Wind Energy

Wind energy start-up company's dilemma of supply chain strategy case pre...

noreply@blogger.com (KgGuruji) — Thu, 02 Jul 2015 03:50:00 +0000

What Indian government can do to bring "ACHCHHE DIN (अच्छे दिन)" to wind sector 2014-2019

noreply@blogger.com (KgGuruji) — Thu, 29 May 2014 06:36:00 +0000

Shri Narendra Modi led National Democratic Alliance's election victory in May-2014 mean different to different group, industry sector, countries & people. However, one thing is common among all, it is clear vote for hope, change and against status quo in the country. Indian wind energy sector is no different from expectations.

Even though wind energy is cost competitive with other fuel sources (due to technology development, scale of economies & other factors), it's clean & green energy, it creates jobs, helps country to diversify energy portfolio & help to achieve energy triangle, lower operating costs, it is inexhaustible renewable source of energy, turbines don't consume water for energy generation (Conventional power require huge water for production of electricity) and several other benefits, India has witness reduction of new capacity addition in wind power in 2012-13 (1721 MW) and 20-13-14 (2076.5 MW) financial years compared to 2011-12 (3163 MW).

India surpassed target of 9000 MW of new capacity addition in 11th five year plan during Apr-07 to Mar-12, achieved 10260 MW. Target of 11000 MW is set for 12th five year plan during Apr-12 to Mar-17. To recover 700 MW shortfall of 2012-2014 and to achieve balance 7200 MW in 3 years, lot of actions will have to be taken by government and other stakeholders.

1. Revise target of 12th five year plan from 11000 MW to 15000 MW

This will help industry to achieve 4000 MW/year for next three financial years. Indian wind turbine manufacturers have 10000 MW/year of supply capacity, hence, meeting demand of 4000 MW a year is achievable. Wind industry can contribute to Indian economy 0.33% of GDP through companies working directly in sector.

2. One minister for two separate ministries (New & Renewable energy & Power) can ensure compliance of Renewable Purchase Obligation (RPO)

Earlier ministry of new & renewable energy could only write and request ministry of power to make RPO compliance mandatory for states because of two separate ministries with different goals. Now one minister heading both, must ensure that this compliance is strictly followed.

2.1 Combined ministry instruct state utilities, that if they are looking for funds for financial restructuring, compliance of RPO is must as set-up by National Action Plan of Climate Change (NAPCC). Only few state utilities like Karnataka, Maharashtra, Gujarat, Rajasthan are trying to achieve their RPO targets, other states must follow.

2.2. Setting up an effective web-based automated monitoring & verification system for Renewable Energy generation/procurement by state /private electricity utility companies will help in achieving operational compliance reporting.

2.3 No carry forward of shortfall in RPO to next year should be allowed, as they can purchase RECs instead to achieve compliance and don't allow counting of excess solar generation towards compliance of non-solar RPO & vice-a-versa.

3. Make state electricity distribution companies financially strong & ensure regular payments to wind power developers or owners

Many state electricity distribution companies are in deep trouble, making huge financial losses due to several other reasons. Unless then become efficient & profit making, their payments to wind power developers & owners are delayed for longer period. This affects wind project cash flow & increases credit risk of the project. If SEB's financial health is Strong, they make payment on-time, and might get some discount on the bills.

4. Reduce borrowing costs for new projects

Current 10 year loans at high interest rates of 12+% is unfavorable for financing wind power projects. New government can bring innovative change by changing debt-related policies, like paying part of the interest-rate obligations of projects or lending funds below commercial rates or for longer period.

5. Accelerated depreciation for SME companies for less than 5 MW projects

To encourage participation of small & medium enterprise sector companies in wind power, accelerated depreciation need to be brought back for maximum 750 MW to 1000 MW projects in a year for less than 5 MW project size. This initiative will help to increase capacity of new projects in year over & above Independent power producers or large companies have planned.

6. Land clearance

Project developers have faced several bottlenecks that had delayed the process of setting-up wind turbines in few states. With out changing laws if only process of grant or purchase of land is speed-up, it will help in new capacity addition.

