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Wind group Vestas' cost-cutting strategy is on the right track

The component-focused cost-reduction strategy brought in after Vestas suffered "above-target" development costs on its V112 and 2MW turbine platforms has boosted earnings by more than €30m ($38.4m) in the first year.

The Danish turbine maker’s “cost out” approach aims to staunch revenue leakage from lost production factors (LPF) in areas ranging from product engineering design through component fabrication to operations and maintenance.

Early indications are good. The company has managed to shave a reported LPF of 4.5% in 2010 from a monitored fleet of 22,000 turbines around the world down to 2%, meaning they are up and running 98% of the time.

“Cost out is part of our normal day-to-day activities,” says engineering solutions senior vice-president Jorge Magalhaes, who joined Vestas at the end of 2010 after 20 years in management at blue-chip companies including Emerson, Motorola and Philips.

“The reason we have focused more on this is a result of the need to accelerate these activities in the face of more difficult market conditions in terms of making our products more competitive, as well as issues with the two new products we launched last year [the V112 and 2MW platforms].

“It was a combination of these two factors that led us to take a different approach and focus more heavily on this than we would normally do, at the same time as we announced significant restructuring.

“There have been a large number of positives that came out of this process, and we expect the €30m [improvement in earnings before interest and taxes] to be significantly higher in 2013, as a lot of these changes have come late in the year as we imple­mented them in our factories.”

After running the rule over its V112- and V126-3.0MW designs, as well as the V100-, V90- and V80-2.0MW machines, the company identified 100 areas for streamlining, from transport of main components down to redundant man­ual blade locks.

Among the main cost improvements, it has found that moving turbines by rail rather than road will save 15%, while using new grades of ­rare-earth magnets for ­permanent-magnet generators will cut 35% from the bill of materials [BOM]. Rejigging­ the rear frame, internal crane ­gallery and nacelle support structure carved €32,000 out of its BOM and slashed assembly times by 20%.

Even standardising the bolts used on the redesigned V112 ­nacelle has shown the potential to make a “substantial ­difference”.

“We reduced the bolts from the rear frame by 27%. There were seven different bolt types for ­different head ­faces, with different surface­ treatment, different stress levels — we reduced it to one. It sounds like an insignificant detail, but the ability to do this gives us insight into how we might modify other parts of the turbine,” Magalhaes says.

“We feel we now have two platforms in the V112 and 2MW, which are known technologies performing well in the field, that we are improving further by standardising many of the underlying elements.”

One immediate benefit from this attention to standardisation comes in the supply chain.

Vestas’ design approach is now more “supplier-connected”, he says, a sign not just of the company’s vision of a “different way of building a more reliable turbine”, but also of the rapid maturation of the wind sector.

“The V112 was the most-tested­ platform ever released to the marketplace. We tested every com­ponent to ensure it had ten- to 20-year lifecycle reliability,” says Magalhaes.

“At the same time, we saw there are many costs added to make [a product] more robust, and the question becomes whether you can justify adding that cost.

“Before now, discussions with our suppliers weren’t as mature and robust. It is an indication of the maturity of the [wind] sector that many of our suppliers had served the automotive industry, so they understand — they went up the same learning curve ten to 15 years ago.”

Vestas has started “embedding” suppliers within its design team early in a project, with a view to smoothing modular integration of turbine components and the logistics of just-in-time delivery and assembly. It has also torn a page from the automotive sector’s parts-procurement approval pro­cess, to make sure there is “a good, solid handshake” between a finalised product design and the ­supplier’s ability to deliver the quality of the parts ordered.

“We are harnessing this intelligence [of outside industries] along with the economies of scale that come with modularity,” ­explains Magalhaes. “We are also moving to take as much complexity out of our designs as possible.”

The cost-out strategy is pointing to another boon for Vestas as it fine-tunes future designs, includ­ing the recently upgraded V164-8.0MW.

“Much of the learning and tools from development of the V112 have gone into the V164,but most of all we had a lot more ­rigour in staying on top of the complex ­development of a completely new platform where there are a lot of trade-off design ­choices, and which you need to find a way of tracking so that you avoid many changes after the fact.”

Big savings, but they’re looking for more

Although Vestas has what it believes to be the lowest lost production factor of any of its peers, it aims to shave it further.

“We know we can go below 2%, but after a point you start getting diminishing returns for cost-cutting efforts [because reliability begins to be lost],” states Jorge Magalhaes. “You need to strike a balance. We haven’t a specific target, but ideally it should be 0%.

“The challenge is how to make our products more competitive without impacting on quality and reliability.

“We have taken a value-based approach on all decisions, from first design drawings through to operations and maintenance. By focusing on the V112 and 2MW platforms, we expect to drive a lot of changes and learning that will benefit the new products under development now — the V164, the V126 and others going forward.”