Case Study of Wind Turbine Sourcing: Manufacturer ... - IEEE Xplore

2012 IEEE Electrical Power and Energy Conference

Case Study of Wind Turbine Sourcing: Manufacturer Selection Criteria Jari Sarja, and Veikko Halonen

Abstract—Selection of the wind turbine manufacturer is naturally an important issue for wind energy companies when they build new wind farms. This paper describes the main factors by which wind energy companies choose their turbine manufacturers in a selected case region in Finland. The study was conducted using semi-structured interviews, for which the experts and decision makers of selected wind energy companies formed the focus group. During the analysis of the results it became clear that it was not possible to form a detailed and prioritized list of selection criteria, but still some general themes emerged. The main theme was the manufacturer and product reliability, and then the production volume, cost factors, availability factors, and the organization of maintenance in this order. Interestingly the arctic conditions of the selected case region did not play any significant role.

average of 20 per cent of the EU final energy consumption [3]. On this basis the Finnish Government has drawn up a national long-term climate and energy strategy [4]. Raahe is a medium-sized Finnish town on the western coast of Northern Finland (64°41'N, 24°28'E). A significant amount of Finland's wind power capacity is produced in Raahe and in its neighboring areas, approximately 20 per cent. In addition, around twenty new wind farms have been planned to this region. The location of the region is shown in Fig. 1. The region's existing wind farms are operated by two different wind power companies, one of which is also involved in the future projects. In addition to this company there are nine other wind power companies involved in the future projects.

Index Terms—business, supply chain management, wind energy

I. INTRODUCTION

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HE purpose of this study was to determine the factors by which wind power companies choose their wind turbine manufacturers. The study was qualitative, and the empirical data were collected by interviewing the wind power company personnel involved in the decision-making. At present, wind power capacity in Finland is small in comparison with other EU countries. 130 wind turbines in late 2010 yielded less than 200 MW of capacity, equivalent to about 0.3 percent of Finland's electricity consumption (cf. Denmark 20%) [1]. Geographically, Finland is a good place for wind power production because of the long coastal area, and wind power can also be produced during the long winter period. Construction of wind power production capacity is increasing in Finland. At present there are about 150 wind farm projects, of which about twenty are offshore projects [2]. The strong wind power construction boom is guided by the European Union’s climate and energy package which was approved in December 2008. According to this package all member states have an obligation to reduce greenhouse gas emissions by 20 percent in 2020 compared to 1990 levels, and to increase use of renewable energy sources accounted for an

The research material for this work was collected in “Green Technology” project supported in part by the European Regional Development Fund (ERDF) of the European Union. Jari Sarja is with Raahe Unit, University of Oulu, Raahe, Finland (e-mail: [email protected]).

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Fig. 1. Location of the case region. The interest to find out the selection criteria originates, for example from the case region's remote location, large seasonal climate changes, and geographically dispersed suppliers. The seasonal average temperature of the case region varies from below 0°C in winter to above 10°C in summer. In winter the average thickness of snow coverage is about 60-90 cm [5]. Within each wind energy farm there are or will be wind turbines manufactured by one or more companies. At present, the wind turbine manufacturers’ market shares in Finland are (calculated from wind energy capacity): WinWinD 37%, Siemens 35%1, Enercon 14%, Vestas 9%2, Veikko Halonen is with Raahe Unit, University of Oulu, Raahe Finland (e-mail: [email protected]). 1 Due to an acquisition this number includes also the market share of Bonus 2 Due to acquisitions this number includes the market shares of NEGMigon, Nordtank, and Windworld

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Harakosan 3% and Nordex 2% [1] In this paper we first describe the previous research on the total investment of wind farms and sourcing activities. Then we show the results of the present study. Finally we give conclusions and suggestions for further research. II. LITERATURE REVIEW To our knowledge, the wind turbine manufacturer selection criteria have not been scientifically studied extensively from the wind power companies' point of view. Lewis [6] has studied the development of the national industry from the perspective of Chinese, Indian and South Korean wind turbine manufacturers. There is also a range of commercial reports of market shares of wind turbine suppliers [7]. On the other hand, plenty of research can be found in the industrial supply chain management and strategies. For example, Weber, Current, and Benton [8] have studied the corporate procurement decisions from the traditional production management point of view. Boer, Labro and Morlacchi [9] have extensively studied the criteria for the selection of suppliers on the basis of previous research, and Araz and Ozkarahan [10] from the point of view of suppliers’ capability classification. The theory of material and component sourcing can be difficult to match with the wind turbine sourcing decisions, as it is a completely different type of investment with a long payback period. Lee, Chen and Kang [11], and H. Kang, Hung, Pearn, M. Lee and Kang [12] have studied the strategic choice made by the whole wind farm investment. Their research is based on the traditional AHP (Analytical Hierarchy Process) method for decision making combined with BOCR analysis (Benefits, Opportunities, Costs, Risks), and they cover a wide range of variables for planning the wind farm and doing the capability assessment starting from wind conditions and ending to political factors, wind turbine manufacturers, and land acquisition. The researchers and their evaluation team have chosen sub-criteria for each criterion based on the available scientific literature and practical experience. For wind turbine manufacturers the sub-criteria are: design and development, manufacturing, and installation and maintenance.

