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Reducing cost of energy in Reducing cost

of energy
the offshore wind
energy industry
The promise and potential of supply 151
chain management
Jan Stentoft
Department of Entrepreneurship and Relationship Management,
University of Southern Denmark, Kolding, Denmark
Ram Narasimhan
Department of Supply Chain Management,
Eli Broad Graduate School of Management,
Michigan State University, East Lansing, Michigan, USA, and
Thomas Poulsen
Department of Mechanical and Manufacturing Engineering,
Aalborg University, Copenhagen, Denmark

Abstract
Purpose – To support ongoing industry efforts to reduce the cost of energy (CoE) of offshore wind
compared to other types of energy sources, researchers are applying scientific models and thought
processes to identify potential areas of improvement and optimization. This paper aims to
introduce a conceptual framework from a supply chain management (SCM) perspective, aimed at
promoting the reduction of CoE in the offshore wind energy industry.
Design/methodology/approach – Using conceptual arguments from current academic literature
in SCM, a comprehensive framework is presented that clarifies how SCM practices can be used by
offshore wind energy industry to reduce CoE.
Findings – The offshore wind energy sector is a young industry that must reduce CoE to compete
with other forms of energy. Applying a supply chain perspective in the offshore wind industry has
hitherto been limited to the academic community. This paper offers a SCM framework that includes
three interdependent aspects of reducing CoE – innovation, industrialization and supplier
partnering – to guide the industry towards sources to reduce CoE.
Research limitations/implications – SCM is a broad research area; thus, the presented
framework to reduce the CoE is open for further development.
Practical implications – The paper provides insights into how the CoE can be reduced through
innovation, industrialization and partnering in the offshore wind energy supply chain.
Originality/value – The paper offers a seminal contribution by introducing a SCM framework to
understand sources and approaches to reduce CoE in the offshore wind energy industry. International Journal of Energy
Sector Management
Keywords Conceptual framework, Supply chain management, Cost of energy, Vol. 10 No. 2, 2016
pp. 151-171
Offshore wind energy, Analytic framework, Conceptual © Emerald Group Publishing Limited
1750-6220
Paper type Conceptual paper DOI 10.1108/IJESM-04-2015-0001
IJESM 1. Introduction
10,2 Renewable electricity generation depends on three key drivers: climate change, security
of supply and affordability (Gibson and Howsam, 2010). The earth’s reserve of fossil
fuels is under pressure. Fossil fuel energy forms negatively affect the environment,
stimulating research and development of a range of new green forms of energy
(Svanberg and Halldórsson, 2013). One of these new technologies is wind power energy.
152 From a European Union perspective, wind power is the only energy form not affected by
security and supply risks (Pregger et al., 2011). Wind power is a source of energy that
compared to other renewable sources of energy has very low emission levels (Saidur
et al., 2011). In environmental terms, wind power is therefore a compelling alternative to
conventional electricity generation produced by fossil fuels and nuclear power. Growth
in global population and energy consumption is predicted, and the most rapid increases
will come from the USA, China and India (Ochieng et al., 2014).
Wind energy is one of the cleanest and most environmentally friendly energy
sources, and unlike fossil fuels, will never be depleted (Bilgili et al., 2011). Wind power is
a promising green energy option because of its abundance, renewability and zero
pollution. Recently, this energy form has been growing rapidly worldwide, playing an
essential role in the diversification of the power generation mix (Yuan et al., 2014). In
addition, wind power is one of the fastest growing and most mature renewable energy
technologies, promising large-scale exploitation and commercialization potential (Da
et al., 2011). The first turbine was installed in 1991 in Vindeby, Denmark; since then, the
technology has evolved from “wind parks” on land to installations offshore (Barthelmie
et al., 1994). Moving offshore avoids some of the issues that have led to public opposition
to onshore wind farms, such as effects on wildlife, noise and visual impact (Heptonstall
et al., 2012; Saidur et al., 2011).
The offshore wind energy industry is a relatively immature industry (Higgins and
Foley, 2014) in comparison to onshore wind and established industries such as
aerospace and construction. The immaturity is reflected in the low integration among
supply chain actors, as well as a lack of standardization, lack of transparency in
demand, order and inventory processes and lack of collaboration across the supply
chain. The main actors in the offshore wind supply chain are utility providers, wind
turbine generator manufacturers, foundation providers, sea cabling providers,
substation providers, installation vessel providers, and operation and maintenance
providers (Neri et al., 2015). The industry has depended on public subsidies from the
beginning, but political pressures now require that the sector become economically
competitive with fossil fuel-based energy forms (European Union, 2014; Heptonstall
et al., 2012; Wüstemeyer et al., 2015). From an industry life-cycle perspective, the current
stage can be classified as a growth phase (Klepper, 1997), with a combined focus on
product and process innovation (Abernathy and Utterback, 1978). Industry experts
agree that reducing the cost of offshore wind energy should involve supply chain
management (SCM; Gibson and Howsam, 2010; Greenacre et al., 2010; Heptonstall et al.,
2012; Wüstemeyer et al., 2015).
In general, energy efficiency has been largely neglected in logistics and SCM
(Halldórsson and Kovács, 2010; Halldórsson and Svanberg, 2013). Further, applying a
supply chain perspective in the offshore wind industry has hitherto been limited to the
academic community (Athanasia et al., 2012; Heptonstall et al., 2012; Neri et al., 2015);
however, supply chain innovation can be a major source of competitive advantage
(Arlbjørn and Paulraj, 2013). The correlation between product and process innovation, Reducing cost
especially involving knowledge about and active support for the development of supply of energy
chain skills, is paramount to the growth of the wind industry (Wüstemeyer et al., 2015).
To compete against fossil fuel-based energy production technologies, CoE must be
reduced to obviate public subsidies between the years of 2020-2030 (European Union,
2014).
The purpose of this paper is to show how SCM can reduce costs in the offshore wind 153
energy sector and to identify significant possibilities for service improvements. For
example, service improvements can include new technologies to store energy and
increase output (e.g. with seawater pumped storage systems; Katsaprakakis and
Christakis, 2014; Slocum et al., 2013). In this paper, the promise and potential of SCM to
reduce CoE encompasses all wind farm life-cycle phases, including development and
consent, installation and commissioning, operations and maintenance, and
decommissioning (Poulsen, 2015). We provide a conceptual framework to show how
SCM practices can be used in the wind industry to decrease the CoE. This SCM
framework draws on successful applications of SCM in other industries. The discussion
focuses on three streams of thought: innovation, industrialization and partnering.
The remainder of the paper is organised as follows: In the next section, we describe
the wind energy technology evolution for both onshore and offshore wind. We present a
theoretical frame of reference, including levelized cost of energy (LCoE), SCM and
supply chain innovation. Next, a conceptual framework is used to explain how SCM
practices can supplement the ongoing cost reduction efforts of the wind energy industry.
We conclude by describing the implications of transforming the offshore wind energy
industry using SCM. We suggest an ongoing implementation plan consisting of
“triple-helix” collaboration, public-private partnerships and training, orchestrated by
the principal supply chain entities.

