How Tesla’s Supply Chain overcame the chip shortage.

The automotive industry is facing a widespread chip shortage that has affected the production of vehicles.

As expected, many car manufacturers have shut down their production plants due to widespread semiconductor chip shortages. But despite all these, Tesla’s supply chain seems to be outstanding. It’s clear that we cannot overestimate the importance of chips or semiconductors. The average car needs thousands of chips to function properly. You don’t need much nudging to guess that an electric vehicle would need way more than that.

For instance, a hybrid vehicle may need about 3,500 chips. 

An Overview of The Chip Shortage

In 2021 alone, the shortage of semiconductors cost manufacturers a whopping $210 billion in revenue and about 7.7 million vehicles in lost production.

The major companies that reported declining sales were Nissan, Honda, and General Motors. Some car manufacturers, like BMW and Daimler, were forced to also had to shut down their factories. With the Automotive industry upside down because of semiconductor chip shortages, it is quite peculiar that Tesla’s supply chain has been enjoying increased production, sales, revenues, and profits. In the Q4 of 2021, Tesla reported an 87% increase in vehicle production, with a record 308,000 vehicles.

Outstanding for a car manufacturer, even if it is an electric car manufacturer. 

But what is the technology company doing right?

Even for an electric vehicle manufacturer, Tesla’s supply chain has defied the odds against it. Other supply chains (especially those in the automotive industry) could learn something from their supply chain management. 

How is Tesla Beating The Odds?

The Tesla supply chain is built on the tenets of a vertically integrated supply chain.

The EV manufacturer has taken the responsibility of building every one of its vehicles from the ground up.  Most companies, especially car manufacturers, tend to shy away from vertical integration and, frankly, with good reason. Horizontally integrated supply chains allow a company to focus on its key strengths, which is great. But the thing is that Tesla’s core competency is technology and electrical innovation, so vertically integrating its supply chain works for the company. 

Here are some reasons why

Tesla’s Writes Its Own Software.

A key factor contributing to the semiconductor chip shortage, especially in the Automotive industry, is that specific software has to be written for each car manufacturer.

In cases with different models, the software must be written for each of those models. The software is the vehicle’s soul and is unique to each model. This means that a car manufacturer cannot easily switch between suppliers. Tesla has gotten around the software issue by writing its software in-house, which allows the company to completely revamp the software when it needs to source from other suppliers. The ability to rewrite its software gave the company huge flexibility, allowing it to use different semiconductor chips in its vehicles.

Something other car companies, especially the traditional ones, could not replicate. 

Design its Own Circuit Board.

The circuit board is another vehicle component that relies heavily on the semiconductor industry. 

The circuit board is one of the parts of the vehicle that Tesla’s supply chain produces itself. Because the company produces the circuit board itself, it can completely redesign its circuit boards to meet the specifications of the new semiconductors. 

Fewer SKUs or Models

A lot of the innovative flexibility mentioned above would not be possible without the limited SKU of the Tesla fleet.

The company has four models: 3, S, X, and Y. Compared to other vehicle or car manufacturers, Tesla doesn’t have a lot of SKUs. With many of its competitors having more than ten models. A company like Toyota has about 40 models in its production line. Most of the fleets by other car manufacturers aren’t just electric vehicles. There are hybrid vehicles and gas-powered vehicles. The combination of the different models and different modes of power has made it very difficult for car manufacturers to maintain the type of flexibility Tesla enjoys. With the limited SKUs it enjoys, Tesla can manage its materials more efficiently, but in the coming years, the company will probably expand its SKUs.

Many wonder if it will be able to the supply chain so effectively then. 

Tweaking Vehicle Features

Despite Tesla’s supply chain flexibility, it was not enough to meet demands.

Tesla was smart in taking a tactical approach, offering its customers Tesla models with some missing features. It also designed the Tesla vehicle so that some parts could be retrofitted. The company achieved this by offering customers Tesla models without features like Bluetooth chips and USB ports. Generally, Tesla took away some of the features of its cars, such as radar sensors and lumbar support.

By doing this, the company could reduce the complexities in designing its vehicles. 

Tesla achieved this based on its reputation. And it may not be replicated in another company’s business model. 


Despite the current supply chain crisis facing the automotive industry, Tesla’s supply chain has come out strong with a combination of flexibility and agility based on innovative solutions. 

Every supply chain manager may want to learn something from the Electrical vehicle giant. Supply chains can be innovated when we look inward and play to their strength, especially amid a supply chain crisis.

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