limit their responses to the case region. The selection criteria revealed in the interviews were thematized i.e. grouped into larger entities. Thematization means that the research data are examined to find characteristics that are common to several interviewees' responses [14, 15]. During the analysis became clear that the various interviewees have dealt with the individual criteria from different points of view. For example, the criterion of "tower height" is a technical requirement, which can be connected to production volume or total costs. During the research also revealed that the different criteria given by the interviewees cannot be reliably scored because of the interviewees’ different points of view, trade secrets or due to different levels of their answers (detailed - general). Natural business related connections occurred between the themes. For example, reliability, availability of spare parts and speed of maintenance were placed under different themes, but they all affect the volume of production, and through that to the financial goals. Fig. 2 shows the connections between the various themes. It is clear that many of the criteria could have been placed under several themes, and that the themes overlap strongly. Based on the number of selection criteria mentioned by the interviewees the themes could be ordered, as well as individual criteria within a theme. On the contrary, the criteria belonging to different themes could not be ordered, because in this study there is no absolute measure of the importance of an individual criterion.

III. RESEARCH METHOD Originally the target group for the present study was ten wind energy companies involved in the new wind farm projects planned in the case region. We conducted the study as a qualitative research by interviewing the technical experts and decision makers of the wind energy companies. The interviews were semi-structured [13], that is, the questions were prepared in advance, but the interviewees could answer the questions freely. All in all, seven representatives out of ten possible took part in the interviews conducted early in 2012. Interviewees were asked to mention the most important factors that drive their selection of wind turbine manufacturers in the future projects in the case region. After this, the interviewees were asked to rank these factors by their relative importance. If necessary, the discussion was guided using additional questions. The interviewees were also directed to

Fig. 2. Connections between the themes. IV. SELECTION CRITERIA Six themes were revealed in this study: reliability, production volume, cost factors, availability factors, organization of maintenance, and others. In Fig. 3 the relative importance between these themes is illustrated.

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Fig. 3. Relative importance of the themes. A. Reliability Most of the wind turbine manufacturer selection criteria mentioned by the interviewees where related to the operational reliability of wind turbines. In all, 36 % of the selection criteria that rose during the interviews where related to reliability. Within the reliability theme most of the interviewees clearly emphasized the supplier's existing reputation. The supplier's reputation in this context does not refer to production statistics, but to the practices, services and supplier's overall reputation as a company. The supplier's reputation seemed to act as a kind of a threshold to start the negotiations for purchase. If the supplier's reputation was not good enough, no negotiations with the supplier even started. The image of the supplier's reputation was created from an interviewee’s own past experiences and by sharing information with other companies. One interviewee talked about the pricing of risk, i.e. how they compare the price of the product and the compensation of the manufacturer's reputation. The supplier's reputation in this context also includes the concepts of the supplier's credibility, recognition, and background factors and financial situation. "... now begins gradually to stand out from this how credible the whole package is, or how large the parent company is, and that it has activities also after tens of years, it is absolutely a must! " "... must be a reliable firm, it must have a good track record and a lot of mills operating under different conditions with great success." "... and then of course a very important factor for us is that we have previous experience of that mill type and its manufacturer, how the co-operation has proceeded, whether for example, there has been some problems in service in the past, long delivery times, long down time due to the fact that one has not obtained field technicians or spare parts quickly enough in place ... that is that how our mutual co-operation and communication have proceeded in the past." Within the reliability theme the second most common issues appeared to be the supplier's location and warranty

