Enercon India: Project Planning
A case published in Vikalpa (house journal of IIM Ahmedabad) and written by Saral Mukherjee and G Raghuram, faculty of IIM, Ahmedabad
Management Case: Describes a real life situation faced, a decision or action taken by an individual manager or by an organization at the strategic, functional or operational levels.
Key Words: Project Management, Wind Energy, Logistics, Delivery Reliability, Outsourcing
August 23, 2003, 7.30 a.m.
Prithwiraj Rathore had just finished his tea in the morning when his cellphone rang. As the team leader of erection and commissioning activities at the Nawapur site of Enercon, Prithwiraj was habituated to getting calls at odd hours. But, this telephone call seemed ominous. The villagers had been agitating for the better part of last week as they were under the impression that the wind turbine generators being constructed by the company near their agricultural land would affect the growth of their crops. While Prithwiraj had used all his reasoning powers to enlighten the villagers, he knew that what was driving the agitation was greed and not fear of stunted crop growth. He had seen such agitations under one pretext or another in almost every site he had managed in the last seven years at Enercon. Essentially, the villagers who held land close to the project site wanted to grab as much compensation as possible. In order to bring the situation under control, last night, Prithwiraj had requested the company for posting armed guards at the site. Vikrant Singh, Project Manager at the Vadodara project office, had indicated that such guards would be available within two days.
Fortunately, it turned out that the phone call was not about reporting any trouble with the villagers. Instead, Jayant Shah, Site Engineer, was reporting a snag with the 220 tonne crane. To avoid high winds during erection of the wind turbine generator sections, the erection team usually worked either at dawn or late afternoon. While work was in progress at location W7 that morning, the crane stopped functioning because of a printed circuit board (PCB) blowout. Repairing such faults usually meant replacement of the PCB. Jayant reported that he had already informed the firm that supplied the crane. A similar PCB blowout had happened two weeks earlier and it had taken two days to replace the PCB.
Within half an hour, Prithwiraj was on his way to the project site at Nawapur. Even though the morning traffic on the Porbandar-Dwarka highway was light, it would take him around one and a half hours to cover the 40-km stretch between Porbandar and Nawapur. Porbandar is a small town on the western coast of Gujarat that is reachable from Vadodara by overnight train. The remoteness of the Nawapur project site implied that any supply of spare part would take time. Nawapur was located in a region that had been identified as having significant wind energy potential. Innumerable wind turbine generators set up by different operators dotted the landscape. While it would not be a problem for arranging cranes of 80 tonne capacity, there were only six or seven cranes of 220 tonne capacity available for hire in the entire country out of which Enercon had hired four, one for each of its four project teams. Hence, asking for a replacement crane meant that an entire project team had to be relocated to the Nawapur site. The Nawapur project was already running late owing to the agitation and heavy rainfall during the ongoing monsoon season. Any further delay would significantly affect the probability of finishing the project within the due date of end September. More importantly, the delay would lead to serious concerns whether the project would get completed if the villagers started a bigger agitation. On the other hand, asking for a replacement crane would result in a huge increase in the project cost.
There were other issues too that required attention. Out of the 14 wind energy converters (WECs) to be erected at the Nawapur site, materials for only ten had been received so far. Among these, one consignment of the nacelle assembly (a critical part of the WEC) was damaged in transit.
COMPANY BACKGROUND
Enercon India Limited (ElL) was founded in 1995 as a collaboration between the Mehra family and Enercon GmbH of Germany. Enercon GmbH held 56 per cent of the shares in ElL while the rest was held by the Mehra Family. Enercon GmbH was founded by Aloys Wobben in 1984. Starting with the 30 KW capacity E12 model, Enercon GmbH went on to introduce the 4.5 MW capacity E112 in 2002. (A chronology of major events and product introductions at Enercon GmbH is provided in Exhibit 1.) One of the major breakthroughs occurred in 1991 when Enercon GmbH introduced a gearless WEC, the E40. A gearless WEC could deliver optimal power under any wind speed and did not draw reactive power from the grid during low wind periods. The wear and tear of machine parts was also considerably less. The phenomenal success of the gearless design had helped Enercon GmbH corner 18.5 per cent of the global WEC market (Exhibit 2) and 38.9 per cent of the German market (Exhibit 3). The features of various WECs designed by Enercon are provided in Exhibit 4. WECs were manufactured in the cities of Aurich and Magdeberg in Germany, the union territory of Daman in India, and in the state of Sao Paolo in Brazil.
