I want you to think about a situation when you are deciding to wear a suite for a special occasion. You have the option to buy a ready-to-wear suite from a store (Boss for example) with the possibility to customize it a little bit at the tailor so it fits better. The solution is cheap and operational. The other option is buying the material for the tailor so he can tailor your suite from scratch, it will cost you more but will fit you perfectly.
Now think about an analog situation: You are Elon Musk (Tesla’s CEO), the suite is an ERP system, the store is SAP, the tailor is your IT team and the occasion is going to the electrical car market and be a successful and innovative company.
Back in 2012, Elon Musk decision was pretty straightforward, he had his CIO Jay Vijayan ditch ERP vendor SAP and build his own custom ERP from scratch.
The idea came as a solution to deal with one main issue:
Most automakers use vertical ERP systems (for example SAP for car industry). However, this typical solution is an issue for an innovative company like Tesla because their model was different from the typical car makers.
Typically, the industry is working with the dealership model: all sales are required by law in most states to go through franchised dealers. That also includes service, although dealers get reimbursements for warranty-related maintenance and repairs.
Nevertheless, besides the innovative approach of Tesla in making electrical cars, they also wanted to innovate their sales model by maintaining a very direct relationship with its customers since the company has vertically integrated distribution and service.
In this case, coping with a new sales process will affect other processes like procurement and production. For these reasons, the vertical ERP solution was deemed ineffective and constraining for Tesla’s adaptability and ability to move quickly (which is the main competitive advantage that the company has over its larger rivals).
In a 2014 interview with CIO Insight, Vijayan (Tesla’s CIO) commented on the decision to build their own customized ERP:
Elon’s vision is to build a vertically integrated organization where information flow happens seamlessly across departments and where we have a closed feedback loop to our customers. By doing this, we can provide the best possible product, service and overall experience to our customers in the fastest way possible, while also operating efficiently as a business.
Tesla proved that process innovation needs the right tools to support it. The ERP system being a central one, an innovative company should make the strategic and difficult decision of going for a vertical solution with lower customization capabilities or building a laborious highly customized system from scratch. Yes, we are back to the suite dilemma and Elon Musk decision was to wear the tailored suite.