Managing Asia s most complex supply chain ecosystem China Offshore Wind Power A white-paper on LLP / 4PL success in China Sponsored by Turnkey Group August 2015 1
About Turnkey Group Turnkey Group is a Hong Kong based consulting firm with offices in Asia and Europe. Turnkey Group delivers high quality, cost saving projects and solutions within 3 main areas: Logistics, Environmental Management & Reporting, and Supply Chain Process Solutions. Incorporating elements of software and consulting, their services identify unique opportunities to improve logistics networks, increase supply chain efficiency and optimize sustainability initiatives and decrease costs. Founded in 2006 by Tony Wines, Turnkey Group is the first ISO 14001:2004 certified consultancy firm in Hong Kong and has won multiple awards including: - HSBC living business order of merit award for environmental excellence - Supply Chain Asia best consulting partner finalist for 2010 www.turnkeygroup.net About Renewable Energy Solutions Renewable Energy Solutions is a consulting company covering the end-to-end supply chain for constituencies in the renewable energy industry with a special focus on wind energy. Our core consulting services include strategy crafting, M&A scan and deal origination, M&A project management, due diligence support, post-merger integration, business case creation, and detailed market intelligence. We pride ourselves in providing tailor-made strategic solutions and unique market insight for our clients. Renewable Energy Solutions is working together with a vast range of companies and organizations to understand and analyze the Chinese market for both wind energy in general as well as the shipping and logistics landscape for offshore wind in particular. We advise and support these different organizations with market research within the Chinese wind industry by analyzing the challenges, risks, and opportunities. Our goal is to assist our clients with targeting the Chinese market with the right entry strategy. www.re-sols.com 2
Contents 1.0 Executive summary 4 2.0 2.1 Introduction Challenging, but not impossible 5 5 3.0 3.1 3.2 Supply chain challenges during the start-up phase 6 6 6 4.0 Supplier Management: Local logistics providers vs global 3PL companies 7 4.1 4.2 7 8 5.0 Planning, IT Systems, and Evaluations 9 5.1 5.2 9 9 6.0 Market Intelligence 10 6.1 6.2 10 10 7.0 Conclusion 11 3
1.0 Executive summary Managing global supply chains is a daunting task for any firm or organization. This white paper reviews the role of Turnkey Group ( Turnkey ) serving as a lead logistics provider ( LLP ) or so-called fourth-party logistics ( 4PL ) partner of German Siemens, as the Siemens Wind Power ( SWP ) division wanted to establish a manufacturing footprint in China. Tasked with finding a suitable location in the greater Shanghai area instead of the area near Tianjin, Turnkey acted as SWP s LLP when it came to setting up this new manufacturing location in Lingang. In addition, Turnkey acted as a 4PL providing advice to SWP about when to contract global third party logistics ( 3PL ) providers in China and when to enter into direct contractual relationships with local providers of more basic supply chain service elements. Turnkey acted in a very collaborative manner and assisted both with practical resource support initiatives to support the immediate requirements of SWP consultative type assignments, specialized software development related to Wind Power procurement, stock management and assembly, and hands-on management where necessary. At the same time, the partnership between SWP and Turnkey was strategic in nature and yielded demonstrable and real savings to SWP as they realized their venture in China. It resulted in enabling them to partake in the emerging Chinese offshore wind market where SWP is today the world s de-facto market leader with a 2013 market share of in excess of 80% according to GWEC (2014). 4
2.0 Introduction Growth opportunities in China remain strong, and with the 12th Five Year Plan s ( FYP ) heavy focus on establishing environmental and sustainable manufacturing and energy sources, this signifies great potential for the offshore wind industry. China s 12th FYP running from 2011 through 2016 includes the initiative to reduce carbon intensity by 17% per unit of GDP by 2016, and to increase the use of non-fossil fuel energy sources by 11.4% as a total of country energy in the same time frame. This is a great opening for renewable energy sources step in and expand. While the potential is high, companies conducting business in China might discover that managing the supply chain there is complex and that China can be difficult to navigate. The country s immense geographic size, regional differences, complex legislation, and a situation where no one company can cover the entire end-to-end supply chain are factors that make for a challenging task. 2.1 Challenging, but not impossible When facing the complex supply chain environment in China, one solution is to employ an independent Lead Logistics Management company. An independent company can provide neutral management of your supply chain, help you to minimize your costs and maximize efficiency, while also acting as the liaison between manufacturer and supply chain. They can provide strategic and consultative support, and manage certain processes where your team might have gaps in operational expertise, for example possibly quality control or equipment inspection. That is just what SWP did in 2008. They were establishing a blade factory production unit in Lingang Industrial Park, to complement an already existing outsourced tower manufacturing unit in Lianyungang, managed by CS Wind, and Nacelle and offshore facilities that were incorporated in the Jiangsu and Shandong districts. SWP hired Turnkey as their dedicated LLP to help them develop an effective supply chain strategy, alongside the implementation of logistical solutions to assist SWP in executing a long term supply chain strategy. This white paper will discuss in detail how an independent Lead Logistics Management company, can support and benefit a wind energy company when entering the Chinese market and will provide specific examples from the SWP-Turnkey case study. 5
