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Sustainable Sourcing and Procurement at Tesla Research Paper

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Updated: Jun 16th, 2022

Introduction

Organizations operating in the modern business environment are required to be sustainable for them to remain competitive. The concept of sustainability seeks to address the environmental and economic issues affecting the business and society (Witjes & Lozano, 2016). Sustainability is also a long term objective that pursues a greener future where environmental degradation is minimal. The functions of sourcing and procurement are not exempt from these considerations. In the manufacturing industry, raw materials and other essential inputs into the production process have serious environmental and socioeconomic implications. For example, raw materials such as rare earth metals are obtained from the Earth in processes that pollute the land and render it unusable after the mining activities (Rogetzer, et al., 2019). Such environmental issues should be considered by a firm that sources those materials and makes an effort of engaging those suppliers who are conscious about sustainability. This report examines sustainable sourcing and procurement practices for a manufacturing company. The firm selected for this purpose is Tesla, a company well-known for the manufacture of electric cars and other energy production and storage products.

Literature Review

The current literature regarding sustainable sourcing and procurement explains how businesses can pursue sustainable goals through various strategies. Other literature focuses on sustainability models and others on expressing the need for sustainability. The study by Rogetzer et al. (2019) explains how recycled materials can be a means to achieve sustainability in sourcing under the price and demand constraints. The researchers explain that sustainable sourcing is constrained by demand, prices, and yield and understanding the correlations between these elements can offer a pathway for firms to pursue their goals. Additionally, the economic feasibility of recycling is an important consideration not only because of the cost savings but also because of environmental impacts. Rogetzer et al. (2019) present their study in the context of manufacturing where certain raw materials are obtained from the Earth. Alongside environmental degradation, other socio-economic issues, for example, conflicts in the Democratic Republic of Congo where the materials are sourced also bear sustainability challenges.

The literature on sustainability is largely concerned with the environment. However, some researchers are attempting to highlight the importance of achieving a balance between other sustainability issues, including economic and social. A holistic perspective to sustainability, according to Witjes and Lozano (2016) is needed to attain that a balance. These researchers propose the concept of a circular economy as a critical model to help with sustainability goals. Such a framework involves the pursuit of economic growth and at the same time addresses the serious concerns regarding the raw material and energy shortages. Circular economy implements strategies such as resource efficiency meaning minimal wastage. Other ideas proposed alongside the circular economy include durability, industrial symbiosis, eco-designs, and renting/leasing among others. A circular economy is a concept that can be pursued by private businesses as well.

Sourcing such materials should be done in a manner that helps the supply chain pose the least possible threat. The term ‘responsible sourcing’ has been used by (Brink, et al., 2019) to imply practices that address sustainability concerns across the mineral supply chains. The researchers explain that due diligence and the development of sustainability schemes can make the supply chain more sustainable. In other words, the first step to pursuing sustainability is becoming responsible. Sourcing such materials by the companies that use them for manufacturing or other purposes should be a responsible practice. Brink et al. (2019) insist that such practices include the management of environmental, economic, and/or social sustainability. Therefore, it is not just the firms directly involved with mining that are required to be sustainable.

As seen with the literature examined above, not many researchers examine sustainable sourcing and procurement without mentioning the entire or other elements of the supply chains. Research by Singhry (2015) seeks to propose a model of sustainability from sourcing to reverse logistics. In other words, the study focuses on the entire supply chain that starts with sourcing production materials for transporting the finished products to their final destinations. The author describes supply chain management as a holistic corporate strategy covering sourcing, transporting, producing/manufacturing, consuming, and reverse logistics. As such, the sustainability goals set for sourcing and procurement practices are part of the broader supply chain management goals.

