The impact on the food & grocery supply chain of rising energy costs has brought renewed focus on sustainability, the environment and corporate social responsibility (CSR), and of course, cost reduction initiatives. IGD's Darran Watkins takes a macro-economic perspective on the global energy markets, and looks into how organisations are looking for ways to improve energy, fuel and transport efficiencies.
 

Oil demand - and prices - are rising rapidly

Energy use: oil, gas, coal

The world’s grocery industry has developed in an era of relatively inexpensive energy and has become highly reliant upon it. But this era of development may be coming to a close as both the financial and environmental cost of energy rises rapidly.

Oil is a particular area of concern. Demand for oil is soaring, driven in particular by the emerging markets of China and India, but current producers are already operating close to capacity and are unable to respond quickly. The geographical concentration of oil reserves and key capital items in the hands of a relatively small number of nations is also a concern for some buyers. These issues are unlikely to be resolved in the near-term and so prices may be expected to continue rising strongly.

Natural gas consumption is also rising fast, buoyed-up by its reputation as a relatively “clean”, low-carbon fuel. Gas reserves are also geographically concentrated and Russia in particular has benefited from its extensive reserves in recent years. In contrast, coal has recently fallen from favour, mainly due to its status as a “dirty” fuel, but consumption is expected to rise significantly in the future, due mainly to expansion of electricity generation and industrial facilities around the world.
 

Three key forces affecting prices

Market forces refers to the interaction of supply and demand for energy on global and local markets, and with demand outstripping supply, the market price of energy commodities naturally rises. In a volatile marketplace, a key factor for governments is to ensure security of supply, and so intervention in energy markets or business practices by governments in pursuit of their policy goals will also impact on prices. Finally, unpredictable events, such as extreme weather, terrorist attack, war, or speculation all cause disruption to energy markets and therefore sudden price fluctuations.

The bio-fuel alternative

The promotion of the use of bio-fuels in the transport sector in particular has been pushed up the priority list and the political agendas of many companies and governments alike. The first generation of bio-fuels are ethanol and bio-diesel. Ethanol is produced from crops such as wheat and sugar and can be added to petrol, whilst bio-diesel is derived principally from vegetable oils like rapeseed and palm oil, and is added to ordinary diesel. Bio-diesel is thought to emit around 50 per cent less carbon monoxide and 78 per cent less carbon dioxide than normal diesel.

It is believed that increasing Europe’s use of bio-fuels will play a significant role in curbing harmful emissions. As such, the European Commission has since committed member states to encouraging the production and use of bio-fuels, and has set a minimum target of 10% of vehicle fuel coming from alternative sources by 2020. It is fair to say that debate over the sustainable sourcing of biofuels constrained rapid roll-out, but focus on second and third generation alternatives should see a change in adoption once again.
 

Managing energy use – from farming to the consumer

There is an obvious requirement for food and grocery businesses to manage energy use in order to minimise cost, as well as respond to other non-commercial concerns, including regulatory compliance and CSR.

• Farming - rising demand for food, coupled with the opportunities offered by bio-fuels production, may offer a critical opportunity to boost farming incomes, one which has not been seen for some years.
• Manufacturing - possibly the most problematical stage in the supply chain, since this is the point at which most energy is invested into the product and its packaging. With both energy and other costs rising ahead of factory gate prices, manufacturers of all kinds must seek to achieve greater productivity for each unit of input expended.
• Grocery retailers - play a key role within the supply chain of linking producers with consumers. As such, retailers have the opportunity to provide leadership and direction to both sides, although the need to remain sensitive to consumer needs cannot be overlooked. Grocery retailers will also need to readdress some aspects of their operations, from pricing policy, sourcing, store portfolios and distribution.
• Consumers - are impacted by rising energy prices just as much as the businesses which serve them. Some consumers are demonstrating an increased interest in environmental issues, the origin and ingredients of food products, and the welfare of suppliers: the ethical consumer is becoming a reality!

How are businesses responding?

Leading retailers, such as Wal-Mart and Tesco in particular, have announced potentially far-reaching plans for environmental sustainability, covering all areas of their business from energy efficient distribution and sourcing, product labelling and recycling, through to increasing the availability of bio-fuels at petrol stations and extending the ranging of “energy efficient” products.

In terms of supply chain, retailers and suppliers alike are employing a number of solutions for improving energy efficiency within their operations through more sustainable distribution practices. Many companies are changing delivery frequency and order quantities to ensure vehicle fill; some are increasingly using bio-diesel, double deck trailers, and sharing transport with non-competitors; whilst for others, even wind turbines and electric vehicles are now under trial.
 

Learning as we go

By trialling new technologies, engaging in more collaborative working, and reviewing operational working practices, the impact on the food & grocery supply chain of rising energy costs is far-reaching. The need to reduce carbon emissions has driven the environmental challenge and is front of mind for every business leader. Companies are learning as they go, but there is no easy answer and much work still needs to be done.

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Darran Watkins is IGD's Senior Supply Chain Analyst, responsible for IGD’s on-line information service Supply Chain Analysis. He regularly speaks at IGD and external events, including IGD’s annual Availability & Demand Planning conference, contributes to several ECR initiatives, and is a member of the ECR Europe Sustainable Transport workgroup.