2. Offshore wind farms in brief

2.1 Development from 1991 to present
Wind energy is clean and pollution-free, helps reduce CO2 emissions and has no water
consumption in energy production compared with conventional power plants (Saidur
et al., 2011; Snyder and Kaiser, 2009). Electric power generation from wind first began
onshore 120 years ago, although wind power itself is more than 3,000 years old (Leung
and Yang, 2012). The first offshore wind turbine was installed in 1990 in Nogersund,
Sweden (Zhang et al., 2011), and the first commercial offshore wind farm was
established in Vindeby, Denmark, in 1991. This first offshore wind farm took onshore
turbines offshore. In the early stages of Denmark’s offshore wind industry,
policymakers spurred development of offshore wind technology (OWT) by facilitating
learning through interactions among knowledge institutions (e.g. universities),
components suppliers, project operators and turbine manufacturers. The most
dominant forms of learning consisted of “learning by doing” and “learning by using”
(Higgins and Foley, 2014; Smit et al., 2007). In 2002, Horns Reef 1 in Denmark was
commissioned with 160 MW offshore wind power, thus moving offshore wind farm to a
new stage. This initiative greatly enlarged the size of the project; before this, the largest
offshore wind power project (Middelgrunden near Copenhagen, Denmark,
commissioned in 2001) was only 40 MW. Since then, the number and capacity of farms
has expanded. By the end of 2014, 74 offshore wind farms had been established in eleven
IJESM countries across Europe. Globally, offshore wind energy production is mainly located in
10,2 Europe, with a total installed capacity of 8,045.3 MW at the end of 2014 compared with
86 MW in 2001. The remaining installed offshore wind energy consists of 400 MW in
China, 49 MW in Japan, and 5 MW in South Korea (Guldbrandtsen, 2014, p. 25).
The Asian offshore wind industry, still in its infancy (Guldbrandtsen, 2014, p. 24),
has three offshore wind farms (test sites only) installed in China and Japan. In China, the
154 installed capacity by the end of 2013 was well over 10 GW. Beyond planned capacity
increases in the countries with offshore wind farms, a number of other countries are in
different stages of planning offshore wind energy. USA does not yet have any offshore
wind farms commissioned, but 14 projects totaling 3.9 GW have reached an advanced
stage of development (Hamilton, 2015), of which two are approved (Guldbrandtsen,
2014, p. 39). Although India in 2012 generated over 25 MW from clean energy sources
(from an overall installed power capacity of 202MW), it has yet to tap the potential of the
offshore wind energy sector (Kota et al., 2015; Mani and Dhingra, 2013). Today, about
300 million people in India lack access to electricity, and there is a rising concern about
climate change (FOWIND, 2015, p. 6). Offshore wind energy is expected to play a larger
role in the future because of land acquisition issues for onshore wind projects.

