It is well-recognized in the "just in time" world of retail that a highly efficient supply chain and procurement strategy can mean the difference between success or failure -- and it is equally important in the solar sector, too. Yet, what does it take to build such a finely-tuned supply chain ecosystem?
What does best practice look like? 7-Eleven is one of most prevalent chains in the convenience retailing industry. It operates more than 58,000 7-Eleven locations worldwide, with each store providing approximately 2,500 different products and services. Very few of them have a back room that could be utilized for inventory stocking needs. Instead, 7-Eleven keeps the shelves stocked by making daily deliveries through a complex, highly effective supply chain.
Walmart operates a short supply chain, buying directly from manufacturers where appropriate. The company chooses its suppliers carefully, working with those which can meet its price, quantity and frequency needs. Moreover, they operate as a single supply chain, with a shared communication network, buying at large enough quantities to leverage economies of scale and move items directly from manufacturers to warehouses. This reduction in links creates a lean supply chain that translates to lower end prices.
These two examples highlight that the modern supply chain, and procurement, is a network of partnerships. The era of a simple supplier-customer relationship has passed. The future is a cooperative network where manufacturers at different levels of the production chain cooperate with their customer for the benefit of the end user.
The rewards are significant, for those which can navigate the complexity. According to an Accenture survey, collaboration with suppliers can deliver 50% time savings and 30% cost savings. Developing strategic partnerships with suppliers enables companies to influence their supply chain, to drive innovation and quality. This is a win-win scenario, generating a virtuous circle which allows all players in the value chain to be more efficient, reducing cost and increasing competitiveness in the market.
The solar industry is maturing into a highly competitive, global industry, and the concentration in suppliers is providing increasing economies of scale. Market leaders in the panel-manufacturing supply can chain improve their costs (raw materials, manufacturing and logistics), which allows them to offer a more competitive price to their customers.
For example, the Silicon Module Super League (SMSL), now a collection of nine companies, is responsible for 50% of the global solar panels shipments by 2018 and are expected to be 60% of the global shipments in 2019. The SMSL is a collection of some of the world’s largest silicon module suppliers in the modern solar PV industry. My company uses panels from some of these suppliers in our solar PV plants.
A mutually beneficial partnership is critical for module buyers like EPC or IPP companies. In a market environment where huge stocks are not profitable, and manufacturing is mainly driven on demand, price fluctuations and temporary overdemand may impact very significantly a project’s financial viability. When a sales rush happens, having a module supply agreement guarantees module availability with a consistent financial model, preventing unexpected price spikes.
In this environment, chasing a one-time deal in the short term can lead to a lack of availability of the necessary goods (due to a first come, first served model) or paying higher prices in the medium term. An approach of chasing any supplier willing to offer a lower bid is short-term thinking. Solar energy is an extremely competitive market environment. Factors like long-term performance, warranty, a strong investment in research and development and capacity to grow with the market will define if a manufacturer is the correct partner. Though capital expenditure is clearly critical, there are many hidden and soft costs other than price that need to be taken into account when choosing suppliers. For or companies like mine, ESG metrics — in particular, transparency in governance and sustainability standards — are an important consideration.
Solar panels represent approximately 47% of the EPC price of building a solar plant. Approximately 50% of the global solar market is centralized in China, the biggest consumer and installer of photovoltaic energy in the world. As a consequence, the Chinese government’s decisions on PV subsidies and tariffs have an impact on the entire PV market, alongside other markets’ protective measures. Each short-term market change, which is difficult to forecast in the medium or long term, generates price fluctuations and availability constraints.
With this in mind, creating a frame agreement can ensure the availability of modules when needed, as well as a reasonable price range, so that both parties are able to forecast price and demand respectively — and thereby optimize their financial model with a level of stability. For example, in my company's experience and from our research, direct procurement under a frame agreement can deliver potential savings in the region of 7%, by leveraging volume requirements and medium- and long-term commitment with a limited number of key companies.
Timing matters, too; agreeing on a price in advance circumvents the specific market conditions on the date an individual project needs to be signed. Also, the framework approach ensures the availability of the correct product at the correct time and avoids potential costs of missed milestones — or even loss of revenue due to the delayed start of production.
Another benefit of advance planning here is being able to choose the correct technology. When putting together a frame agreement, the customer selects the brands and components that streamline the subsequent operation phase, rather than leaving the decision to an EPC company or having to accept what is available on the market at that time.
So, how do you realize these benefits? Think beyond the immediate scope to identify a win-win partnership mindset where both players benefit. There is a range of simple, yet powerful, methods as starting points:
1. Consider a medium and long-term strategy.
2. Share information and forecasts.
3. Analyze needs and dependencies together.
4. Provide mutual securities.
5. Work together to optimize the entire value chain.
It can take time to identify and build the right relationships. Yet it is a worthwhile investment. Seeing the big picture and carefully selecting partners, with shared standards and values — with which to frame supply agreements — can guarantee a cost-efficient, high-quality operation in a global market.
POST WRITTEN BY
EVP, Global Head of Engineering and Construction, Sonnedix, overseeing the design and construction of assets for global solar PV platform.
As seen on Forbes