Direct materials sourcing technology a hub for manufacturers
In this podcast, LightSource CEO Spencer Penn explains how three years at Tesla motivated him to solve sourcing inefficiencies that kill margins and slow product development.
A three-year trial by fire at Tesla inspired Spencer Penn to start a software company to fix the problems he experienced with direct materials sourcing.
Penn joined the electric vehicle maker in 2015, the year before it unveiled the Model 3, its first car designed to be affordable for middle-income buyers. His job focused on the financial aspects and business operations of engineering -- critical factors like labor costs and the car's bill of materials (BOM). Both had to support two big objectives: an ambitious, three-year development cycle -- half the usual turnaround time -- and a base price of $35,000.
Penn found Tesla's sourcing process to be frustratingly manual, with fragmented BOMs and disconnected supplier workflows slowing product development and cutting into profit margins. He identified the cause as an automation gap between Tesla's product lifecycle management system, which was the engineering system of record, and its ERP, where financials were managed.
Penn left Tesla in 2018, and in 2021 he cofounded LightSource to try to fill that workflow gap. The company makes an AI-native direct materials procurement "operating system" designed to integrate the entire design-to-production lifecycle and the workflow between engineers, buyers, suppliers and finance.
In this episode of Enterprise Apps Unpacked, Penn gives examples of sourcing inefficiencies, explains their impact on the bottom line and shares what the Tesla experience taught him about how technology could solve complicated procurement problems.
Spencer Penn
Procurement at the center
The compressed development schedule and low price point exerted tremendous pressure on Tesla employees, including Penn, who was helping engineering executives figure out how to source quality parts affordably and on time.
"Tesla at that time was an all-you-can-eat buffet of pain points and problems, so I got exposed to everything. Procurement was just one of 20 things, but procurement was the one that to me felt so impactful because it directly hits the P&L [profit and loss statement] of the business," he said. "There are two big flows of money in Tesla: in through the purchase of car parts, and out through the sale of delivered vehicles. Almost everything else is a rounding error."
Many of the problems came from the sheer number of phone calls, emails and file exchanges needed to coordinate workflows between engineering, finance, procurement, suppliers and manufacturing. The problems were magnified by Tesla's decision to run sourcing and product design in parallel, which was unusual at the time, according to Penn, but is now recognized as an innovation.
"The car was being iterated at the same time that we were sharing drawings with suppliers, at the same time we were getting pricing and building out pilot and prototype lines," he said.
The low point was what came to be known as the "production hell," when Tesla couldn't make all the cars it promised on time. Ultimately, the company took the lessons to heart, simplified its operations, and the Model 3 became the bestselling plug-in EV three years in a row.
Other topics discussed in the podcast include the following:
- How LightSource works and who uses it.
- The "spec to scale" philosophy behind it.
- The role played by AI.
David Essex is an industry editor who creates in-depth content on enterprise applications, emerging technology and market trends for several Informa TechTarget websites.