2.2 Advantages and disadvantages of offshore wind farms

Offshore wind power is more complex and costly to install, compared to onshore wind
power (Bilgili et al., 2011); however, offshore has become increasingly attractive for its
potential. The cost of offshore wind energy production is higher than the cost of onshore
because of longer distances to shore; more difficult operations and maintenance (O&M);
rising material, commodity and labor costs; more expensive foundations; and difficult
integration to electrical networks (Bilgili et al., 2011; Henderson et al., 2003). The cost of
offshore energy is between 1.5 to 3 times the cost of onshore counterparts (Breton and
Moe, 2009; Ochieng et al., 2014). However, offshore wind energy production also has a
number of advantages compared with onshore wind energy production.
Advantages include wide offshore spaces for wind farms, where winds are typically
stronger and more stable, resulting in significantly higher production per unit installed
(Bilgili et al., 2011; Breton and Moe, 2009; Esteban et al., 2011). In addition, wind farms
can be located close to users, thus requiring shorter transmission lines (Snyder and
Kaiser, 2009). Further, wind turbines are typically bigger than those on land because it
is easier to transport very large turbine components by sea. Finally, installing wind
turbines sufficiently far from the shore can reduce negative visual and noise impact
(Bilgili et al., 2011; Ochieng et al., 2014).
Despite these obvious advantages, certain offshore energy production challenges
must still be addressed. These challenges are related to offshore wind farms’ impact on
fish and marine mammals (Kaldellis and Zafirakis, 2011); shipping and navigation;
tourism (Snyder and Kaiser, 2009); negative impact on wildlife (Saidur et al., 2011); and
negative visual/aesthetic impact on the seascape (Snyder and Kaiser, 2009). These
challenges constitute a “social gap” in the sense that there is a discrepancy between
apparent high levels of public support for wind energy and low planning applications
success rates for wind farms (Bell et al., 2005). The Danish wind farm, Middelgrunden,
commissioned in 2001, provides an interesting example: After consultations, the
initially proposed rectangular layout was replaced by a graceful curve. Subsequently,
this wind farm has become a tourist attraction in Copenhagen and has avoided excessive
criticism in spite of prominent visibility from many locations in the city (Henderson Reducing cost
et al., 2003). of energy
Finally, offshore wind energy production is predicted to show a strong annual
compounded 22 per cent growth rate from 2014 to 2023 (Guldbrandtsen, 2014, p. 7).
However, Kota et al. (2015) outlined four conditions required for success with offshore
wind developments any place in the world:
(1) governments must be ready and able to create the political and financial 155
environment that encourages growth;
(2) advanced technological grid parity is essential for the turbines operating above
the seas;
(3) O&M plays a crucial role in making offshore wind farms reliable and
economically viable; and
(4) reducing costs while maximizing economic benefit is a key priority.

3. Theoretical frame of reference

In this section, we present central theoretical concepts used to analyze the promise and
potential of SCM to reduce CoE in the offshore wind energy sector. First, we discuss the
concept of LCoE. The next section provides an overview of SCM and relates this to the
offshore wind supply chain. The last subsection shows how the supply chain can be
viewed as a target for innovation.

3.1 Levelized cost of energy

Cost minimization has always been a key driver of energy policy and investment
choices (irrespective of ownership arrangements), and levelized cost is a starting
point for analysis of technology choices (Gross et al., 2010). Cost minimization
focuses on estimating the average levelized cost of generating electricity over the
entire operating life of the power plants for a given technology, taking into account
various cost components (IEA, 2010, p. 166). The “levelized cost of energy”
expresses the unit cost of 1 MW/h over the lifetime of an energy technology by
taking the sum of the discounted lifetime costs relative to the sum of discounted
energy production at the time of the investment decision. In this calculation, the
development costs, capital investments, financial costs and life-cycle costs are
included after adjusting for inflation. The cost elements are divided into capital
expenditure (CAPEX) and operating expenditure (OPEX). CAPEX includes the
expenditures associated with wind farm development, deployment and
commissioning up to the point of takeover. OPEX covers costs during the
operational period. Recently, MEGAVIND (2015) launched a new LCoE calculation
method that provides new nuances to the total lifetime costs of an offshore wind
farm by introducing development expenditure (DEVEX) and abandonment
expenditure (ABEX). DEVEX is defined as all costs incurred in the period from idea
and development to design and planning. ABEX is defined as all costs related to
abandonment of the wind farm upon termination.
The LCoE measure is used by policymakers and technology developers to
provide an approximate estimate of the relative merit of different technologies
(Gross et al., 2010). However, some factors may limit the calculation of levelized
costs, such as the difference between planned lifetime and “economic life”,
IJESM unpredictable fuel price volatility and the value of government-funded research
10,2 programs (Heptonstall et al., 2012). According to Heptonstall et al. (2012), all costs
have increased since the mid-2000s for all electricity-generating technologies. This
is also the case for offshore wind and is caused by increases in both CAPEX and
OPEX. The increases in offshore wind costs are summarized by Greenacre et al.
(2010, p. 11) as:
156 • rising materials;
• commodities and labor costs;
• adverse currency movements;
• increasing prices for turbines above the cost of materials attributable to supply
chain constraints;
• marketing and engineering issues;
• increasing depth and distance of more ambitious projects affecting installation,
foundation and O&M costs;
• supply chain constraints, notably in vessels and ports; and
• planning and consenting delays.

In addition to this list, Heptonstall et al. (2012) discussed future upward pressures on
costs attributable to establishing wind farms in deeper waters further from shore.
Heptonstall et al. predicted capital costs would increase because of larger and more
complex foundations, increased grid connections and more challenging installation
environments. In addition, O&M costs are also predicted to increase for wind farms
located in cold, icy or remote areas where maintenance accessibility is restricted
(Shafiee, 2015). However, Heptonstall et al. (2012) also discussed downward cost
pressures on offshore wind energy, including increased competition throughout the
supply chain; greater supply chain confidence; innovation; efficiency gains; scale effects
and standardization in turbine size and technology; and foundation design and
improvements in O&M regimes.

