Using Blockchain To Enhance Supply Chains
In the retail world, an effectively managed supply chain is one of the most important factors for competing over customers. These customers care about finding the lowest-cost way to obtain a product, and are more loyal to the economics of a supply chain than they are to any particular brand. This is a large part of why Amazon is such a global superpower - customers are unlikely to go anywhere else.
So as a manager, director, or C-level executive in this world, finding an edge over the competition is the top priority. This is why modern supply chains demand to be digitised and put on the blockchain. Supply chain efficiency allows these companies to compete for a customer and blockchains help super complex global supply chains deliver products and services on time.
How Vulnerable Is Your Supply Chain?
You might feel as if your current supply chain isn’t complicated enough to need a blockchain. You’re probably even thinking that this will add more complexity to your supply chain, but that is probably not the case.
For starters, it is very rare to have a short and fully domestic supply chain nowadays. Even the simplest product may consist of raw materials, semi-products, packages, and more that could be sourced in different countries. And the more complex the product, the harder it is to manage the supply chain.
Before going any deeper into the topic, it’s time to ask yourself “how complex is my supply chain?” Try counting the number of suppliers, transport companies, governmental institutions such as certification offices or customs clearance offices, logistics providers, wholesalers, retailers, distributors, and clients. That’s a lot of different players who are all involved in the supply chain of your product. How many intermediaries and middlemen are there in the end? Tens? Hundreds?
Complexity isn’t a bad thing, per se, but it does open up your supply chain to vulnerability. This is because you have less visibility and more noise, which leaves your business exposed to fraud, data manipulation, overstocking, quality control issues, and overproduction. All of these problems can be improved upon by creating an anonymous and transparent supply chain by adopting blockchains.
How is Blockchain Relevant to You
You may have heard of blockchain and blockchain technology before, but you probably haven’t realized how it can help your company. The first thing to clarify is what blockchain is and isn’t.
First, let's state what blockchain is not. It is not a centralised system. It’s not owned by any one party, so it cannot be forged and altered without a business partner’s knowledge.
Blockchain is a shared, unalterable ledger for recording the history of transactions. It increases trust, accountability, and transparency across business networks. There is no single party that is on top or in charge of the network, so the trust issues present in the centralized networks that currently dominate our world disappear. It is not Bitcoin either. Bitcoin may be the most popular and well-known cryptocurrency but it is important to note it is not the only use of blockchain. Bitcoin is a way of value transfer based on the blockchain infrastructure, which is just one example of the use of blockchain technology.
Transparency enables lower friction among parties, as no event is party to a subjective perspective and a viewpoint that could compromise the network. So really what blockchains are is a new environment for businesses to do commerce in. They have a platform or infrastructure within which all parties see each other, cross-check peer’s actions and documents and can do business on pre-agreed conditions in a transparent way.
This might sound like only a utopian ideal for business, but it’s not. Any business can join.
Current Market Dynamics in the Blockchain Projects Space
Blockchain technology is being adopted at a rapid rate, and recent reports paint an interesting picture on spending in this area over the next decade.
International Data Corporation (IDC) is an American provider of market intelligence, and in their August 2019 report (Worldwide Semiannual Blockchain Spending Guide), they forecast spending on blockchain systems to increase by 80% compared to last year. This will result in projected spending of 2,7 billion UDS.
This growth dynamic will continue, with approximately 60% growth annually in the upcoming years which will reach 15,9 billion USD in 2023. Gartner, another recognized research company is even more optimistic and forecasts the blockchain market in 2030 will reach 3,1 trillion USD. These are huge numbers and growth rates, however trends like this have existed before with tech and the Internet, so it isn’t unheard of.
Helen Disney, CEO of Unblocked, which teaches corporate executives about applications of blockchain and distributed ledger technologies in different verticals recently launched a new event series which recognises the growth of blockchain applications in the supply chain. She commented:
“We now see a number of real world examples and use cases of blockchain in supply chains creating waves of innovation and leading to greater transparency, security, scalability and efficiency. Forward-looking corporates can’t afford to ignore the advantages that blockchain can bring to their supply chain and logistics operations”.
One might say that these are only comments and forecasts and can’t be depended upon. But it is difficult to ignore the fact that the biggest global brands are either researching blockchain and looking for its application in their business, running tests on their business, or have already built and implemented blockchain-based solutions for a market competitive advantage. I’ll provide only a sample of brands that you might happen to know that already use blockchain. Case studies regarding well-known brands that already use blockchain are: Accenture, Apple, Bank of America, FedEX, JP Morgan Chase, Mastercard, Samsung and Merck. These are just a small sample.
Decentralized vs. Permissioned Blockchain for Your Business
One might ask how it is possible that such brands can operate on so transparent, open and anonymous on the other hand blockchain system as Bitcoin does. At this point, it is important to differentiate decentralized and permissioned blockchains.
The key distinction here is where the control exists. With permissioned blockchains, the manager of the blockchain retains the ability to control who can view, publish, and subscribe to shipment-specific data. This makes it suitable for centralized organizations who want to benefit from the technology without giving up control or becoming too transparent with sensitive market data.
