How Blockchains will Build a Transparent Supply Chain

Using blockchains, a great game-changing technology, to enhance trust, efficiency, and speed in supply chain management.

©Prof Archie D’Souza

Faculty in Logistics, Supply Chain & Project Management at Dayanand Sagar University and Rajeev Gandhi National Aviation University.

He is also Subject Matter Expert and Faculty at the Logistics Sector Skill Council of the National Skill Development Corporation.

His forthcoming book on how blockchain technology will impact project and supply chain management will be launched soon

Blockchain technology has been the greatest game-changer in the field of finance. There are other industries too where it’s having a great deal of impact. One such sector is the supply chain. Its use in managing supply chains is one of the most promising applications of emerging blockchain technology. So great is the potential impact on supply chain management that companies like Maersk and IBM are getting together to offer logistics solutions using blockchain technology. [see: https://casepillar.com/harvad-business-review/maersk-betting-on-blockchain/ ]. Blockchain technology has the potential to help supply chain partners with some of their challenges by creating a complete, transparent, tamperproof history of the information flows, inventory flows, and financial flows in transactions. Besides the study just mentioned, several researchers have found out how blockchain might improve their supply chain operations. Seeing its success elsewhere, there’s no doubt that the technology can enable the following:

·         faster and more cost-efficient product delivery

·         make products more traceable

·         streamline the financing process

·         enhance coordination among buyers, suppliers, and banks

If one looks at the history of supply chains, we’ve seen SCM progress over the decades, sometimes rapid but, most of the time, slow and steady. However, blockchain technology is out to transform and cause disruptions in a way and at a speed that we’ve never in the past witnessed. Companies should gear up for the biggest revolution after the inventions of the steamship, steam locomotive, the automobile, and aeroplane. Companies that do not update to this new underlying technology will be left behind. Once they start using blockchain technology in logistics they will wonder how they have been managing their supply chain operations all these decades. It’s like the internet when it was introduced. Today no one can think of life without it. Once they introduce blockchain technology, companies can rebuild their approach to supply chain management at the ecosystem level and go from the frog-in-the-well to an integrated global view, all at the drop of a hat.

At the very basic level “blockchains will do for networks of enterprises and business ecosystems what enterprise resource planning did for the single company,” said Paul Brody, a leader in blockchain technology from EY. He also stated, “At its most basic level, the core logic of blockchains means that no piece of inventory can exist in the same place twice.” We will look here at some ideas on how Blockchain Technology has the potential to revolutionize and re-engineer the supply chain sector, all over the globe and across the board.

The Elimination of Middlemen & Value-sucking Intermediaries

There’s no doubt about the fact that everyone just loves to hate the middleman. Some of them, like the freight forwarder – especially the customs broker – for instance, have made themselves indispensable. Clients have been made to think that they are really useful and add value. In reality, they are value-sucking intermediaries. The advent of bitcoin along with smart contracts thanks to the introduction of blockchain technology has changed all this. In the past, the only way one could get a large number of entities to agree upon a shared, truthful set of data and a coordinated operation of the services they offer was by mandating it. The airline, shipping line, and crude oil cartels – IATA, the shipping conferences, and OPEC – had a vice-like grip on the consumer. The transparency that blockchain technology brings will change all that.

Let’s look at how a typical international consignment moves irrespective of the mode of transport, irrespective of whether the shipment is containerized, bulk, or breakbulk. These are the steps that almost every shipment has to go through:

·         Goods are packed by the shipper (exporter) and they, in turn, inform their agent that goods are ready to be shipped – need for an agent

·         Goods at the shipper’s premises need to be loaded on a truck, container on a trailer or any other means of local conveyance involved – need for a local trucker

·         International carriage should be arranged for – besides the need for a carrier, viz. airline/shipping line, an IATA or steamer agent’s services also needed

·         Insurance needed to be purchased – need for an insurer and an insurance agent/broker

·         Goods needed to be moved to an airport/port/truck or train terminal – the same trucker mentioned above does it

