Blockchain And The Digital Supply Chain

The burgeoning tech can streamline the entire supply chain

26Mar

Supply chain management is overdue for major disruption. The act of moving a product from the manufacturer to the end recipient has become excessively complex. It can involve multiple suppliers, inspectors, several modes of transport, and reams of documentation: contracts, invoices, delivery notes, and customs clearances. Visibility and transparency while the goods are in transit are generally poor.

A blockchain application can streamline the supply chain process and make it possible to track and trace the delivery at every step along the way, but blockchain development will require a mighty effort on all those involved.

What is on every supply chain executive’s wishlist

In 2009, IBM conducted a global survey among supply chain executives (CSCOs). The main challenges that CSCOs expressed were cost, visibility, risk, customer needs, and globalization.

Figure 1 Source: IBM - The Smarter Supply Chain of the Future: (p 9)

A decade later, not much has changed except adding supply chain digitization to the mix. Visibility is still a major issue, both with regards to the progression of goods through the supply chain and an increasing demand for transparency in provenance and corporate social responsibility. Consumers need to know that goods and their raw materials are ethically sourced and that resources like water and energy are being used responsibly.

In Eye for Transport’s (EFT’s) 2017 Global Supply Chain Report, visibility was still a major pain-point. What was more, the situation had deteriorated between 2016 and 2017.

Figure 2 Source: EFT 2017 Global Supply Chain Report (p 13)

Considering that among the 400 participants were Amazon, Adidas, and Toyota, we may expect that the average visibility in the industry is even lower.

Lack of transparency and visibility reduces the effectiveness of risk management, while increasing globalization adds to the risk. Companies should aim for at least 80% visibility if they want to survive and compete effectively, like the top 30% in Figure 2.

Roadblock en route - EDI

Supply chains have changed dramatically, but the technology has not. One of the reasons that visibility issues haven’t been resolved yet is that the supply chain industry still relies on an archaic way of exchanging data. This barrier is known as the Electronic Data Interchange format (EDI).

Revolutionary in its time (the 1970s), the EDI was designed for only a few participants, such as an OEM (original equipment manufacturer) and a supplier. The EDI doesn’t work well for today’s supply chain with multiple participants and the bureaucracy of cross-border transactions.

Paul Brody - global innovation blockchain leader at EY - said: “Supply chains are no longer traditional networks of OEMs and suppliers. Now they are vast ecosystems, with many product variants moving through multiple parties, all trying to coordinate work together."

How Blockchain can improve the supply chain

The use of blockchain to expedite the movement of goods can revolutionize supply chain management, and most CSCOs have realized this. Eye for Transport found a marked change of 14% in the interest in blockchain among its respondents over 12 months, and identified it as one of the 'Hot Trends' in supply change management, along with digitization, chatbots, and workforce transformation.

Figure 3 Source: Supply Chain Hot Trends, Q2 2017 - Eyefortransport, p5

The reason for this change is the increased understanding of where blockchain can bring improvements. The same respondents indicated where they saw blockchain benefiting their organization.

Figure 4 Source: Supply Chain Hot Trends, Q2 2017 - Eyefortransport, p4

Unlike our traditional centralized databases, a blockchain is a distributed ledger. Each transaction is replicated across the whole chain and each participant has a copy of the ledger. Someone who wanted to tamper with one transaction would have to change every single instance of it in every single ledger.

This feature also makes it possible to remove intermediaries from the chain. The validity of a transaction is reached by a consensus vote by the participants, which makes an intermediary as a trusted partner irrelevant. The data is also traceable and visible to everyone in the chain, which are the key pain points for all supply chain executives.

Deloitte illustrates how blockchain reduces the main supply chain pain points in the diagram below, from their white paper 'When Two Chains Combine - Supply chain meets blockchain.'

Figure 5 Source: When two chains combine - Supply chain meets blockchain (P 3).

One of the most powerful agents in the blockchain is the smart contract. Along with providing flexibility, the smart contract also assists in compliance and stakeholder management, as it will only execute on a valid trigger.

The power of the smart contract

Although smart contracting did not receive a large score in Figure 4 above, this is where much of the blockchain power resides. Essentially, a smart contract is a small piece of code containing business rules, which allows it to perform the same function as a traditional intermediary. An event triggers a condition that activates the smart contract, and the product moves to the next link in the chain. This adds velocity to the blockchain, because the execution of the condition is immediate, especially compared with a situation where there was a human intermediary, such as a customs officer.

There are many cases where the smart contract can oil the gears of the supply chain:

Deloitte lists a few:

Figure 6 Source: Deloitte: Upgrading blockchains-Smart contract use cases in industry (P4)

The case for a blockchain in supply chain management has been piloted by Maersk and IBM when they expedited the delivery of cut flowers from the highlands of Kenya to the flower markets of Rotterdam. Kenya exports over 100,000 tonnes of cut flowers annually. There are as many as 200 documents and other communications in the process. One holdup in the process can have a drastic impact on such perishable goods

Figure 7 Some statistics on flower exports: Source: IBM Infographic

One of the examples where a smart contract can play a role in this supply chain is when the shipment is waiting to be loaded on to a ship. Once officials approve the consignment, the container can be moved on to the ship via a smart contract.

Figure 8 Starting the Journey: cut flowers to Europe - IBM infographic.

Although this was a pilot, IBM is using what was learned to roll out other blockchain instances.

Taking the plunge

If you are contemplating a blockchain implementation, consider the following:

- External help is required to get to grips with the process, development, and implementation.

- This is a cooperative initiative. Your supply chain partners need to be involved, whether they are suppliers of raw materials, logistics companies or watchdogs over the transfer of goods across borders and oceans.

There definitely is a surge of interest in how blockchain can solve the supply chain conundrum. CSCOs have been exploring the possibilities of blockchain in supply chain management, now they are gearing up to build their own blockchains. Paul Brody, Global innovation Leader for Blockchain at Ernst and Young, who we quoted earlier, has noted this change happening over the last 18 months.

In the nearest future, the blockchain will bring velocity and flexibility to supply chains drowning in paper and processes that have been in place for the last 40-50 years. This is probably not a time to be conservative, the laggards will be at a digital disadvantage and may not be able to catch up.

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