ElL introduced the gearless design in India at a time when the wind energy business in India was going through a downturn. The initial excitement about wind energy had given way to the problems of maintenance and upkeep. The strategy of ElL was to offer a complete gamut of services "from concept to commissioning and beyond." This included exploration of potential high wind locations, micrositing WECs within a location, interfacing with regulatory authorities for required permissions, agreements with Electricity Boards (EBs) for evacuation of power, preparing approach roads, construction of WEC, erection and commissioning of WEC, installing transformers and internal grid for evacuation of power to EB substation, and operation and maintenance of WECs. To overcome the client's concerns about uptime of WECs, ElL offered a guarantee of 95 per cent uptime subject to grid availability from EB. ElL attempted to offer its clients a hassle-free avenue for investing in wind power, shielding them from the need to understand the intricacies of the technology. Indeed, many of the ElL customers had never visited WEC locations owned by them.
The installed base of Enercon machines had increased significantly in the last eight years as shown in Exhibit 5. The growth of the installed base reflected in the sales performance of the firm as shown in Exhibit 6. During 2003-04, ElL planned to install 263 E40 converters as shown in Exhibit 7. It had decided to discontinue the production of the 230 KW E30 model and planned to introduce the 300 KW E30 model in the future. It had set itself the target of having an installed base of 1,000 MW by 2010. The market share of different WEC manufacturers is given in Exhibit 8. ElL had become a significant player in the Indian market, though not the market leader.
ElL's manufacturing facilities (two plants) were located in the union territory of Daman. They manufactured various components of 230 KW and 600 KW WECs. Synchronous generators were wound and there after vacuum impregnated, baked, and lacquered. Fibre glass epoxy resin blades were molded for home and export markets and assembly of electric control panels and mechanical machine parts were undertaken. Enercon was the only Indian company that exported wind turbine blades. It had received export house status from the Government of India and held the distinction of being the first Indian company to export complete WECs to Australia. Enercon Exports Limited was a 100 per cent subsidiary of ElL having the primary objective of exporting electronic parts to Enercon GmbH. ElL's staff of 945 included 150 managers and engineers who had undergone extensive training in Germany. The company was ISO-9002 certified for manufacturing, installation, and services. Enercon GmbH supported the Indian affiliate with the latest design and development.
ORGANIZATION STRUCTURE
ElL's employees were located at the corporate office in Mumbai, two factories in Daman, the business development offices (BDOs) in the key states, and the site offices at the WEC locations. The staff strength consisted of 500 in the two plants, 200 in operations and maintenance of WECs, 125 in installation, 50 in project offices, and 70 in the corporate office including marketing. Exhibit 9 shows the organization chart at the corporate level. The functional heads of Finance, Marketing, Projects, and Information Technology were located at the Mumbai office while the others were stationed at Daman. Two separate divisions formed in the recent times included Enercon Finance and Enercon Wind Farms Limited. The former was devoted to arranging for the financing needs of the clients while the latter owned and operated wind farms as an independent power producer. These divisional heads were also located at the Mumbai office.
The structure followed in the project sub-division is shown in Exhibit 10. The business development office (BDO) (Exhibit 11), headed by a manager, dealt with the identification of potential locations within that state and interfaced with the regulatory authorities and EBs. The site offices could either be a temporary project office at a site or a permanent office serving several WECs at a particular location. ElL used four project teams that dealt with the erection and commissioning activities. The team leader reported to both the installation head at Daman and the business development manager located at the region. The location of the BDO in a state depended on the location of the regulatory authority in that state. For example, the BDO for the state of Gujarat was located in Vadodara since the Gujarat Energy Development Agency (GEDA), the nodal authority for the development of the renewable energy sector in Gujarat, was located there. All offices, including the remote site offices, were linked by computer networks and an ERP platform from SAP enabled real time planning and control.
THE NAWAPUR PROJECT
The BDO in Vadodara had identified two potential locations in Jamnagar district of Gujarat. One was the Nawapur site situated on the Porbandar-Dwarka highway and the other was the Jangpura site situated on the Porbandar-Rajkot highway, about 70 km from Porbandar. The Jangpura site was on a government land and the Vadodara office had filed all the necessary documents with GEDA for the transfer of the land to ElL for the development of wind power. ElL had offered this site to a prominent client based in Gujarat. The agreement with the client called for commissioning of WECs by end September 2003 so that the client could claim depreciation benefits.