7. Long term issues

7.1 Power evacuation - State government must take-up power evacuation projects keeping future wind power & possibly solar power capacity addition in state grid. National Clean Energy Fund can be used for this purpose for seven states which has high potential for wind power.

7.2 Delayed tariff revision by states - Any delay by State electricity regulatory commission in revision of tariff impact state electricity board's financial health. If state electricity board incur huge losses, it will impact the entire chain of wind power development in the state.

7.3 Strengthening of Rupee v/s foreign currency-Due to 50-70% import of components strengthening of rupee will reduce turbine cost, improve payback period & financial viability of the project.

7.4 Power surplus state SEB refuses to sign new power purchase agreement at tariff recommended by SERC - No SEBs specially seven states which has high wind power potential should refuse to sign new project PPA because it is power surplus SEB. It should sign PPA, add power surplus & sale it to other starving state, earn more money.

7.5 Change of mind set to buy & use renewable power first over conventional power - State load dispatch centers operated by SEBs must be receptive and ensure that power produced by renewable energy sources is acquired / purchased first over conventional sources of power. Currently, wind parks are being asked to stop their turbines, if the demand of power is less. Even developed countries give first priority to wind power over conventional power. If SLDCs faces a problem of prediction of power, software & systems which can predict power can be introduced.

Most of these steps really don't require a new legislation or major policy changes. It require maximum governance, which everyone hope from this new government, efficient administration & compliance of various acts & rules already in place. Wind power development will not only in addition power generation capacity, it will also contribute in development of economy, it will create new jobs (or gain lost jobs / experienced people back), bridge gap between power demand & supply, ensure electricity reaches to every house & industry with out power cut. If these steps are implemented "अच्छे दिन जरुर आयेंगे".

........Ketan Gandhi (Sr. Principal Consultant & President)

KgGuruji Consulting & Serivces

info@kgguruji.com, www.kgguruji.com

What is your "Wind turbine supply chain and product improvement" strategy during slowdown?

noreply@blogger.com (KgGuruji) — Fri, 07 Jun 2013 14:02:00 +0000

What is your "Wind turbine supply chain and product improvement" strategy during slowdown?

Wind energy sector has witnessed several cycles of ups and downs in last 30 years - few years of growth followed by slow down and new level of growth again. Entry of new wind turbine manufacturers (OEMs) and supply chain partners of key components during growth phase followed by hold of business or exit of some of the players have also been observed. The major dilemma that design, engineering, product development, purchase, supply chain teams of OEMs and sales, product / solution development teams of supply chain partners faces is selection of strategy and approach during slowdown of sector - (a) reactive, most common approach to meet immediate needs and to cut everything from budget, inventory, developments, new ideas, training, people, to price or (b) proactive, actions for future goals and competitive advantage.

Common actions as a result of reactive approaches often could be (1) stop developing an alternate supplier (2) stop or hold experimentation or field trials of new / innovative alternate systems (3) reduce or no capital investment like plant, machinery or systems (4) reduce or no training (5) No or hold new ideas & solutions (6) more focus on sourcing price reduction (7) longer credit period for supplied components (8) reduced or no sharing of real business plans, manufacturing forecasts in the chain (9) reduced headcount etc. Though some of these actions might help to reduce the cost and improve profit or increase chances of short term survival, it certainly impacts competitive edge of the OEMs and supply chain partners and their future goals.

In fact, slowdown period can be used by wind turbine OEMs and key component suppliers and prospective suppliers to improve their competitive position of themselves and of entire chain to prepare for better future by taking proactive steps.

Following strategies and actions (based on real-life success stories of successfully navigating during difficult period) OEMs, supply chain partners & prospective suppliers can try to implement for win-win outcome.

