Comprehensive Deep Dive Redirects Engineering, Design & Manufacturing Costs
The world’s leading wind manufacturing companies (OEMs) lost a combined €5 billion last year, for a variety of reasons. Despite strong political desires and rosy market projections, economic realities are going to remain tight for at least the next year or two, if not longer. Large or small, companies need to truly and continuously optimize and systematically improve efficiency so you can survive to operate another day. Ventoco has been there and done that, in some cases for the world’s leading renewable companies.
Operations, Personnel, Materials & Supply-Chain: Stop-Cost Requires Wide-Ranging Review
Four of world’s top five wind turbine manufacturing companies – GE Wind, Nordex Acciona, Siemens Gamesa and Vestas – lost a combined €5 billion in 2022. That, despite many in the public sector and the industry touting a highly optimistic outlook for renewable energy development and generation over the next years.
There are many reasons for these giants’ profitability challenges, such as supply-chain bottlenecks and rising costs, slow permitting processes, uncertainty regarding application of government regulations, lack of confidence in the longevity of incentives for renewables and the war in Ukraine.
Another common cause that challenges most companies, whether we’re one of the bigs or a relatively small component or equipment manufacturer, construction company, developer or supply-chain partner, is what seems to be an ongoing uncertainly and variability in cost.
Most companies, if not all, can benefit from an unbiased and deep review of processes, people, engineering and designs, and use of materials that all is wrapped into the total cost of goods sold. And sometimes doing it well requires outside assistance.
When Times Get Tough
One of Ventoco’s major engagements in 2011 and 2012 was a stop-cost project for a major global OEM in renewables.
Our client needed to get a handle on some of its material and supply-chain costs, and quickly. Its leaders gave our president, Lars Moller, three weeks to commence an initial investigation, recommend an approach and a plan of attack, decide on a list of required team members, and then lead the program through a 12-month implementation.
Once the customer’s executives approved the plan, Moller pulled together a team of six of the most qualified professionals in the industry to look at the most impactful aspects causing an unexpectedly high product cost. The cost was significantly off the mark compared to the business and investment justification for launching the product for global sales and production in the first place.
During challenging economic times, most companies do two things: lay off employees and squeeze their suppliers. To those supply-chain partners they say, “This is your price, take it or leave it. If you don’t, we’ll cancel our contract or volumes.”
First, layoffs. Few of us like them, but they’re sometimes necessary for companies that want to survive challenging economic periods. We helped our client with the onerous task of identifying relevant alternative organizational changes including certain positions that could be cut or combined, and with their own assessments and inputs from Ventoco and others, the company released several thousand people from its global network.
In terms of suppliers, we believe the old cliché applies – don’t bite the hand that feeds you. Regardless of what industry or sector we’re in, renewable or otherwise, our suppliers make our business possible; we need to treat them right in times of abundance and scarcity alike.
A third option that companies can and should pursue is to figure out what is actually causing higher costs and greater spend. This is much more difficult, but in our opinion should be done before and, whenever possible, rather than cutting positions or squeezing suppliers.
So that’s what we did.
An Around-the-World Review
When we started looking deeply at our client’s product cost models, designs and supply-chain practices and calibration, one thing stood out: it was selling one of its newly launched product lines at a significant negative variance to their projections. It was just as the executives had guessed, but now we had evidence, data and a plan to remedy the underlying issues.
The engineering design team, and for that matter the company overall, took great pride in this particular component, and rightly so. It incorporated impressive innovations and technologically was more advanced than alternatives on the market. However, it came with significant material costs that, as it turned out, customers were either not able or willing to pay for, especially when they could get less advanced but serviceable and sufficiently functional components from competitors. Our client had been forced to reduce the sales price as a result but had not scaled back the level of advanced technology and related material costs.
Upon further examination, we also discovered that the materials our client needed to manufacture the component while meeting local-content requirements in various global markets were in some cases not even available. Not only were the costs above what the market would bear, but the materials required were what we call “unattainium.” That possibly also meant our client could be in danger of being in breach of contract with multiple customers; it simply could not comply with local content rules.
It’s great to create something that is near perfection, but if you can’t get what you need to produce it and no one could afford it, anyway, it’s likely to drive the company out of business.
After convincing our client this was the case, the Ventoco and project team members worked with the engineers to redesign some of these components with true-to-customer requirements and internal financial projections on direct costs, and with local material accessibility on the table. The original design stood, ready for a future when its advanced capabilities would be needed or materials became available and less costly, but in the meantime we scaled it back to a level that customers needed and were willing to pay for, and that aligned with the broader supply chain to be assured of delivery and cost control.
It is not an overstatement to say the stop-cost project helped turn the company’s prospects around. It gave hope and a method to redirect our client’s focus on more transparent product- and program designs that also were aligned with their supply chain, and in some cases, local content requirements.
The company reached design and materials cost improvement goal of €400 million for these particular newly launched products less than 16 months after launching them, and end customers received a product they wanted that also complied with the in-country materials being used, as committed by all parties involved.
The current economic and geopolitical global situations are once again threatening profitability outlooks for companies like this client, and for many companies that are much smaller and less established. Ventoco has the depth and hands-on experience to help.
* Note – Due to nondisclosure agreements, we are unable to reveal this client’s identity.