Compare this to fully decentralized networks (like Bitcoin) and you can see a massive difference. On those blockchains, anyone can read the chain, make changes to the chain (if accepted by the consensus), and write a new block into the chain. This makes it an entirely public blockchain.
The distinction isn’t black and white either. Ripple operates a permissioned blockchain that only allows certain parties to be transaction validators. Permissioned blockchains may or may not require “proof of work” or other consensus systems to validate transactions. Without this requirement, the blockchains are more like shared ledgers.
Supply Chain As an Early Adopter of Blockchain Technology
All of this may lead you to ask why such an innovative technology is catching on so fast in one of the oldest industries. Don’t these industries already have tons of established systems that would make them less likely to adopt blockchain?
Right now, we’re experiencing the evolution of a concept that will revolutionise the business world just as the Internet has done for the last 3 decades. Almost every industry can benefit from blockchain implementation. However, those that are susceptible to fraud and data alteration are the ones that will be most likely to adopt the technology early on.
According to IDC, the biggest share of blockchain investments is in the financial industry (30%) and in manufacturing and supply chain (20%). These statistics provided by IDC are mirrored by projects we have observed in the marketplace. I will present what are in our opinion the two cases studies most worth analysing. First will be TradeLens, a blockchain platform designed for ocean shipping management. Second will be Food Trust, a platform used by the biggest retailers and FMCG manufacturers for supply chain management.
Case Study #1: The Shipping Industry
Ocean Shipping Industry Background
The book ‘Ninety Percent of Everything’ goes into depth about the ocean shipping industry. This is an industry that remains invisible to most of the population but which touches everything we use in our lives, including cars, garment, food, gas, medicine, and much, much more.
Ocean transportation is a crucial part of global supply chains. It is complex, hard to manage, not transparent, full of middlemen, and to a great extent, very old-fashioned. Its complexity and management difficulty stems from the number of parties, interactions, and documents involved in the process of shipping.
For example, with IBM and Maersk shipping a container full of flowers that originates from Kenya and is delivered to the Port of Rotterdam, at least 200 interactions are required between parties. Additionally, there are even 18 documents (eg. Sea Waybill, Bill of Lading, Booking Request, Import Declaration, Health Certificate, etc.) that are produced and have to be submitted, verified, tracked.
All that makes the process both complex and difficult. This is also what makes it a perfect environment for blockchain adoption but on the other hand very difficult to implement across a broad market.
Introducing the TradeLens Platform
Maersk, the largest ship owner in the world, recently introduced a platform called TradeLens in partnership with IBM. The platform is designed to exchange event data and handle document workflow in a transparent, smooth, and visible manner for the participants.
This platform works to digitize workflow and track shipments from end-to-end resulting in less friction caused by costly point to point communications. When tracking millions of containers a year, this is what’s necessary to integrate with custom authorities on the selected trade lanes.
Difficulties Deploying the Platform
The TradeLens system brings exporters, export authorities, ports, customs, ship owners, and importers together onto one platform. Shipping from a particular port requires signatures from many agencies. For example, the Port of Mombasa requires 3 different signatures, as well as 6 documents describing the origin, chemical treatment, quality, and customs duties.
A packing list is uploaded by the producer which is visible to all participants. This document and the smart contract behind the process trigger an export approval workflow between the 3 agencies. The status is visible for all to see in real-time, so the Port of Mombasa can track the sealing of the container, loading by a transport company, and approval from the customs clearance. All of this is delivered in a timely manner, thus allowing them to prepare for the container.
Blockchain provides secure data exchange and a tamper-proof repository of these documents and shipping events. All the actions on the platform are visible with precise information such as when, by whom, and what documents are delivered. One can easily check where the transported goods are at any point of time and who is in possession of them, as well as what the next steps of the journey are.
How TradeLens Affects Your Supply Chain
The key feature of TradeLens is that documents are visible once they are updated. TradeLens can significantly reduce delays and fraud, which may result in saving billions of dollars on an annual basis. On a macro level, further implementation of blockchain applications and reducing barriers of ocean trade has the potential to increase worldwide GDP by 5% and total trade volume by 15% (according to the World Trade Organization).
The platform has great potential to influence the industry, but to do so it must be widely accepted by the existing power structure. Maersk and IBM, the founders of the platform, had difficulties persuading other companies joining the platform due to their concerns about entering on a less than equal footing.
In May 2019, the problem was to some extent solved when two other major players from the shipping industry, MSC and CMA-CGM, agreed to enter the agreement. These two companies joined Maersk, Asia’s Pacific International Lines, ZIM Integrated Shipping Services, and Hamburg Sud, who were up to that time the only participants of the platform.
MSC and CMA-CGM serve as Trust Anchors in the system who validate transactions and will participate in the TradeLens Advisory Board to promote the neutrality of the platform. Maintaining evenhandedness in the platform is essential for it to be successful and attractive to other participants. Today TradeLens hosts over 100 supply chain operators from shippers, cargo owners, freight forwarders, port authorities, and other parties. Once combined, the group will manage nearly half of the world’s ocean container cargo data.
