corporate-finance/fitch-affirms-alcoa-idr-at-bb-outlook-stable-0503-2021
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Lambert, F. (2017, February 20th). Tesla Model 3: aluminum part supplier announces investment to
increase output ahead of Model 3 production. Consulted at 01-04-2021.
https://electrek.co/2017/02/20/tesla-model-3-aluminum-part-supplier-invest-production/
LME (n.d.a). Aluminium. Consulted 01-04-2021.
https://www.lme.com/en-GB/Metals/Non-ferrous/Aluminium#tabIndex=2
LME (n.d.b). Copper. Consulted 01-04-2021.
https://www.lme.com/en-GB/Metals/Non-ferrous/Copper#tabIndex=2
Maida, J. (2019, July 5th). Top 5 Vendors in the Global Automotive Electrically Adjustable Outside Rear
View (ORVM) Mirror Market 2019-2023 | Technavio. Consulted at 03-04-2021.
https://www.businesswire.com/news/home/20190705005019/en/Top-5-Vendors-in-the-GlobalAutomotive-Electrically-Adjustable-Outside-Rear-View-ORVM-Mirror-Market-2019-2023-Technavio
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https://www.fool.com/investing/2019/03/26/who-are-teslas-lithium-suppliers.aspx
20
Powertron (2019, March 11th). What’s the Difference Between Lithium and Lithium-Ion Batteries?.
Consulted at 01-04-2021.
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https://www.rsc.org/periodic-table/element/3/lithium
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2,752.0 Mn by 2027 | Credence Research. Consulted at 03-04-2021.
https://medium.com/@jennifersmithbriskinsights/smart-glass-mirror-in-automotive-market-is-expectedto-reach-us-2-752-0-f7c3e02aed16
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https://www.investopedia.com/terms/k/kpi.asp
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UK.
21
7.0 Appendix
7.1
Suppliers Tesla Model S
7.2: Preliminary Qualifications
Weighting
30%
Understanding goal
10%
Unit price
10%
Transport costs
10%
Free of errors
20%
Lead time
10%
Time flexibility
10%
Quantity flexibility
100%
22
Criteria