The total cost of the project to the client was Rs 600 million. Any delay beyond September 30 would imply that the client could claim only half (instead of the whole) of the 80 per cent depreciation benefits during 2003-04. Consequently, the remaining tax benefits (at 30 per cent corporate tax rate) would get postponed by a year. Also, for the delay period, the client would not have the benefit of wind power-based electrical energy which normally costs Rs 5 per unit from Gujarat EB. The 1.4 million units (KWH) of energy from the 14 WECs could be wheeled to the client's site at a 4 per cent wheeling charge and an expected 10 per cent loss.
A dispute arose regarding the ownership of the land in April 2003 and villagers in Jangpura obtained a stay order from the court. Even though the dispute was between GEDA and the villagers, ElL did not want this dispute to affect its relationship with the client. Therefore, it offered the Nawapur site to the client, keeping its earlier due date commitments. By end June, the decision to finish the commissioning of 14 WECs at Nawapur by end September was taken. Some of the material (including over-dimensional consignments) which had already been brought to the Jangpura site had to be shifted to a coastal site (near Nawapur) where ElL had operating WECs.
The Nawapur site (Exhibit 12) was on private land and ElL needed to negotiate with each landowner. The land acquisition part of a project generally takes about four to five months and comprise several rounds of negotiations. The speeding up of this process meant that the villagers could gauge the desperation of ElL in clinching the deal. Consequently, the land prices went up. ElL estimated that it had to finally settle for prices which were about 30-35 per cent more than the normal rates. The total land cost was about Rs 15 million for 300 acres.
Exhibits 13 and 14 give a bar chart plan of the Nawapur project as viewed by the installation head (Daman) and BDO (Vadodara) respectively.
By the time the land acquisition process was nearing completion, the monsoon had set in. Heavy rains disrupted the movement of trailers carrying WEC equipments from Daman to the project site. The approach roads could not handle the heavy loads and trailers got stuck in the mud. New roads needed to be built and the earlier ones strengthened before the trailers could deliver their loads. By the middle of August, rains had subsided and work was on at full steam.
Exhibits 15 and 16 show the activities involved in the Nawapur project and their precedence relationships respectively. The composition of the project team is given in Exhibit 17. The project progress report from the SAP software is given in Exhibit 18.
August 23, 2003, 5.30 p.m.
As Prithwiraj settled into the front seat of the car for the return journey to Porbandar, thoughts about the completion deadline of the project crowded his mind. The 220 tonne crane was yet to be repaired. He had spoken to the Vadodara and Daman offices several times about the alternatives. Vikrant Singh was worried that the crane breakdown had occurred just when the villagers' agitation seemed to peter out. The financial deal inked with the client stipulated that WECs would be erected and commissioned before September 30. Any failure in this delivery commitment would mean that ElL would have to make good the financial loss suffered by the client. More importantly, it would affect the customer confidence in ElL's ability to handle wind energy projects "from concept to commissioning and beyond."
The project office at Daman was, however, of the opinion that nothing much could be done except expediting the repair of the crane by the vendor. The option of moving another project team to Nawapur would invariably result in stopping the work at some other project site. Such decisions could be taken by the VP-Project only after considering the workloads of other project teams. Considerations of ElL owning more cranes of the 220 tonne capacity also seemed important especially in the context of the growing business. (Exhibit 19 gives the cost economics).
Everything was not lost yet. During the day, Prithwiraj had supervised the laying of foundation bolts at some of the WEC locations. He had given a directive to his team that all work that did not require the services of the 220 tonne crane should be completed so that the erection work could proceed at full steam once the crane was ready. He estimated that, by tomorrow, almost 65 per cent of the project work would be completed. But, tomorrow, as the saying goes, is another day!
About the authors: 1. Saral Mukherjee is an Assistant Professor in the Production and Quantitative Methods Area at the Indian Institute of Management, Ahmedabad. A Fellow of IIM Calcutta, he specializes in operations management and is involved in research, teaching, and consulting in the area of supply chain redesign, inventory policies, process analysis, project management, and operations strategy. 2. G Raghuram is a Professor in the Public Systems Group at the Indian Institute of Management Ahmedabad. His interest areas are logistics and supply chain management, and infrastructure and transportation systems. He is a co-editor of three books: Shipping Management: Cases and Concepts, Infrastructure Development and Financing: Towards a Public-Private Partnership, and Logistics and Supply Chain Management: Cases and Concepts.