1. Supply chain risk management - keep minimum two alternatives of all key components:

Single sourcing, though brings few operational benefits of bargain power, less administrative work, always has an inherent risk of continuity of supply, if, something happen to supplier like takeover of supplier by OEM's competitor or supplier has financial problems, it is always difficult for OEM to be sure that they are using the best system to keep their firm competitive, longer development time of alternate component, hence not easy to switch to other source immediately, other suppliers may lose interest in trying to offer solutions when they see single source situation is likely to persist. To reduce supply chain vulnerability and ensure supply chain continuity to avoid any possible interruption of normal business and thereby profitability in future - two suppliers of all key components are must. It will be easy to develop alternate supplier when industry is passing through slowdown face. Prospective supplier's focus on developing more client accounts increases and can support OEMs very quickly. For example, Blades, Gearbox, Generator, Control System are often single source components. Using two key components from prototype can also reduce turbine re-certification at later date when OEM want to introduce second source.

2. Review of "make or buy" and redesign supply chain quickly:

During growth it is very common for OEMs to follow backward integration strategy of key components and follow "Make" strategy. However, in slowdown this investment of plants, machinery, employees and other assets turns to liability due to under utilization. Landed cost of "make" go up substantially in comparison to "buy" same components from established players. Periodic review of landed cost of "make" v/s "buy" of the components which can be sourced from established vendors help to control cost. During slowdown plants of these established companies are underutilized. Hence, it could be a win-win for both if OEMs changes strategy from "Make" to "Buy". For example, Generator, Control Panels, Power Converters, Transformers, Tubular Towers etc. are components which can be sourced from established players. At times, OEMs are responsible in creating over capacity of sub-components by adding new plant infrastructure looking at demand supply gap of key components during growth phase. However, these decisions will result in to over capacity in decline phase of the market. Manufacturing cost of key components will be higher than sourcing cost of same equipment from supplier, if plants are underutilized and other operational costs are very high. Better long term "buy" strategy can help OEM to divest underutilized or un-utilized assets, free cash for operation, relocate human resources in other value added tasks, and reduce purchase price of those key components.

3. Engage prospective supplier, implement new ideas, experiment and conduct field trials:

OEMs should engage prospective supplier in developing prototypes, asking own as well as supplier teams for new product / solutions ideas and conduct as many field trials as they can. These can give valuable insight about what works best and can also validate design & engineering goals. OEMs and suppliers be ready with final product / solutions / component which can be implemented in series in future. For example, integrating condition monitoring system or Laser based wind speed monitoring system in wind turbine could enlighten OEMs with new knowledge and open-up improvement opportunities.

4. Focus on life cycle costing:

To meet cost reduction targets, at times purchase team focuses more on equipment purchase price and not on life cycle cost. Wind turbine key component must have 20+ years of life and also has operation, maintenance, repair, replacement and upkeep cost which must be added to compare prices of two similar products. Life cycle cost calculations & sourcing agreement based on it help OEMs and suppliers to develop & enhance long term relationship.

5. Seek more Value addition in products / services:

Its easy to ask suppliers to reduce price or give more discount in slowdown, however, this adds pressure on supplier's operating margins and also their ability to serve OEMs better. Instead of only cost reduction, an alternative approach would be to ask for more value addition in products or services, ask for more features, ask for technology upgrade, more add-on's with no extra cost etc. which will help OEMs to add more value in their turbines. This helps suppliers to also think different ideas and come out with innovative solutions to remain ahead of their competitors and better utilization of supplier's human resources. For example OEM can obtain close loop turbine optimization software tool which can used for turbine software optimization in short time from prototype to series production.

6. Access best practices and products from across the globe:

Multiple sources bring know-how, does & don'ts and different experiences from across the globe, which can benefit to OEMs. If OEMs continue single sourcing, difficult to be sure, whether learning from from other's success & failure have been taken care and shorten learning curve. Best practices followed by other OEMs can also help to improve systems, processes and performance which can be accessed by associating with multiple vendors. For example, lean supply chain, new product development, warehouse management, "make or buy", etc. management practices has proved beneficial to many other industry sectors which can also be beneficial to OEMs.

7. Value analysis/Value engineering to optimize design:

Slowdown reduces day to operational work load of few human resources. Instead of straight decision of cutting manpower through lay-offs, few people can be assigned projects about value analysis / value engineering. This focused improvement efforts will help in cost reduction, improve customer perceived quality and performance. Suppliers and specialist can also be taken on board in cross functional team to analyze value characteristics deemed most important from internal and external customer point of view, to reduce costs, maintain or improve performance and quality requirements. For example, improved control algorithm in control system can actually reduce loads on wind turbine turbine and design of tower can be optimized to reduced tower cost by few %. One small value analysis / value engineering project can bring millions of € benefits to OEMs on recurring basis.