As mentioned above, sustainability goes beyond the environment to address other concerns such as economic and social concerns. As such, Singhry (2015) goes ahead to define social sustainability as managing and creating skills and capabilities to suit future generations. More so, social sustainability seeks to promote health and equal treatment of all people to promote a good quality of life. The author further argues that social sustainability is embedded in socially responsible behavior. Singhry (2015) also describes the economic sustainability of a supply chain as being characterized by improved quality, cost efficiencies, shareholder value, and market performance. That is to say that business is allowed to pursue economic benefits from the economic activities mainly because that is one of the core purposes.

Besides explaining the need and importance of sustainable sourcing and procurement, some authors propose models with which to pursue these goals. A model for analyzing fuzzy data envelopment to be used in sustainable sourcing has been presented by (Hatami-Marbini et al., 2017). They emphasize that sustainable sourcing is increasingly becoming a priority for businesses because of the changes in consumer behavior and norms across the supply chain. Similar to studies such as Rogetzer et al. (2019) and Brink et al. (2019), these researchers have also used natural resources as the focal point for their hypotheses and arguments. They explain that the rates of natural resources depletion, climate change, carbon emissions, and global warming make sustainability the key factor for the social and economic survival of firms. Businesses are also using sustainability as a strategy to pursue competitiveness. It is argued here that consumers are aware of the current environmental predicament and understand that only sustainable businesses can help resolve the situation.

Various techniques to help in the pursuit of sustainability in sourcing and procurement have also been proposed. Researchers such as Lintukangas et al. (2019) propose that business should adopt innovative practices in supplier management and orient the suppliers in the sustainability expectations of the company. Supplier management is an act of selecting the suppliers to provide the company with materials and production or other operational requirements. In other words, it is an act of managing the sources of the suppliers. Innovative practices in sourcing allow the firm to use its innovations and those of the suppliers in addressing the sustainability concerns. Lintukangas et al. (2019) propose dynamic capabilities that allow businesses to scan, detect, identify and interpret threats and opportunities presented to them. In this case, the dynamic capabilities are intended to help a company recognize and utilize new approaches to sustainability. The emphasis here is that such efforts should be coupled with a critical requirement that the suppliers follow the same strategies and align their sustainability objectives to those of the company.

Forcing suppliers to become sustainable is a topic that has been addressed by several studies. For example, Wright (2016) explains that the mechanisms that mandate the suppliers and subcontractors to implement sustainable practices in aspects such as labor are becoming more common. As mentioned above, sustainability is a concept that goes beyond the environment and covers social issues as well as economic concerns. Labor in many cases can be a social issue, especially considering how employees are handled and the conditions within which they work. Such concerns are justified when considering that the developing economies have become a hub for large manufacturers because of the availability of cheap work. Such hubs are characterized by poor working conditions as manufacturers seek to reduce costs. The example of the Democratic Republic of Congo given by Rogetzer et al. (2019) where ‘conflict materials’ are sourced support Wright’s (2016) concerns. With the consumers becoming aware of such practices, the reputational from the sustainability concerns further push for more sustainable employment practices.

As can be seen from the literature provided above, sustainability can be approached from diverse perspectives. The most important aspect to notice is that sustainability requires commitment from the organizations and sometimes a legal framework to enforce the sustainability goals. Searcy (2017) explains that successful sustainable procurement initiatives require firms to persevere and their commitment to sustainability may depend on finding sustainable suppliers. Such suppliers may be concerned with the environment or other concerns such as the working environment. The bottom line is that when suppliers are committed to sustainability then there are great chances that a manufacturer will also persist in the pursuit of sustainability. In other cases, the efforts may require a legal or policy framework or even a favourable political environment. According to Brokaw (2017), the Trump administration may be blamed for the laxity in the pursuit of sustainability, especially with regards to climate change. Such a regime diminishes the efforts and commitment of businesses towards responsible business conduct.

