The Blockchain and the Supply Industry: A Closer Look
Updated: Apr 29, 2020
In our last blockchain post we went over what the blockchain is and how it works. But if you are reading this there are two more questions you want answered; how is it good for the supply chain industry and is it right for my business? This post will address the industry-wide question.
For all the literature that exists on the blockchain, thus far the leading document about its potential impact on the supply chain industry is a 2018, 28-page white paper authored by DHL and Accenture. This post will cover the highlights of that paper and supplement it with other sources as well.
If you work in the supply chain and logistics field you are probably very familiar with the industry’s shortcomings; How inefficient it is at keep tracking of shipments from one carrier to the next; How many independent carriers there are and how difficult it is to keep track of who is who and where your shipment is at any given time; How much paper the industry still uses to keep track of transactions; and what a pain it is to get and record permissions from one government entity to the next.
Logistical Issues with Blockchain
These are problems that have been around not only for years, but in some cases, for centuries. In fact, these long-standing issues may no longer seem like issues so much as the way business is done because that’s the way it’s always been done.
These long-standing issues have high costs. Namely, they cause delays, they open the door to confusion between carriers and clients, and they cost money. They also inhibit change as people and organizations get accustomed to the dysfunction or don’t want to take on new technology, never mind learn how to use it. Let’s shine a light on some specific supply chain industry inefficiencies. According to the DHL/Accenture report, " today there is a significant amount of trapped value in logistics, largely stemming from the fragmented and competitive nature of the logistics industry. For example, in the US alone, it is estimated that there are over 500,000 individual trucking companies. With such a huge number of stakeholders involved in the supply chain, this often creates low transparency, unstandardized processes, data silos and diverse levels of technology adoption.”
The DHL/Accenture report also notes that, "Many parts of the logistics value chain are also bound to manual processes mandated by regulatory authorities. For example, companies must oftentimes rely on manual data entry and paper-based documentation to adhere to customs processes. All this makes it difficult to track the provenance of goods and the status of shipments as they move along the supply chain, causing friction in global trade.” This is to say nothing about human error and the time it takes someone to record this information by hand, never mind the cost of paper and notebooks on which to record it.
In light of these industry-wide issues, the DHL report argues that, “[the] Blockchain can potentially help to overcome these frictions in logistics and realize substantial gains in logistics process efficiency. This technology can also enable data transparency and access among relevant supply chain stakeholders, creating a single source of truth. In addition, the trust that is required between stakeholders to share information is enhanced by the intrinsic security mechanisms of blockchain technology.
Furthermore, blockchain can achieve cost savings by powering leaner, more automated, and error-free processes. As well as adding visibility and predictability to logistics operations, it can accelerate the physical flow of goods. Provenance tracking of goods can enable responsible and sustainable supply chains at scale and help to tackle prod- uct counterfeiting. Additionally, blockchain-based solutions offer potential for new logistics services and more innovative business models.”
Okay, So What’s the Real Issue?
This is all wonderful, you say, but shared visibility solutions exist. And you are right. But,"they are generally proprietary and therefore not inter-operable. By contrast, blockchain is evolving through open standards initiatives, such as the Hyperledger project run by the Linux Foundation.”
This means when the Hyperledger project creates its enterprise blockchain software that it is not good just for IBM, Oracle, or Maersk, but for the greater enterprise blockchain industry as a whole. For example, "Blockchain technology has huge potential to optimize the cost as well as time associated with trade documentation and administrative processing for ocean freight shipments.
One example that highlights the complexities behind ocean freight today is the estimate that a simple shipment of refrigerated goods from East Africa to Europe can go through nearly 30 people and organizations, with more than 200 different interactions and communications among these parties.” (source: https://www-03.ibm.com/press/us/en/pressrelease/51712.wss ) I don’t know about you, but if a game of Telephone (definition: https://en.wikipedia.org/wiki/Chinese_whispers ; example: https://www.youtube.com/watch?v=bLPGUN9p74Q ) among ten people in the same room can go wildly wrong, what could happen with three times as many people located around the world? Forget that, I’m sure everything’s fine…
If these examples of inefficiencies haven’t driven you mad, then let’s talk about money. A report by the World Economic Forum estimates that " reducing supply chain barriers to trade could increase global gross domestic product (GDP) by nearly 5% and global trade by 15%.” In dollar terms, that translates to increases of $3.793 trillion (https://data.worldbank.org/indicator/NY.GDP.MKTP.CD ) for global gross domestic product and $2.579 trillion for global trade respectively.
Sources: DHL Report in cooperation with Accenture.
This begs the question; how big a problem are erroneous bills of lading in terms of money lost? "Current industry estimates indicate that 10% of all freight invoices contain inaccurate data which leads to disputes as well as many other process inefficiencies in the logistics industry. This problem is so prevalent that in the oil and energy industry alone, Accenture expects that at least 5% in annual freight spend could be reduced through improved invoice accuracy and reduction of over-payments. Blockchain has the significant potential to increase efficiency along the entire logistics and settlement process including trade finance and help to resolve disputes in the logistics industry. As digitized documents and real-time shipment data become embedded in blockchain-based systems, this information can be used to enable smart contracts. These contracts can automate commercial processes the moment that agreed conditions are met.” (Source)
Let’s go a little deeper by walking through the steps of another example: “...blockchain in combination with the Internet of Things (IoT) in the logistics industry will enable even smarter logistics contracts in future. For example, on delivery a connected pallet will be able to automatically transmit confirmation and the time of delivery as well as the condition of the goods to the blockchain-based system.
The system can then automatically verify the delivery, check whether the goods were delivered as per agreed conditions (e.g., temperature, humidity, tilt) and release correct payments to the appropriate parties, greatly increasing efficiency as well as integrity.
Blockchain can further be used in the context of IoT to automate machine-to-machine payments (e.g., connected machines negotiating and executing price based on the logistics activities performed). Another example of smart contracts in the logistics industry is the digitization of letters of credit (L/C) in order to accelerate the preparation and execution of a standard paper-based L/C – a process which currently tends to take from a few days to a few weeks.” (Source)
These are the reasons why supply chain and logistics industry experts are excited about the potential of the blockchain. It has the potential to save industry participants time and money. That being said, this potential assumes that the entire industry adopts the technology en masse. It assumes that companies have the budget and the expertise to ditch legacy systems for the blockchain. And it assumes that this transition and the technology itself works smoothly. These are heady assumptions.