3.2 Supply chain management and the offshore wind supply chain
More than 30 years ago, the concept of SCM was introduced in the industrial and
academic press (Oliver and Webber, 1982). Since then, many definitions of SCM have
been proposed, including moving from internal to external optimization (Stevens, 1989);
emphasizing business processes (Christopher, 1992); orienting toward customer
satisfaction (Cooper et al., 1997); focusing on flows of product, services, finances and
information (Mentzer et al., 2001); stressing the importance of relationships
and networks (Harland, 1996); separating SCM from logistics (Cooper et al., 1997); and
providing different perspectives on SCM vs logistics (Larson et al. 2007). Based on a
comprehensive study of the literature, Stock and Boyer (2009) defined SCM as:
[…] the management of a network of relationships within a firm and between interdependent
organisations and business units […] with the benefits of adding value, maximising
profitability through efficiencies, and achieving customer satisfaction (p. 706).
A central characteristic of SCM is its strong reliance on differentiation. Some companies
are part of simple supply chains; other companies are part of complex supply chains.
Some companies have a limited number of suppliers; other companies have many Reducing cost
suppliers. In addition, several contingencies make supply chain practices different of energy
among companies (e.g. number of customers, number of products and services and
number of manufacturing locations). Not all elements have the same strategic priority;
thus, differentiation plays a central role in SCM.
The offshore wind supply chain consists of a number of different actors. The supply
chain begins with the users of electricity provided by utilities. The utilities have long 157
been the wind farm developers and operators (however, recently we have seen other
ownership structures). The physical supply chain begins first with turbine
manufacturers operating at various stages. A wind turbine consists of a rotor, nacelle,
tower and blades. Next, the wind turbine needs a substructure or foundation, a
substation and a grid connection via subsea cables. The turbines, foundations, cables,
substations and any permanent accommodation quarters are installed by personnel
onboard vessels. These elements, generally viewed, represent the supply chain up to the
commissioning for operation. In the operation phase, the O&M supply chain takes over.
The repowering or decommissioning supply chain is at the end of the turbine’s life cycle
(Ortegon et al., 2013).

3.3 Supply chain innovation

Experts widely agree that firms must gain competitive advantage through innovation.
Well-managed innovation processes are not only important for a single company but
also to the shared processes of many firms within its supply chain network (Arlbjørn
and Paulraj, 2013; Roy et al., 2004; Wagner, 2012). In today’s business environment,
some firms are exceling in managing “coopetition” relationships (i.e. both competing
and collaborating at the same time; Wilhelm, 2011). The supply chain is a vital source for
future competitiveness in the offshore wind energy sector (BVG, 2014; Heptonstall et al.,
2012; Wüstemeyer et al., 2015) and thus also represents a target for innovation (Arlbjørn
et al., 2011; Narasimhan and Narayanan, 2013).
Supply chain innovation is defined as:
[…] a change (incremental or radical) within a supply chain network, supply chain technology,
or supply chain process (or a combination of these) that can take place in a company function,
within a company, in an industry or in a supply chain in order to enhance new value creation
for the stakeholder (Arlbjørn et al., 2011, p. 8).
This definition encompasses certain distinctive characteristics:
• supply chain innovation ranges from incremental to radical;
• innovations can take place at the intra-firm, dyadic, chain or network level; and
• the aim of these innovations is to create value not only for the focal firm but also
for other stakeholders, including suppliers, buyers and end customers.

The concept of supply chain innovation has been developed in a framework

encompassing the interrelated dimensions of supply chain business processes, supply
chain technologies and supply chain network structures (Arlbjørn et al., 2011). Recently,
academic literature on supply chain innovation has received increased attention,
including, for example, how supply chain innovation contributes to customer value
(Munksgaard et al., 2014); how to change network structure (Gadde, 2013); how to
develop relational capabilities through inter-organizational processes (Oke et al., 2013);
IJESM how supply chain innovations are diffused in organizations (Hazen et al., 2012); and
10,2 green supply chain innovation (Jensen et al., 2013). Thus, the introduction of new
offshore wind farms and O&M practices is likely to be more successful if accompanied
by innovative supply chain designs, innovative SCM practices and enabling technology.