Company Description

Tesla Inc. is a manufacture of all-electric cars based in the United States of America. It was founded by Martin Eberhard and Marc Tarpenning in 2003 and co-founded by Elon Musk. Within the first 15 years, Tesla had become an international phenomenon producing and selling electric cars across the world. Tesla has been described as a Silicon Valley-based pioneer firm operating in the electric car sector. The key business function is the development, design, production, and sale of battery electric vehicles (BEVs). Additionally, the company makes BEV components, including charging, battery, and powertrain technology (Moritz, 2015). Tesla’s reputation has grown as a result of successful car models such as the Roadstar, Model S, Model 3, and Model X among others.

Tesla operates in two broad segments with the first one being the automotive segment that focuses on the design and development, as well as production and sale of electric cars. The second is the energy generation and storage which specializes in the design, installation, manufacture, and sale/lease of products associated with energy storage and solar power systems for commercial and residential use. Additionally, this segment also sells surplus electricity produced by the company’s solar energy infrastructure (Tesla Inc, 2020). In the automotive sector, the most successful products are the Model S sedan and a sport utility vehicle (SUV) Model X. Model 3, a sedan made for the mass market is also an increasingly popular model.

The ownership of Tesla is distributed across three types of shareholders. Individual stockholders account for 6.33% of the ownership while mutual fund holders and other institutional shareholders account for 25.8% and 17.22% respectively. As of 2019, the company employed about 48020 employees. There has been a steady growth in the number of workers between 2015 and 2018 with 13060, 30030, 37540, and 48820 employees for 2018, 2016, 2017, and 2018 respectively. The 2019 figure is a slight drop and, with the COVID-19 pandemic in 2020 no further growth is anticipated, at least until the pandemic is over. The organizational hierarchy of the firm includes Elon Musk at the top serving as the CEO and director. Chief Financial officer (Zachary Kirkhorn), Vice President for the Asia Pacific (Robin Ren), Senior Vice President for Powertrain and Energy Engineering (Andrew Baglino), and Chief Designer (Franz von Holzhausen) all work under the CEO.

Sustainability is an issue of serious concern for Tesla because its business relies heavily on raw materials. Sustainability in sourcing and procurement as discussed in the literature review presents Tesla with a challenge. The battery technology used by Tesla requires some of the rarest earth minerals often acquired in countries such as the Democratic Republic of Congo where child labor and other vices make the raw materials unsustainable. Sourcing raw materials for the EV batteries are generally associated with squalid working conditions and child labor, two vices that should not appear in a sustainable company (Phan, 2020). According to Bulman (2015), the production of Powerball battery at Tesla will require a supply chain that is ‘Super-charged.’ In other words, the production energy storage systems ushers in an era of ‘lithium gold rush’ which can only mean an over-exploitation of the resource.

The company will need to establish early relations with suppliers and governments across the world where the resource is sourced. Cobalt is majorly obtained from DRC, which makes its supply unstable as it fluctuates depending on the current levels of conflict. These and other issues are serious sustainability concerns viewed from economic, environmental, and social perspectives. Lithium is another rare resource extracted from brines beneath South American deserts and evaporated using the energy from the sun. The growth in demand means other continents such as Australia have started crushing rocks to obtain the useful resource. Another rare metal is nickel, which is also mined in areas where human rights violations and child labor are abundant (Goldman, 2017). Evidence that Tesla does not recycle batteries is given by the fact that while 90% lead-acid batteries are recycled, only 5% of lithium-ion batteries go through the same process (Digital Initiative, 2017). Tesla, being a major producer of these batteries, is doing little to recycle the products majorly. The table below summarizes the findings from the literature review:

Table 1: Summary of Literature Review Findings

Point # Findings
1 Scope of sustainability Environmental, economic, and social sustainability.
2 Literature focus Environmental
3 Implications of sourcing practices Sourcing minerals is a practice that has great detriments on the environment.
4 Supplier commitment Sustainable sourcing requires finding suppliers committed to sustainability goals.
5 Legal frameworks Sometimes a legal framework is needed to enforce sustainability.