8. Share pain areas, implement new solutions to optimize performance:

Slowdown period for OEMs is often a slowdown for supply chain partners and prospective suppliers. To solve pain areas of OEMs, existing or prospective suppliers in this period can allocate specialist engineers and solve pain areas by suggesting new solutions or improvements. For suppliers, it can become an opportunity to additional scope of supply or services and help strengthening relationship with OEMs. For OEMs problem areas can be resolved in turbines already in operation, these design changes can also be implemented in series production at present or future. In growth phases of market, neither OEMs nor suppliers will have enough resources or time to work on additional problem solving.

9. Train people:

Slowdown period could be blessing in disguise. Employees can be spared from operational duties for new knowledge through training and other learning opportunities. Laying off people who were developed by OEMs spending millions of € in the past can only benefit competitors of OEMs, as they get employable and ready resources. OEMs should use this period to train people on new technologies, concepts, new methods, products, solutions, integration of other products & systems in wind turbines for performance improvement, and cost reduction. Training can also help in new idea generation very essential for process and product innovation.

It's right time to challenge the limits, take initiatives, experiment more, engage supply chain partners and prospective suppliers and service providers for sustainable competitive advantage and maintaining leadership among competitors. Change the approach in slowdown phase of the market.

Rethinking in-sourcing & backward integration strategy in Wind turbine supply chain

noreply@blogger.com (KgGuruji) — Wed, 24 Oct 2012 10:07:00 +0000

Installed capacity of Global wind power grew at 26.9% CAGR during year 2000 (17400 MW to 2011 (238000 MW). The wind turbine manufacturing business has grown from a “cottage industry,” with hand-built subsystems, to sales warranting large-scale production operations. Wind Turbine Generator (WTG) manufacturers faced shortage of key components. WTG supply chain tier-1 partners were not able to meet market demands due to shortage of manufacturing capacity. New WTG manufacturers sourced technology licence to enter in to the business. Minimum local content rule in few countries forced company to open new factories in those countries even though they had surplus manufacturing capacity. WTG manufacturers and key component suppliers all spotted an opportunity to expand their manufacturing capacity (Probably with an assumption that CAGR will continue in future as well).

By End of year 2009, new capacity of wind turbine manufacturers and key component suppliers became operational. The sector has capacity of approximately 80000 MW a year against 2011 installation of 40000 MW. Due to several challenges like turbulent economy, difficulty in getting project finance for wind projects, infrastructure (grid) challenges, withdrawl of / change in financial support / tariff in few countries etc. lead to a delay new projects.

Between 2001-2007, WTG manufacturers and key component suppliers adopted in-sourcing, backward integration, acquisition of component suppliers, capacity expansion as their supply chain strategy to achieve supply chain security, anticipation of future business growth and maximizing their shareholder's returns. However, overcapacity of WTG and key components impacted profit & market share of these players. WTG manufacturers and component suppliers experienced high under utilization, shifted their focus from core wind power development to wasting resourcing in highly competitive manufacturing business of components, blockage of their cash (Capex) in setting-up plant & machinery, buying lands & setting-up infrastructure, under utilization of manpower, increased overheads, piling up of inventories of raw material & key components, higher interest payments etc. has impacted balance sheet and P & L of WTG manufacturers & key component suppliers.

Following actions can help WTG manufacturers and their supply chain partners going forward until market demand pick-up again and demand crosses supply.

1. Focus of core competence: WTG manufacturer must focus on their core competence of identifying site with good wind potential, design & development of right product (turbines) that can maximize the investor returns, higher reliability, reduction in cost per kWH, project & services, improvements & optimization of turbine. This will require smaller teams, it can increases utilization of all resources to make firm more competitive and differentiate from other competitors.