158 4. Supply chain management framework for reducing the cost of energy
Supply chain innovation, as discussed in the previous section, is enabled by both
product and process innovation. The OWT industry, although early in its development
(i.e. industrialization) with respect to some aspects of SCM, is confronted by intense
competition and a “technology race” is in the offing. The capacity of OWT firms is
projected to increase from 2MW to 7 and 10 MW units. Such increase in capacity will
require new technologies (e.g. direct drives, new materials), and it will likely increase
dependence on suppliers of new technologies. Aside from technology-based innovation,
process innovation in the management of supply chains will also be necessary.
In this paper, we focus on the latter aspect of supply chain innovation. In describing
the role of process innovation, we discuss SCM practices that have been utilized
successfully in mature industries to pursue the twin objectives of innovation and cost
reduction. In mature industries, such as automotive, aerospace, and oil and gas, strategic
supply management practices are extensively used. Our aim is not to suggest that these
practices are easily transferrable to the OWT industry. Rather, our intention is to
discuss their general applicability in an evolving industry where these practices might
not find extensive use. We recognize that the OWT industry has a longer life cycle
compared to some mature industries, such as the automotive industry. It does bear some
resemblance, however, to the aerospace industry, where the life cycles of products are
comparably long.
The OWT supply network comprises many intersecting supply chains and draws
upon the knowledge and skills of a diverse set of industries, such as electric components
(e.g. turbine components), cables and controllers, and towers. Some of these industries
are large-scale manufacturers; others are smaller-scale industries with significant power
differentials between firms. These characteristics can also be seen in the automotive and
aerospace supply chains (for example, aircraft engine manufacturers have considerable
power and influence in dealing with Boeing). Therefore, transfer of best practices can be
a useful strategy for rapid deployment of SCM practices in the OWT industry. For
example, supplier segmentation and partnering practices could be useful in managing
relationships with suppliers of technology. Strategic cost management, including
consortium buying practices, could be utilized to achieve cost reduction when procuring
from large-scale manufacturers. Early supplier involvement (ESI) and concurrent
engineering could be useful in developing new products.
It is important to recognize that best practices from repetitive manufacturing
industry may not be directly applicable to activities in all phases of the OWT industry.
This is an important issue. Examples in industry have shown that transfer of best
practices has occurred across distinctly different industries. The OWT supply chain
actually comprises multiple intersecting supply chains consisting of various
components and subsystems (e.g. cables, controllers, electrical components and
mechanical components, such as gearboxes). These elements are not unique to the OWT
industry and are similar to elements of the repetitive manufacturing industry. The firms
involved in producing these elements are large-scale manufacturers; best practices from
repetitive manufacturing could be useful in dealing with these supply chains. In other Reducing cost
supply chains, while some ideas can be borrowed from repetitive manufacturing of energy
industry, not all practices can be used exactly.
Transfer of best practices can cut across industries. For example, IBM Rochester
carried out a process benchmarking study with L.L. Bean, a well-known US retailer, to
improve its order fulfillment operations (NIST, 2015). The transfer of best practices from
this study enabled IBM Rochester to garner the coveted Malcolm Baldrige award (NIST, 159
2015). Similarly, firms in the health-care industry have benchmarked themselves
against Ritz Carlton, a hotel chain operator in the hospitality industry. In the same vein,
OWT firms can seek to transfer best practices from repetitive manufacturing industries,
such as the automotive and home appliance industries and from project-oriented
industries such as aircraft manufacturing.
OWT farms go through several phases, starting with design and development,
manufacturing and installation, operations and maintenance, and ending with the
decommissioning phase. Although best practices in SCM can be potentially useful in
each of these phases, the greatest potential for the effective use of best practices might be
in the early phases – design and development, manufacturing and installation. Next, we
discuss the conceptual framework that develops the promise and potential of SCM
practices in the OWT industry. Figure 1 is a conceptual framework showing how SCM
practices can be used to reduce CoE. The framework also depicts where “maturity

Figure 1.
SCM practices for
reducing CoE in the
wind power sector
IJESM models” and benchmarking can be useful in implementing these practices in the wind
10,2 power industry. For example, the wind power industry could practice supplier
relationship management (SRM) by benchmarking firms in mature industries such as
automotive and home appliances. Practices that are connected to maturity models can
be understood and implemented by studying maturity models that describe evolution of
these practices and their path dependency.
160 To explain the framework shown in Figure 1, we focus on three interdependent
aspects of reducing CoE: innovation, industrialization and (supplier) partnering. These
three aspects cover a number of practices related to supply chain innovations (see
Section 3.3) in terms of supply chain business processes, supply chain technologies and
supply chain network structures. Thus, each of the practices can be classified as supply
chain innovations, revealed through the components of the supply chain.