issues. Although, the supplier's location within the reliability theme emerged to be one of the most important selection criteria, the supplier's country of origin was not considered to be general concern with the reliability of the product. Instead, the fact that the supplier's factory or a representative was near considered improving the reliability by a rapid solution to possible problems and by getting help. As a concept, the supplier's location includes also a domesticity. One interviewee told the domesticity itself to be one of the manufacturer selection criteria, and another interviewee told happily choosing a domestic alternative, if it is competitive with other criteria. Within the reliability theme warranty issues were given the same emphasis as the supplier's location. The warranty length and coverage provided by the supplier, and especially the financially calculable supplier's availability factor have a clear importance of the customer's purchasing decision (availability factor is the percentage of time the turbines are capable of operating in a given time period). Third highest number of mentions within the reliability theme got the following two criteria: production statistics and track record, and suitability for arctic conditions and resistance to cold. Many interviewees told they acquire information about product reliability by examining the public production statistics. Two interviewees mentioned the product's suitability for the arctic conditions and resistance to cold, which are essentially related to the northern location of the case region. One of those interviewed stressed the legal aspects of the reliability factors by highlighting the sufficient documentation of the agreed terms. B. Production Volume The production volume of a wind turbine got the second highest number of mentions. From all the emerged selection criteria 23% were associated with the turbine’s energy production volume. Production volume in this context means the maximal volume of the selected wind turbine's energy production. Tower heights and blade lengths provided by the manufacturer are the most important factors affecting the volume of the production. More than half of the interviewees mentioned these facts. They belong essentially together since each interviewee who mentioned one of these mentioned also the other, i.e. both, the tower height and blade length were mentioned together or not at all. The tower height and blade length are key factors in the case area. Finland's relatively low windiness, flat shapes of the land and forests cause the need for long bladed turbines. "... and the suitability of the technology, that is, how it is rated for the power plant type in relation to the wind conditions of the location, the tower height, rotor (propeller) diameter relative to generator power, and so forth from within."

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"... Because we are in Finland and here we have much lower windiness than in the countries such as Germany or Sweden or Denmark, so we have to go a lot higher and we need to get higher towers and not all manufacturers have those. And while we are higher we also want to have bigger wings (blades) so that could get more energy. " Wind turbine performance rose to the second largest criterion under the production volume theme. Performance was examined from two perspectives; the power curve (wind speed at pole height vs. power produced by the wind turbine) as well as production unit's (kWh or MWh) price. Three interviewees indicated an interest in gearless options due to higher efficiency, but emphasized that it is not an important selection criterion. It appears that the gearless alternatives are of interest and their development is observed. Nevertheless, gearlessness is not an important criterion, because there are limited amount of manufacturers, and because their purchase prices are higher than geared ones. C. Cost Factors As in industrial sourcing in general, price and cost factors are not the most important supplier selection criteria. For example, Overby and Servais state in their wide literature review, that quality and relationships between firms are more important supplier selection criteria than price [16]. The third highest number of selection criteria mentioned by the interviewees in the present study was related to the cost theme. From all selection criteria that came up 17% where associated with various components of costs. The total cost was the most common cost factor. The total cost in this context means the plant procurement costs including also the infrastructure works in the location of the plant (e.g. earthmoving, tower foundations, high voltage substations, etc.). The interviewees had limited the total cost in different ways. For example, one group of interviewees counted foundation costs in the total cost, while others included the total cost of the operation-term costs such as maintenance costs. Due to different methods of calculating the total cost we consider it here only as a concept without breaking down into smaller parts. "... then come these brutally commercial factors, like the plant price, then the price of the required infrastructure - even it has differences depending on the plant model - and then there is the price of maintenance contract provided by the manufacture." "... the essential part of the cost-effectiveness is that what are the anticipated operating and maintenance costs over the long term." Turbine’s price and offered electrical grid technology solutions, i.e. the infrastructure were mentioned second most often within the cost factors theme. It can be concluded that, although the wind turbine is certainly the largest single investment in the establishment of wind farms, the total cost is

the sum of many factors. Only two interviewees mentioned the price of the turbine to affect the acquisition decision. Moreover, two interviewees mentioned the suitability of the offered electrical grid technology solutions to the local system requirements as a cost factor. The operation and maintenance were mentioned only once, so their financial significance is not the most important manufacturer selection criteria. D. Availability Factors Fourth most mentioned manufacturer selection criteria were related to the availability factors. From all the emerged selection criteria 13% were associated with the availability theme. Inside the availability theme the availability of desired type of power plant (for example, onshore / offshore, the desired output class), the rapid availability of spare parts and the power plant delivery time were mentioned relatively equally. E. Organization of Maintenance Fifth most mentioned selection criteria considered the organization of maintenance, about eight per cent. Interviewees had clearly two different approaches to address the issue of maintenance. Some said all the manufacturers having the major market share have already a maintenance organization in Finland (their own or purchased), and as such it comes as a given factor. Still others emphasized the formation of the maintenance organization. The difference in the approaches may be due to, for example, whether a wind energy company has already operated in the past, or whether the company is just starting their first project. Another reason may be that the selected turbine manufacturer is new or old player in the country. Regardless of the approach the ultimate motive of the interviewees was to be certain to get the maintenance as quickly as possible when needed. F. Others In addition, the study revealed two distinct factors, which we feel, cannot be placed directly in the above mentioned themes, but deserve to be considered separately. These two factors represented four per cent from all the criteria. The first of these is the R & D cooperation between firms. R & D cooperation may not be so self-evident criterion for selection, that it is not widely mentioned in the interviews. The interviewee's point of view this was the activity of the manufacturer and direct cooperation with the design direction of third parties, such as the electricity grid companies, contractors and authorities. A point worth noting is that only one interviewee mentioned the noise and safety aspects, but he did not mention it as an actual selection criterion, but rather a matter which will be monitored for the future. These aspects are related to the blade heating option which is provided by some manufacturers. The blade heating may be relevant because of the case area's winter-time and population density circumstances; there is no ice that would come off from the heated blades, and the noise remains at the planned level. In