2. Outsourcing: Adopt outsourcing as supply chain strategy for key components and other non core functions/activities. Outsource key components to tier-1 suppliers & supply chain partners. This will help reducing under utilization of staff, reduce overheads, better optional cost control due to fixed price purchase from vendor, offer staffing / manufacturing capacity flexibility to take care cyclic / seasonal variation in demand and help better continuity & risk management. Increase of raw material cost % due to outsourcing (compared to in-sourcing) can be offset by prices offered by vendors due to better scale of economies, low overheads and expertise. (e.g. All types of industrial control panels and power converters can be outsourced to experience system integrator like H & F Industrial Control Panel, Germany (www.hf-icp.com) who can deliver series deliveries anywhere in the world that matches WTG manufacturer's TAKT Time/schedule).

3. Product variants & design optimization: Reduce number of product variants, standardize bill of material parts as much as one can, optimize turbine design by value analysis & value engineering, apply innovative ideas that can dramatically improve performance and reduce cost per kWH. (e.g. better control system can reduce loads on turbine that can allow lighter tubular tower and there by reducing turbine price).

4. Supply Chain collaboration: Collaborate with key component suppliers through long term sourcing agreements, reduce number of suppliers, communicate information in real time, increase transparency in entire supply chain by sharing information and constraints, create an environment of higher trust & confidence. It is really time consuming and painful to develop alternate supplier and also pass through turbine certification / re certification / amendment in certification again & again. If risks and rewards are shared equally, it will be win-win situation.

5. Divest Assets: WTG manufacturers can divest manufacturing infrastructure, plant & machinery and people engaged in components manufacturing business.This will reduce sizable manpower overheads due to under utilization, releases liquid cash to fund core business functions and help increase focus on key strategic areas which will make company more competitive.

6. Improve Inventory Turns: Companies with backward integration or in-sourcing often operates with very low inventory turnover. It also increases risk of inventories becoming slow moving & non-moving inventories due to changes in market demand. High inventory reduces supply chain efficiency, block liquid cash, increases interest cost on borrowings and dent profits. Outsourcing improves inventory turns and there by profits.

7. Rightsizing Manpower: In sourcing or backward integration require huge manpower for manufacturing of sub components. WTG manufacturer can manage 2000 MW of business with less than 1000 people on board if outsourcing strategy is followed for manufacturing sub components, where as for same business size if company following in-sourcing strategy by manufacturing all key components in house might require more than 5000 people. Hence, Under utilization of manpower and manufacturing capacity increases cost and reduces profit.

Outsourcing can transform fortune of WTG manufacturer in wind sector's overcapacity situation.

Time to re-look on supply chain & manufacturing strategies for wind turbine manufacturers

noreply@blogger.com (KgGuruji) — Sat, 24 Oct 2009 09:16:00 +0000

Till Mar 2008 wind energy sector was sellers market. Huge shortfall in capacity of key components was a pressing supply chain security question wind turbine manufacturers were facing. This problem was seen as an opportunity and many turbine manufacturers have ventured in to backward integration manufacuring of components. This action has lead few of them to a conflicting situation. One end actions had given security of future supply chain needs and on other side too much attention, manpower, focus and liquidity got shifted to manage those backward integration projects (which might be of non core competence areas) from core wind areas. Earlier most of the component manufacturing was outcoursed to contract manufacturers. Contract manufacturers have expanded their capacity. Wind turbine manufacturers have created new capacities and either reduced or stopped procuring from contract manufacturers. OEMs turned to competitors for contract manufacturers. End result: Contract manufacturers are in deep trouble. Wind turbine manufacturers are also in trouble as excessive funds, people and foucs is diverted to non core areas. Since corporate overahead of wind turbine manufacturers are higher than contract manufacturers, overall current manufacturing cost might be actually higher than yesterday's procurement price of thos key components. Leading to additional financial loss. On top of these, demand has fluctuated leading to huge over capacity of key components. Buyers are at an advantage rightnow. It's wake-up call to re-look on supply chain and manufacturing strategies of wind turbine manufacturers (OEMs) and their supply chain partners (contract manufacturers). Several actions are possible to go back to win win situation of yesteryears in wind energy supply chain.