4.1 Innovation
In mature industries, innovation is a central aspect of the firm’s competitive strategy
and its principal differentiator. Innovation is fundamentally knowledge based.
However, no firm has all the knowledge to be an outstanding innovator. In today’s
competitive environment, knowledge is dispersed in the global footprint of firms. SCM
researchers have underscored the importance of leveraging unique competencies of the
supply network. From a theoretical perspective, this view stems from the resource-
based view (Barney, 1991; Wernerfelt, 1984) and the knowledge-based view of the firm
(Grant, 1996). SCM researchers have also stressed that the absorptive capacity of firms – that is,
the ability of firms to acquire, assimilate and exploit knowledge for innovation output –
depends on their ability to acquire knowledge from external sources (i.e. suppliers).
Firms that achieve superior innovation output do so by achieving a high degree of
integration with their suppliers.
4.1.1 Value chain integration. Value chain integration is an aspect of strategic
sourcing. Value chain integration entails clear articulation of the firm’s sourcing
strategy, establishing goals and priorities for SCM efforts, a high degree of information
exchange and communication, and utilization of information technology (IT) to increase
end-to-end visibility in supply chains (Narasimhan and Kim, 2002). In (mature)
manufacturing and retail industries, value chain integration has led to superior cost and
responsiveness (innovation) performance. Notable examples are Dell’s pull production
system in the computer industry and Esquel’s system in apparel manufacturing.
Supplier integration leads to close collaboration with suppliers, capturing what has been
termed “relational rent” (Dyer and Singh, 1998).
In addition, integration has enabled firms such as General Motors (GM) and Boeing to
transition to system integrators wherein key supplier partners have full responsibility
for systems and subsystems. In this model, the manufacturer relies on the design,
development, product and process capabilities of principal suppliers. For example, GM
relies on Lear Corporation for seating systems, whereas previously bought seat parts
independently. Toyota relies on Nippon Denso for certain systems, including design,
development, manufacturing and world-wide distribution, making Nippon Denso a
strategic partner (Liker and Choi, 2004). Transitioning to “systems buying” has enabled
automotive firms to accelerate product development, reduce cost, align strategic goals
across the value chain and innovate more quickly (Narasimhan et al., 2010). Further,
supplier-enabled innovation is a key strategy for Johnson & Johnson in the
pharmaceutical industry (Malotte, 2014). Because the wind power energy industry is in Reducing cost
the early stages of utilizing SCM practices, potential for innovation and cost reduction of energy
are high if SCM practices such as supplier integration can be effectively used (Swink
et al., 2007, 2005). Thus, as the OWT industry increases its reliance on innovative and
capable suppliers for strategic components that underlie new technologies and
innovation, implementing value chain integration best practices could be useful.
4.1.2 Knowledge management, knowledge sharing and absorptive capacity. 161
Knowledge management, knowledge sharing and absorptive capacity have been at the
heart of collaborative relationships in SCM (Narasimhan and Narayanan, 2013).
Knowledge flow among supply chain members is facilitated by supply chain (network)
design and architecture, relational networking, frequent communication and
information exchange (Chen and Paulraj, 2004). Raytheon, a major US defense systems
contractor has used supplier knowledge effectively for technology innovation as well as
for product and process innovation. Annual supplier council meetings are held by the
firm to let the suppliers know where Raytheon is heading in terms of new products and
new technologies. These meetings communicate Raytheon’s technology strategy to
suppliers and enable the suppliers to discern where their own technology investments
might be most useful for Raytheon. Thus, Raytheon’s effective information and
knowledge sharing with suppliers results in greater absorptive capacity for both
parties. SCM researchers have suggested that greater knowledge sharing and
absorptive capacity can increase innovation output of firms (Narasimhan and
Narayanan, 2013). Similarly, the wind power industry can increase innovation in
technology and new product development and reduce CoE through knowledge
management in supply chain operations.
4.1.3 Value stream mapping. Value stream mapping is a management process
designed to eliminate waste in supply chain operations and thus maximize value to
customers. Supply chain operations in the wind power industry are complex. Two main
differences distinguish the wind power industry from mature industries. First, the life
cycle of a wind farm is considerably longer (30 years or more) than the typical life cycles
of autos (5 to 7 years) and home appliances (10 to 12 years). Second, the time needed to
construct a wind farm is several years, compared to days or hours for autos and home
appliances. As discussed previously, the longer life cycle has four distinctly different
phases involving many diverse organizations. Each phase can be viewed independently
from a SCM point of view. Value stream mapping can be used to analyze these supply
chains to identify and eliminate non-value adding activities and redesign the activities
for maximum productivity and efficiency. However, SCM practices that are most
effective in each of the phases might be different. For example, supplier integration and
knowledge management for innovation might be most appropriate in the design and
development phase of wind farms. Value stream mapping of the supply chain could
eliminate waste in terms of time, movement, material flow and efficiency of
decision-making, thus contributing to a reduction in CoE.
4.1.4 Supply network architecture. Supply network architecture can be purposively
designed to deliver strategic objectives (Narayanan and Narasimhan, 2014). A supply
network encompasses sourcing and supplier selection, the degree of autonomy given to
tier 1 suppliers, the design of the supply network, the degree of influence of the focal firm
on its supply network, contract management and the degree of personal and
professional ties among network members (Narayanan and Narasimhan, 2014). Ahuja
IJESM (2000) studied the influence of direct ties and indirect ties among alliance partners in
10,2 supply networks and showed that both types of ties positively influenced the innovation
output of the focal firm. In contrast, Narayanan and Narasimhan (2014) showed that
while direct ties are beneficial, indirect ties might not increase innovation output of the
focal firm. The implication of these studies is that supply network architecture plays a
role in the innovation output of firms (Choi and Krause, 2006). Because innovation is
162 closely linked to quality and productivity, this is a fruitful area for firms in the wind
power sector to focus on to reduce the cost of wind energy.
4.1.5 Supply chain analytics. Supply chain analytics is an area with considerable
potential for innovation in product, process and supply chain operations. Although
firms capture data on all aspects of business, including supply chain operations, few
firms are mature enough to fully exploit their data resources for innovation (Gupta,
2014). Current advances in analytics have enabled firms to extract customer and supply
market intelligence from both qualitative and quantitative data as well as from internal
and external data. KPMG refers to this as “massively open business intelligence”
(Gupta, 2014). Firms in the wind power industry could use external data and analytics to
pursue innovations that could potentially reduce CoE. Next, we discuss the second
aspect of the conceptual framework, i.e. industrialization.

