2012

ENERGY EFFICIENCY IN FMCG COMPANIES

ENERGY EFFICIENCY- A key to success for FMCGs

Energy is an integral component of a modern economy. It is an essential ingredient in nearly all goods and services, but its use exacts heavy financial, environmental, and security costs. A key method of reducing energys costs while retaining its benefits is to use it more efficiently. Industrial energy use and the opportunities for improving its energy efficiency depend on many technical, economic, institutional, and political factors. Many such factors have changed since the 1970s, when most Federal energy policy was formulated: Industrial energy intensity has declined over the last two decades as a result of improvements in energy efficiency and shifts in industrial structure. Industrys petroleum consumption has fallen from its peaks of the late 1970s. Prices of petroleum, natural gas, and electricity have declined, when adjusted for inflation, after nearly a decade of increases. Utilities have assumed a new role in promoting energy conservation. Energy policy has been extended beyond the traditional issues of availability and price to include environmental quality and industrial competitiveness.

The Indian FMCG industry is over INR 1300 billion in size. It touches the life of every Indian and therefore has perhaps the widest reach among all industries in India! The industry has tripled in size over the last 10 years, growing much faster than in past decades. This has been facilitated by the many changes in the Indian economic and industrial landscapereduced levels of taxation, easier import of materials and technology, reduced barriers to entry of foreign players, growing organizational maturity of Indian players, growth of media, and, of
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course, the growing affluence and appetite for consumption of the Indian consumer. The industrys potential to grow further and faster is awesome, given the low penetration of most categories and rising consumer incomes. Many FMCG companies have started pioneering sustainability efforts. For example ITC has been publishing an annual report on sustainability and has also conducted sustainability audit of businesses and subsidiaries. HUL has been focusing on ensuring sustainable practices in business. Nestle has initiated pollution-free waste disposal at manufacturing plants, while Dabur has been focusing on reducing energy consumption, increasing renewable energy and plans to become carbon positive in the next few years. Such measures are forcing other players to also involve themselves considerably in driving green practices. One problem area for FMCGs, as these are logistics-intensive businesses that also release greenhouse gases during their manufacturing processes. Since fuel scarcity in the future is likely and transportation is a major GHG culprit, companies should strive to make transportation more efficient and encourage usage of renewable energy through use of hybrid vehicles for transportation.

Cost-effective green technologies are emerging, as is the supporting ecosystem comprising of researchers, regulators and other such personnel facilitating and supporting their development. Commercialization further ensures the

profitability, or at least the economic feasibility, of green initiatives. For example, the widespread adoption of solar energy systems had long been hampered by the high cost of photovoltaic (PV) cells per kilowatt-hour compared with other energy sources. But as the price of traditional energy skyrocketed, low-cost thin-fi lm technology became increasingly

commercialized and this has begun replacing first-generation crystalline silicon

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PV installations today. As solar energys cost per kilowatt-hour continues to drop, it is estimated that a larger proportion of the population will adopt this. The implications of companies choices in terms of environmental impact should be assessed and the trade-offs involved in all major decisions, including sustainable programmes (renewable energy sources and recycled materials, energy efficiency and material yields) should be weighed against risk, cost, growth, and service/ quality. PepsiCo has incorporated sustainability as a criterion in its capital expenditure filter. All capital expenditure requests over INR 5 million must include a review of the sustainability issues and opportunities surrounding the request. As consumer behaviour shifts across segments, re-engineering the supply chain will be critical to stay abreast of these changes and reach an increasingly fragmented customer base. Supply chains are already under pressure to deliver at lower costs and offset generally rising costs for raw materials and energy. This pressure may intensify even further as governments (either nationally or at the state or city level) put a price on carbon emissions and establish new regulations on waste. Changing tax laws with the implementation of GST would lead to simplification and more uniformity. Todays supply chains were built on yesterdays blueprints, in a world where low energy and transportation costs, cheap labour, relatively inexpensive raw materials, complex tax laws and scarce environmental regulations were fixed assumptions. The supply chain of the future, by contrast, will have to be leaner, greener, and more tailored to manage increasing complexity. Once product and process choices have been reconsidered, the supply network needs to be realigned to balance cost, service, risk, and sustainability in meeting market demand. Changing regulation, specifically GST, as well as new areas of demand acceleration, such as eastern India, will need to be incorporated. The challenge for manufacturers is to make the right footprint trade-offs not only for
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today but also for an uncertain tomorrow. Successful companies will build more flexibility and adaptability into their networks with investments in technologies and assets that can react to changes in demand as well as variability in factors like labour costs and energy use.

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