Current Sustainable Sourcing and Procurement Practices

Tesla’s procurement has led to a phenomenon the company calls ‘production hell.’ For example, the production hell was attributed to faulty procurements where the CEO admitted that Tesla chose the wrong suppliers and subcontractors. Such an error led to lost revenues and Tesla having to fire between 400 and 700 workers (Simpson, 2017). From a sustainability perspective, the firm is not maximizing the shareholder value as explained by the declining value of shares. The sustainability concern, in this case, is economic as Tesla was created to generate wealth for the shareholders. However, the company should be commended for the efforts to become sustainable overall. Tesla has established good relations with suppliers which should sustain the business economically. Environmentally and socially, however, Tesla requires to make several adjustments.

It may seem that examining sustainability initiatives at Tesla reveals more unsustainable practices that those that are sustainable. A company in Germany from which Tesla sourced pain for the Model 3 was found to be engaging in activities that were not responsible. The firm, Eisenmann, was contracted to build a paint shop in Fremont, California where it hired 140 employees from Eastern Europe and paid them as little as $5 an hour (Simpson, 2017). Such practices are considered exploitative and only explain that Tesla’s suppliers could be unsustainable.

Sustainability in sourcing and procurement at Tesla have led some observers to label the firm as unsustainable. There are fears that Tesla does not report adequate details regarding the production of its electric cars or the sourcing of its production. However, it can still be observed that the company is significantly inefficient in the raw material usage whereby over 40% of raw material purchases end up being scrapped (Katsos, 2018). Such a huge percentage does not compare well with automotive manufacturers such as Ford who are close to achieving their goal of zero waste to landfills. Electric cars are intended for a sustainable future, but their production is unsustainable. The table below summarizes the current practiced observed at Tesla.

Table 2: Summary of Current Practices

Sustainable Unsustainable Irresponsible
Production of green energy Sourcing of rare earth materials Child labor
Production of electric cars Financial performance Employee exploitation
Delivery of products
Battery technology
High rates of waste

Gaps between Literature and Practices

The gaps between literature and practices regarding sustainable sourcing and procurement can be seen in two ways. First, Tesla fails to understand the real meaning of sustainability whereby producing electric cars for a greener future fails to account for aspects besides the environment. Second, there is inadequate data concerning Tesla’s sourcing and procurement functions in the context of sustainability. This is manifested by the lack of scholarly work on the subject specific to the Tesla and the fact that the articles appearing in the media about Tesla’s sustainability can hardly be considered credible. As such, it is hard to explain the extent to which Tesla’s procurement and sourcing practices can be considered sustainable.

Tesla fails to realize that most of the electricity produced globally is not green energy due to the use of coal and other fuels. Burning coal to power an electric car does not sound sustainable. However, it has been estimated that about 76.6% is derived from coal, natural gas, or petroleum. However, some people express that such a percentage is better than 100% of pollution attained when cars also use these fuels (Katsos, 2018). In other words, Tesla is only as sustainable as the amount of clean energy used. The fact that Tesla also produces clean energy and energy-producing equipment may hint at the firm pursuing green electricity for their cars.

Reading about Tesla’s supplier relations reveal that the company is only interested in suppliers who can deliver even in times of uncertainty. Additionally, the materials sourced should be the right materials. Looking at the waste levels at Tesla reveals that the materials supplied are either not the right materials or that the company is extremely inefficiency. In the incumbent automotive manufacturers, over 80% of the parts produced are re-usable while at Tesla over 1600 lbs of e-waste are produced (Katsos, 2018). Considering that the capacity of the planet to recycle e-waste is only about 5%, the company’s sourcing and procurement decisions are considered unsustainable. It is also important to mention irresponsible actions that include the exploitation of employees through low wages and child labor in countries such as the Democratic Republic of Congo, a conflicting nation where cobalt is sourced. For example, children are forced to work in the mines with no payment.