4.2 Industrialization
The concept of industrialization denotes in a broad sense a shift from agriculture to
manufacturing. Among its many definitions is one by Whitely and England (1977) that
defined industrialization as:
[…] a process of transition from an agrarian society to forms of social and economic
organizations characterised by high levels of resource consumption, increased educational
emphasis, and emphasis on research and development activity (p. 440).
Industrialization has also been described as a socioeconomic process that “includes
a rapid transformation in the significance of manufacturing activity in relation to all
other forms of production and work undertaken within national (or local)
economies” (O’Brien, 2001, p. 7,360). In this paper, the industrialization concept is
narrowed down to the stage at which an industry or a firm is in the maturity curve
of practices in managing its internal and external activities. By this definition, firms
in repetitive manufacturing are higher on the maturity curve. SCM researchers refer
to maturity models in characterizing configurations of SCM practices that are
sequentially adopted by firms (McCormack and Lockamy, 2004). As firms
implement these practices in phases, their SCM capabilities increase, giving them a
potential advantage over their competitors. The simplest of these maturity models
classifies the position of a firm as one of four states ranging from a narrow “buying”
perspective to “partnering” with select suppliers under strategic sourcing (Engel,
2004). Each of these stages in the maturity model implies distinctly different SCM
capabilities. The maturity models also reflect the shifting role of the SCM function
from procurement at the lowest cost to a focus on strategy, competitiveness,
innovation and market responsiveness at the mature stage of partnering with
suppliers. In addition, a shift from an internal to an external, strategic orientation
emphasizes integration and knowledge acquisition (McCormack and Lockamy,
2004). Industrialization in the mature industries utilizes cost modeling, supplier Reducing cost
development initiatives (SDIs) and supply chain process optimization. of energy
4.2.1 Cost modeling. Cost modeling in mature industries is a common practice. Under
cost modeling, the firm develops an independent understanding of the cost structure of
the component or system that it is buying without relying on a supplier quote (Nelson
et al., 2001). Prior to this approach, early in the maturity cycle, firms negotiated a cost
reduction without a comprehensive understanding of the cost structure. In today’s 163
global competition, firms must develop an understanding of how much it costs to make,
move, procure, transact, mitigate risk and comply with international trade and tariff
regulations. Without a complete understanding of the cost structure, sourcing decisions
will be myopic and suboptimal. This approach is sometimes referred to as “should cost”
modeling (Nelson et al., 2001). In mature industries, firms have embraced the notions of
strategic cost modeling, “relative and absolute advantage”, total cost of ownership and
a “clean sheeting” approach to cost modeling (Nelson et al., 2001). Strategic cost
modeling emphasizes the segmentation of procured components and systems into
strategic and nonstrategic groups and related SCM processes. Identification of cost
avoidance opportunities as opposed to cost reduction opportunities is sought in the
strategic cost modeling approach.
“Relative advantage” and “absolute advantage” refer to achieving cost reductions
that compare favorably with internal benchmarks (relative advantage) versus cost
reductions that garner a competitive advantage to the firm (absolute advantage). IBM,
HP and Phelps-Dodge have achieved impressive cost performance by pursuing absolute
advantage in their cost reduction efforts. Further, clean sheeting is a new approach to
cost modeling in which the firm develops a cost structure for the component or system
by assuming best practices and sourcing from world-class suppliers and not necessarily
from suppliers currently in its supply network. The ability to gather supply market
intelligence is essential in this approach. Good Year, among others, has started to
employ the clean-sheeting approach.
4.2.2 Supplier development initiative. The SDI is a common practice in mature
industries (Narasimhan and Narayanan, 2013). SDI encompasses training personnel in
cost modeling and statistical process control, implementing quality management and
continuous improvement practices, assisting in implementing new process technology
and offering financial assistance to ensure solvency. For example, Raytheon helped one
of its suppliers to implement six sigma and lean manufacturing to achieve impressive
quality and cost performance. LG electronics helped its small and medium-sized
suppliers secure loans using its financial strength immediately following the financial
crisis of 2008 This tactic ensured LG’s solvency, as well as supply for LG’s operations.
4.2.3 Supply chain process optimization. Supply chain process optimization refers to
executing SCM processes with maximum efficiency, thereby reducing wait time for
internal customers and execution times for processes, increasing responsiveness to
internal and external partners and increasing accuracy of process outcomes, thus
enhancing productivity and standardization. Purchase order placement is an example.
Intel, winner of the MSU-Richter Award for excellence in SCM in 2014, achieved
impressive gains by employing IT to optimize its purchase order placement process
(ISM-MSU Richter Awards, 2014).
The wind power industry could benefit from adopting these practices and others to
rapidly ascend the maturity curve. Benchmarking and best practices implementation
IJESM could be viable strategies. BVG (2014, pp. 14-55) has provided a number of different
10,2 potential industry benchmarks for the offshore wind industry along the wind farms
life-cycle phases These practices have great potential for reducing CoE in the wind
power sector.