Case Study #2: The Food Industry
The food industry is another sector where blockchain technology can have an outsized effect. The shipping industry benefits from for efficient transportation and tracking of goods, but the food industry gets additional benefits from the reduced risk of lawsuit from contaminated goods.
“This technology could enable me, as the retailer, to be able to digitally track individual pork products in minutes, not days,” explains Frank Yiannas, VP of food safety at Walmart. “I’ll be able to tell if this product is authentic and safe, and when it expires. If a food contamination issue arises at the farm or factory, I’ll know which products to recall and which may be left on the shelves. It could improve supply chain efficiencies, promote sustainability and reduce food waste.”
E.coli Outbreak in 2006
Every single person in the world is a customer to the food industry in some way, and it is expected to be worth USD 20 trillion by 2030. It is also subject to very stringent controls, and is susceptible to supply disruptions. Even a very low risk event has the potential to become a turning point and disastrous for the industry.
In 2006, the US experienced what is now a widely discussed case of an e.coli outbreak in spinach that caused 3 deaths, 31 cases of HUS (Hemolytic-uremic syndrome), and 199 health cases in 26 US States.
The outbreak was caused by e.coli bacteria transmitted through spinach leaves, and this caused all spinach to be pulled from retailers shelves. At one point, no spinach was being delivered nationwide, and all spinach had been pulled from the shelves. It took authorities and retailers two weeks to determine the origin of the contamination.
It turned out to be one supplier, one farm, one lot, and one-day of production. That one focused incident caused all these problems for the entire spinach industry. The Center for Disease Control and Prevention issued a warning about the e.coli outbreak on September 13th, 2006, but it took until October 6th, 2006 before they had tracked down and isolated the farm in question. That is an unacceptable period of time for the containment of an outbreak.
Cases like the one above illustrate how difficult it is to efficiently track processes in the supply chain. They also put further emphasis on the need for high visibility and fast reactions to incidents of this sort.
How to Build Safer and More Reliable Supply Chains
In 2019, IBM and Walmart introduced their Food Trust platform. Food Trust is a blockchain-based cooperation platform that helps manage complex supply chain processes. Food Trust is a solution intended to reduce food wastage, enable safer food, lengthen shelf lives, support traceability, and improve access to information throughout supply chains.
It is a fully transparent food system based on a permissioned blockchain, and it allows companies to track food at all steps of the supply chain and check where it is. It also keeps information so you can check the whole supply chain of the product in seconds.
The main steps monitored by the system are:
- Packing House
- Border Crossing
- Distribution Center
Each of these steps are kept track of by the company's operations and even in some cases can be communicated to the customer. Operations departments and all parties involved in the chain are able to get fresh insights and can keep track of all relevant certifications and events.
The system utilizes smart contracts which enables automatisation of decision making within the supply chain. This is done using predefined rules and terms that act as triggers for new actions when others are completed. Trust Anchors are participants of the system which should participate in the process and get a particular set of information. They have access to the shared ledger of the system and can cross-check the accuracy of the data, documents, and events. This allows them to react immediately if they see any possible errors.
The main benefits of the transparent food system are:
- Enhanced food safety
- Fresher food
- Reduced food waste
- Detering of food fraud
- Promotion of responsibility
- Building of consumer trust
Blockchain systems for food production and distribution management bring so much value that top companies who want to be leaders of the industry invite their suppliers, vendors and logistics providers to the system. This helps them enforce transparency, which in return builds trust and better communication among partners. It is no surprise that others in the industry are following on and this trend is catching on fast.
Blockchain Technology Meets Supply Chain Management
Blockchain technology is becoming increasingly relevant to every industry, just as the Internet did in the early 2000’s. However, as the above case studies illustrate, there are certain industries that are a better fit for it than others. These sectors are the “low-hanging fruit” of blockchain because of the simple ways the technology can be used to save money and mitigate risks.
Supply chains are becoming increasingly complex as the trend of globalization continues, and it is likely this trend will continue. A domestic supply chain with few parties is a relic of the past, and with all the different parties involved in bringing one product from the manufacturer to the customer, there is significant risk involved.
Implementation of permissioned blockchains allow companies to reap the benefits of a shared ledger, but without having a completely public blockchain that any party can publish transactions on. This key difference between permissioned and fully decentralized blockchains is what makes it possible for companies to benefit.
In the shipping industry, businesses are exposed to fraud, data manipulation, overstocking, quality control issues, and overproduction. The food industry has an even higher risk potential, as was shown in the 2006 e.coli outbreak that affected all the spinach in the U.S.
TradeLens and Food Trust are two examples of an emerging trend of companies partnering with technology companies to build blockchain platforms for their supply chain. These are highly competitive industries where even a slight edge can push a company’s margins up significantly. As businesses become aware of the potential savings resulting from using a permissioned blockchain, this trend will only accelerate as more companies come onboard.
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