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reliability wise the blade heating is not considered necessary in the case area. V. DISCUSSION AND CONCLUSIONS Interviewees' answers differed somewhat from each other, for example, due to different business models of the companies. Some of the companies in this study were purely energy companies that invest in to increase their current energy production. Some energy companies had been already in the wind energy production business for a longer period, while others were just beginners. A small number of companies again were an engineering type of operators whose purpose is to manage only the construction project, and leave the actual production to an appropriate energy company. Due to the different perspectives and approaches of the responses the answers were organized in themes. In this way the diverse set of selection criteria was possible to handle and prioritize. We arranged the themes to an order depending on the number of appropriate criteria falling into them. Within a given theme the different criteria could be ordered depending on how many of the interviewees mentioned it. In contrast to this, the importance of two criteria belonging to different themes cannot be compared. For example, if three interviewees mentioned the gearlessness being interesting solution (with reference to production volume), and two interviewees referred to the production statistics (with reference to reliability), it is not possible to conclude that gearlessness is more important selection criterion than the production statistics. In its various forms the reliability found to be the most important theme of the selection criteria. Perhaps a little surprisingly, the interviewees considered the supplier's reliability and solvency of a company, its way to collaborate and solve problems more important than the reliability of the product itself. This suggests that the client companies prefer to buy [the "low-risk"] products from suppliers that they deem to be reliable, than to buy the ["risk-free"] products from companies, which they rely less. Companies, therefore, in a way value the risk, and give more weight to the supplier's ability to react if a problem occurs in the project or production phase. The production volume was considered from two perspectives. When talking from the perspective of the turbine’s output power technical issues came out, especially high towers and large diameters of the propellers needed in the case area. Yet, the unit price of produced energy also came out. The criteria, which were associated with various costs, emerged only as the third most important theme. This is well in line with the outcomes of the investigations considering other industrial sectors. Across studies the order of the most important selection criteria will vary slightly, but quite typically the quality has been the number one criterion. One very common order is quality - availability - price. In the present study, the order was quality (reliability) characteristics of the product (production volume) - price (total cost). The majority of interviewees stressed the total cost

instead of just the price of the turbine. Different interviewees limited the concept of the total cost in a different way. The other themes that came out were the availability factors (availability of turbine type, delivery time and availability of spare parts), the organization of the maintenance (mainly the speed of service) and other factors like the supplier’s service level during the project and the noise and safety factors of the turbine. The noise level of turbines could have been expected to be more important because of the public debate that had been going on in the case area. All in all, the ordering of the criterion themes revealed nothing that could not be expected. It could be summed up like this: "Investors want to obtain from a reliable partner the products that meet the specifications of the local needs such that the total project costs are kept to reasonable levels, deliveries are on time and service is fast." This order of the themes is more or less in line with, for example the model of Lye and Hamilton [17] for the importance of the supplier selection criteria: product quality, mutual trust and awareness, reliable delivery, accountability in problems, and long-term relationships. In interpreting these results one must also note that in the investigation we requested of the most important selection criteria. So there is certainly a whole range of criteria that did not come out in the study, and also all the emerged criteria are important. A challenge in this study proved to be the vaguely formed themes, as well as their inter-linkages and overlaps. These elements are affected by the previously mentioned differences in the interviewees' point of view, but also the differences of the definitions. Many of the criteria would have been generally merged into several themes, but we tried to place them depending on the context in which the interviewee had used the concept. Moreover, the relationships between the themes are ambiguous. For example, two main themes, the reliability and the production volume, are not separate entities but the reliability is essentially linked to the production volume. Consequently, each criterion that was placed inside the reliability theme could have been at least loosely connected directly to the production volume. Limiting the number of themes, however, does not give interpretable answers to our research problem. The motivation for the present study came from the fact that a better knowledge of the selection criteria can help turbine manufacturers in understanding customer needs and wind energy companies to compare their own selection criteria to the general criteria of the business. We propose that in further studies the themes should be limited in advance, and one should seek and organize more specific selection criteria within a given theme. Also, it could be interesting to see if the selection criteria differ in wind power projects, for example, which are located in climatically different locations. VI. ACKNOWLEDGMENT The authors are very grateful to Technical Manager Pauli Maaninka about his expert help during the course of this work.

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VII. REFERENCES [1] [2]

[3]

[4]

[5] [6] [7]

[8] [9] [10] [11] [12] [13] [14] [15] [16] [17]

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