164 4.3 Partnering

The third aspect of the conceptual framework shown in Figure 1 is partnering. Firms
that rank higher on the maturity curve of SCM practices actively pursue supplier
partnering (Narasimhan and Narayanan, 2013). SCM researchers have recognized this
strategic shift (Liker and Choi, 2004). However, partnering does not necessarily imply
long-term contracts; it is possible for firms in mature industries to have long-term
contracts with suppliers without a partner-oriented relationship. For instance, Toyota
has a partnership relationship with Nippon Denso, but does not have a partner
relationship with a supplier who provides door panels despite having a long-term
contract with the supplier.
Partnership in mature industries is characterized by joint development of product
and technology, sharing of product and technology strategy with the supplier, specific
investments made by the supplier exclusively for the buying firm, flexible contracts,
high degree of IT integration and integration with the supplier processes, commitment
of specialized skills and human capital by the supplier, reliance on the supplier partner
for innovation performance, deep relationship and collaboration with the supplier
partner (Narayanan et al., 2015).
4.3.1 Buyer–supplier (B-S) relationship. The buyer–supplier (B-S) relationship has
been the subject of much inquiry in the SCM literature (Narasimhan et al., 2013). The
theories underpinning buyer–supplier relationship have included transaction cost
economics (TCE), agency theory, resource dependence theory and relational norms
theory. Despite the heavy emphasis on theoretical constructs, these theories have
produced practical, useful strategies for effective management of B-S relationships. In
brief, the TCE perspective emphasizes minimizing costs in the economic exchange while
safeguarding against supplier opportunism via contract provisions (Dyer, 1997; Dyer
and Singh, 1998). Agency theory emphasizes the economic relationship between a
principal and its agent, offering perspectives on structuring the relationship. Resource
dependence theory provides a perspective on how to avoid over-dependence on
suppliers (Mahapatra et al., 2010). Relational governance emphasizes deep relationship
with suppliers and development of trust and commitment (Narasimhan et al., 2008).
Practitioners in mature industries agree that B-S relationship management must
stress collaboration, joint problem solving, high level and frequency of information
exchange, concern for the supplier’s profit, ESI and lack of emphasis on power over
suppliers (Nelson et al., 2001). B-S relationship management depends on the
establishment of trust and commitment in the relationship (Narasimhan et al., 2008).
Trust and commitment reduce relational stress, potential for conflict development, and
supplier opportunism and increase productive collaboration between transacting
partners. Studies have shown that in the presence of trust and commitment, firms
experience superior cost, quality and innovation performance (Narasimhan et al., 2008).
Benchmarking to identify best practices from firms in mature industries could lead to
successful implementation of these practices in the wind power industry, potentially
leading to reduced CoE.
 Firms in mature industries use supplier segmentation and develop different business Reducing cost
models appropriate for each segment. Segmenting the supply chain and managing the of energy
B-S relationship via practices tailored for each segment has led to superior cost
performance in mature industries. For example, one classification scheme that could be
used to manage buyer–supplier relationships involves classifying supplier as
commodity suppliers, component suppliers, system suppliers or partnership/strategic
alliances (Liker and Choi, 2004). Best practices from mature industries could be 165
transferred to the wind power industry to achieve lower CoE.
4.3.2 Collaboration. Collaboration is the watchword in business exchange in today’s
competitive environment. Firms in mature industries seek to achieve “customer of
choice” status, also known as “earned preferential treatment” from their suppliers
(Narasimhan, 2014). Henke and Zhang (2010) studied relational health in the automotive
industry for more than a decade, and their data show that firms that achieve superior
cost, quality and innovation performance have a high relational health index relative to
their competition. Best practices exist in mature industries, which could be transferred
to the wind power sector to achieve similar results.
SRM has been widely studied in the literature (Monczka et al., 2015). Core principles
include the practice of relational norms, supplier perception audits, annual supplier
councils, strategic integration through ESI and deep relationship development with
suppliers, leading to relational health (Liker and Choi, 2004). Relational norms lie at the
heart of SRM (Narasimhan et al., 2008). Justice practices – relational justice, procedural
justice and distributive justice – associated with relational norms are helpful in
establishing trust and relational commitment (Narasimhan et al., 2013). Similarly,
justice practices could be helpful in reducing CoE in the wind power sector. Supplier
perception audits are useful to identify areas that need improvement as firms seek to
develop deep relationship with their suppliers. Benchmarking and transferring best
practices could enable the wind power sector to utilize SRM for reducing CoE.
In this section, we discussed configurations of SCM practices that could be useful for
reducing CoE. In this context, developing familiarity with maturity models in different
industries and benchmarking for transferring best practices could be highly useful to
the wind power sector.

5. Conclusion
Transforming the offshore wind supply chain requires collaboration among academia,
industry and government. The Danish Wind Industry Association predicts a radical
increase in turbine manufacturer demand with respect to tier 1, tier 2 and tier 3 supplier
competencies and internal organization, as well as task allocation within the tiered
structure of the wind power industry. The participation of small to medium-sized
enterprises in the tiered supply chain necessitates the deployment of effective SCM
practices. This deployment will require the “triple helix” collaboration among
government, academic institutions and industry partners. Government could provide
incentives to firms comprising the wind power supply chain to become partners in the
industrialization of the supply chain. Academia could provide the necessary knowledge
for such transformation. Government, in collaboration with the wind power industry,
could provide funding for “demonstration projects” to successfully deploy SCM
practices in the wind power industry and assess the projects’ potential for reducing CoE.
In this transition phase of industrialization, academia could play other roles as well.
IJESM First, academia could identify applicable maturity models and best practices. A
10,2 compendium of maturity models particularly useful in the wind power sector could be
developed for use by the industry. Benchmarking of firms in mature industries such as
automotive, aerospace, consumer electronics, home appliances and agricultural
machinery could be useful for identifying best practices. Particular attention could be
paid to cost modeling approaches, strategic cost management, SDIs and SRM. Second,
166 academia could help identify which configuration of SCM practices would be most
valuable in which phase of the life cycle of an offshore wind farm. For example, ESI,
knowledge management and value chain integration could be effective in the first phase.
A different configuration of practices comprising supplier relations management, SDIs
and cost modeling might be more useful in the construction, installation and
commissioning phase. The O&M phase might be aided by collaboration, supply chain
analytics and end-to-end value chain integration practices. Decommissioning could be
aided by partnering. It would be useful to identify the different configurations of
practices so that resource deployment could be maximally beneficial for achieving cost
reduction. Finally, academia could provide the training for manufacturers and their
supplier partners in all the salient SCM practices. Manufacturers should also be
provided with training in achieving strategic alignment across the supply chain,
performance measurement systems and metrics, as well as in strategic cost
management.

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Further reading
Corbetta, G. and Mbistrova, A. (2015), “The European offshore wind industry – key trends and
statistics 2014”, available at: www.ewea.org/fileadmin/files/library/publications/statistics/
EWEA-European-Offshore-Statistics-2014.pdf (accessed 17 March 2015).

Corresponding author
Jan Stentoft can be contacted at: stentoft@sam.sdu.dk

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