3.0 Supply chain challenges during the start-up phase Starting up a new factory requires a lot of planning, research and time there is crucial information that must be acquired in order to sort out the logistics of how your venture will run and operate and very importantly, also turn a profit. LLPs can help by fulfilling tasks such as: conducting water-depth studies and route surveys, reviewing government regulations, securing warehouse facilities, and performing cost evaluations. This can be expanded to undertaking a full mapping of processes that leads to the development of a company s supply chain architecture in a region. 3.1 : When SWP was establishing their blade factory production unit at Lingang Industrial Park (Lingang), Turnkey took on this role, and evaluated with both the Lingang Industrial Park authorities and SWP management to provide crucial information at this start-up phase. SWP expected vessels to berth at a dedicated site within Lingang which would allow blades to be loaded at a site shared with Shanghai Electric. To ensure the viability of this chosen site, reviews needed to be made concerning water depth, times and tide variances, productivity uptime due to the water depth variances, silting, and navigational processes for vessel owners to arrive at the port. Turnkey handled the collection of all this information, providing SWP with the results and any recommendations. Another important task that needed to be done was to conduct route surveys. It was crucial to ensure that there would be no obstacles or limitations that would prevent safe passage of SWP products moving from the factory to ports. Turnkey conducted these surveys, some of them covering areas of over 150-200 kilometers of movement. Government regulations pertaining to road and loading regulations for moving blades also needed to be reviewed, and this was again, handled by Turnkey, who then gave SWP recommendations for the types of vehicles that should be used to load the blades at the factory and transport them, based on trailer capability, regulation, surveyed routes, turning circles and loading access at the facility. Cost evaluations were performed, reviewing optimal solutions to save cost within the supply chain such as, comparing local logistics service providers vs. global 3PL solution providers, cost of licenses and permits to manage the operations at factory locations, and the return on investment (ROI) for a dedicated berth versus port operations managed by SIPG ports. 3.2 The initial start-up of a factory is a complex and time-consuming task and in China, this can become even more complicated due to the complex legislation, varying regulations from region to region, and the vast number of suppliers you need to manage. Employing a LLP to work with you can save your company a lot of time and money, as they perform these essential tasks with great care and attention to detail, providing you with data and informed recommendations along the way, resulting with a well-established logistics structure being in place before you even begin production. 6
4.0 Supplier Management: Local logistics providers vs global 3PL companies Your choice of suppliers is another large aspect of your supply chain, and the cost and quality can vary greatly between them. Large companies tend to use global 3PL s to manage their logistics pipelines, even when setting up factories in Asia. As many of the global players sub-contract to local providers, companies end up potentially pay higher than necessary prices for the price of their logistics operations by not managing the local suppliers directly. When working in China, European/American based Global 3PL s are likely to be the best choice in some function areas where local service providers lack experience, but other areas can often be done by local providers for far less cost. However, the research required to evaluate local providers, ensure they meet your standard operating procedures (SOP s) and provide quality logistics services at an optimum price, as compared to other global 3PL s, is a huge task to take on. Working with local suppliers can also mean working with more suppliers, making the management function of these companies substantially more complicated. A LLP can step in here, and act as a 4PL, reviewing the local based suppliers for you and then taking on the responsibility of managing the entire supplier network, including holding responsibility that suppliers meet and maintain your company s key performance indicators (KPI s) and SOP s. 4.1 In the example of SWP and Turnkey, this is exactly what Turnkey did as the LLP/4PL of SWP. SWP had traditionally provided framework agreements to use European based 3PL s to manage their logistics pipelines throughout Asia. This time working with Turnkey, through a detailed request for proposal (RFP) process, local supplier capabilities were reviewed and the cost differential for using locally based service providers was undertaken in order to compare their product offering and pricing to global providers. Turnkey reviewed opportunities where a direct relationship with a local provider could save in excess of 25% of SWP s cost of operations. In the end, services were split, with global 3PL s managing services they were better skilled for, such as tower global logistics, and stock equipment replenishment. In turn, Turnkey recommended that local providers rendering other services such as warehousing and local distribution services were selected where tasks were of lesser global importance to SWP. The result substantial savings for SWP in supplier costs. Services typically handled by 3PL s vs. local providers in the Chinese wind energy market 7