Additionally, it can be noted that Tesla is generally unsustainable as explained in the previous sections. For example, economic unsustainability is seen when Tesla financial performance is uncertain or when it strains resources attempting a direct distribution, which can be perceived as a high-risk undertaking. Issues such as toxic materials in battery production, high rates of waste to landfills, and overexploitation of resources represent environmental unsustainability.

Lastly, the unavailability of data about Tesla’s sustainable sourcing and procurement means that only best guesses can be made. However, this approach will lead to Tesla being seen as unsustainable. The literature review indicated that production data can be used as an indicator of sustainability (Brink, et al., 2019). The company’s production data indicates high levels of waste indicating inefficiencies in the supply chain. Additionally, the lack of data means that Tesla lacks a comprehensive policy or strategy for pursuing sustainability. The table below summarizes the gaps identified in this section:

Table 3: Summary of Gaps

Economic Environmental Social
Uncertain financial outcomes High rates of waste to landfills Sourcing materials from conflicting countries
High risk practices Toxic materials from battery production Exploitative labor practices by suppliers
Straining resources Over-exploitation of resources Child labor from raw material sources

Recommendations

The most significant recommendation would be one that outlines how such a system can be built. The approaches by Brink et al. (2019) are deemed adequate and should form the most basic recommendations for Tesla. Firstly, sustainable procurement is depicted by the firm’s procurement policy and effected through the buying actions and behaviors. Tesla, therefore, should start by developing a comprehensive procurement policy that encompasses sustainability goals. The concept of responsible sourcing should be deployed in the company as a new best practice in sourcing and procurement.

A policy in itself is not adequate in the quest for sustainable sourcing and procurement. As such, it should be followed by a strategic framework and a roadmap that outline the specific activities to guide the company towards the sustainability goals. A strategy outlines an action plan to be followed in the long term to achieve a set goal. The goal at Tesla is to become sustainable and reflect the same throughout the supply chain. A roadmap for sustainability in procurement and sourcing can be a more specific plan outlining the sequence of actions to be undertaken in the short term to achieve the short term objective. Insourcing and procurement, a roadmap outlines which suppliers are deemed sustainable, how suppliers can be made sustainable, or which suppliers can be engaged by the company based on their genuine commitment to sustainability.

Lastly, a sustainability culture can be created at Tesla where the actions of all employees and other actors in the supply chain all seek to achieve sustainability. The concept of organizational culture entails those behaviors, beliefs, norms, and values shared among a company’s members. The employees comprise the major group of organizational members and the leadership should target them for a culture change. Such a move may require a major organizational transformation which could be costly and complicated. However, the future of Tesla in the electric car market depends on how the company and its partners in the supply chain handle sustainability issues.

References

Brink, S., Kleijn, R., Tukker, A., & Huisman, J. (2019). . Resources, Conservation and Recycling, 145, 389-398.

Brokaw, L. (2017). . MIT Sloan Management Review.

Bulman, P. (2015). .

Digital Initiative. (2017). . Digital Initiative.

Goldman, J. (2017). .

Hatami-Marbini, A., Agrell, P., Tavana, M., & Khoshnevis, P. (2017). . Journal of Cleaner Production, 142, 2761-2779.

Katsos, J. (2018). . Medium.

Lintukangas, K., Kahkonen, A.-K., & Hallikas, J. (2019). . Journal of Purchasing and Supply Management, 25(4), 1-10.

Moritz, M. (2015). Researchgate.

Phan, T. (2020). . The Hustle.

Rogetzer, P., Silbermayr, L., & Jammernegg, W. (2019). . International Journal of Production Economics, 214, 206-219.

Searcy, C. (2017). . MIT Sloan Management Review.

Simpson, P. (2017). CIPS.

Singhry, H. (2015). . International Journal of Supply Chain Management, 4(4), 115-125.

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Witjes, S., & Lozano, R. (2016). . Resources, Conservation and Recycling, 112, 37-44.

Wright, C. (2016). . Journal of Busines Ethics, 137(1), 195-210.

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