4.2 Choice of supplier can play a large role in your supply chain costs, and using locally based suppliers instead of the usual global 3PL services can be a huge area for cost savings but it also means a more complicated supplier management function. When working with a Lead Logistics Provider, the LLP can act as a 4PL, evaluating and securing relationships with local suppliers for you, and then also manage your entire supplier network and ensure that all operations are handled smoothly and to your company s standards. 8
5.0 Planning, IT Systems, and Evaluations With the constant goal of improving your bottom line and saving on supply chain costs, several factors are crucial: Planning Constant reviews and evaluations Improvement of your systems and processes 5.1 SWP s outsourced tower manufacturing unit in Lianyungang was using a system of Excel spreadsheets to manage their stock control - a system that was inconsistently managed and consistently failed to meet the necessary stock management standards. This factory, and other outsourced factories, was not maintaining equipment effectively which led to damage and a lack of quality control. Equipment was frequently lost or mis-located, resulting in millions of dollars of loss for SWP. To alleviate this problem, Turnkey developed an online equipment management software system, giving SWP control of their equipment visibility and allowing them to put effective quality control in place without investing their own personnel into the area. A dedicated Turnkey team and an IT infrastructure were adopted to manage the program within the factory. Approximately 10 million USD per annum were saved through the development of this IT system and others, allowing SWP to better track equipment at outsourced facilities. Planning and researching the location of your warehouses is another area where substantial costs savings can be found. SWP was paying millions of dollars in customs fines due to equipment not being registered or managed in free trade zone facilities. This is a cost that can and should, easily be avoided. 5.2 Detailed planning, ongoing evaluations, and process improvements can save a company large amounts of money in their supply chain. LLPs can manage this for you creating well-researched plans, implementing and managing new systems, and supplying you with informed recommendations, helping you save money in your supply chain processes while not taking time away from your employees and their duties. 9
6.0 Market Intelligence With the China market changing rapidly, it is imperative that you understand the trends and are pro-active, making decisions based on research and knowledge. Beneficial information to be up-to-date on can include: Labor costs out of various districts and potential cost effective locations Container / project cargo rates and forecast trends Review of warehousing capabilities Reviews of Asia Pacific Logistics trends and expected upturn or downturn trends A LLP can assist in developing these market intelligence reports to support your company with important decision making requirements regarding sourcing out of China. 6.1 As a result of working with Turnkey, SWP received dedicated market intelligence, designed to provide them with continual process improvements, leading to cost savings in all modes of distribution. With the help of these reports and research, they were able to manage their processes more effectively. 6.2 It is hard to keep updated with market developments in any market, let alone China. Turnkey helped SWP understand the latest market trends, the logistical situation, and the sourcing opportunities in China on an on-going basis. Although more intangible in nature, this information aided SWP in staying close to a market in aspects of the operation where they had less expertise. 10
7.0 Conclusion The supply chain for offshore wind is already complex, yet it becomes even more complicated when you look at it in the Chinese market. Companies with limited logistics expertise in this region might face a difficult time navigating it all. In these situations, having a neutral, independent company to work with you as a LLP/4PL can potentially be a huge cost saver. They can provide support in areas such as: Managing supply chain challenges in the start-up phase Securing better supplier relationships, evaluating the use of local providers Providing dedicated market intelligence Additional manpower to support elements e.g. equipment management Creation of bespoke IT middleware solutions that can help you realize cost savings These services are particularly relevant for the wind sector, as illustrated through the SWP case study examples. However, for all industries, considerable cost and margin is eroded through the supply chain and logistics functionality and there is a therefore a large opportunity for cost savings. Especially in China! 11
Turnkey Group / Renewable Energy Solutions White Paper team Main Author: Tony Wines Title: Managing Director, Turnkey Group Email: tony@turnkeygroup.net Phone: +852 9860 7030 Co-Author: Ian Catley Title: Business Development Director, Turnkey Group Email: ian@turnkeygroup.net Phone: +44 7786262823 Co-Author: Thomas Poulsen Title: Managing Partner, Renewable Energy Solutions Email: thomas.poulsen@re-sols.com Phone: + 45 212 661 88 Denmark contact person: Xiaoxiao Chen Title: Business Development Consultant, Renewable Energy Solutions Email: xiaoxiao.chen@re-sols.com Phone: +45 9119 7984 Chief editor: Ashley Lindhard Title: Communication & Marketing support Turnkey Group Hong Kong 21st Floor, The Phoenix Building No.23 Luard Road Wan Chai, Hong Kong Telephone: +852 3583 0150 Email: enquire@turnkeygroup.net Renewable Energy Solutions Copenhagen Denmark Mailing address: Renewable Energy Solutions Vivede Møllehuse 15 DK-4640 Faxe Denmark Phone: +45 21 26 61 88 email: info@re-sols.com 12