·         For full-container-loads – will the cargo fit into one container? – need for a surveyor

·         For less-than-container-loads – weight & volume of the cargo to be calculated and freight amount calculated based on the same – again a task for the same surveyor

·         Customs clearance of goods for exports – need for a customs broker

·         Terminal charges to be paid at the origin

·         For bulk or breakbulk shipments, cargo to be loaded on the vessel – the need for a stevedore at the origin

·         International carriage takes place. Containers may be offloaded from one vessel to be loaded on another – need for tracking information

·         Goods reach the destination and the consignee to be informed – need for a custodian at the airport/terminal at the destination

·         Again, for bulk or breakbulk shipments cargo to be unloaded from the ship – the need a stevedore at the destination

·         Goods to be customs cleared for imports and duty paid – need for a customs broker at the destination

·         Good to be delivered at the consignee’s premises – the need for a customs broker at the destination

·         In case the goods are damaged, pilfered or lost, a claim has to be made – a new professional is needed to assess the damage and help in filing an insurance claim

From the above steps, one can see how many intermediaries are needed and, the list is not exhaustive. One agency may perform more than one task alternately all or some of these tasks may be outsourced to a third-party logistics service (3PL) provider. More than the pain of dealing with multiple agencies is the opaqueness of procedures and hidden costs involved. These are two of the pain points that blockchain technology will do away with. Will it lead to job losses? Yes, but only the value-sucking ones. Anyone adding time or place value need not really fear of being rendered redundant.

Blockchain technology will ensure an impartial intermediary to process and account for all transactions. Blockchains can make it possible to build an ecosystem of business partners to share and agree upon key pieces of information, something badly needed in supply chains. Facebook’s Libra, the new cryptocurrency is also using blockchain technology. Blockchains do away with local and central intermediaries by synchronizing all data and transactions across the network. Each participant verifies the work and calculations of others. This does away with enormous numbers of redundant practices and unnecessary cross-checking. Value-suckers get eliminated and only the value-adders remain. As the information is transparent and visible, its reliability can’t be doubted. Using the technology hundreds of thousands of transactions across nodes and networks can be instantly checked on a regular basis.

Now, let’s apply the same security and redundancy principles to something like inventory. Let’s substitute supply chain partners for banking nodes. We now have the foundation for a radically new approach to supply chain partners for banking nodes. We also have the foundation for a radically new approach to supply chain management. There are several cases for this new way of working and, they are all so compelling. As Paul Brody said, “At its most basic level, the core logic of blockchain means that no piece of inventory can exist in the same place twice. Move a product from finished goods to in-transit, and that transaction status will update for everyone, everywhere, within minutes.” With blockchain technology, we now are able to trace every piece of inventory from source to consumption point. Blockchain technology is revolutionizing and disrupting the Supply Chain Sector. It’s a known fact. Here’s a brief look at what these two terms mean.

Blockchain

The terms blockchain and supply chain tend to leave a lot of people more confused than they ever were before. Blockchain is a decentralized, distributed database that holds digital records securely. Also, all records are transparent and accessible to the public, yet they cannot be altered, deleted or edited. Data, once placed in a blockchain, remains permanently etched or encrypted there. Each transaction or record inserted there registers a different block in the chain. What blockchain provides is a highly secure method of record-keeping. It is also more efficient for businesses to work with. Blockchain technology along with artificial intelligence, machine learning and the internet of things, will determine the future of supply chains and how trade is conducted in the future. Robotics is another field that will reshape the future in many ways. Their use can add a great deal of efficiency to a range of products from autonomous cars to warehousing and inventory management.

Supply Chain Management (SCM)

Thanks to the ecommerce revolution, we nowadays have the luxury of getting readymade high-quality items delivered to our doorsteps. The one who makes the purchase, whether in a store or through the net, hardly thinks of how the product was manufactured and how it got there. For the product to reach the buyer, plenty of hands and heads get to work providing raw materials to the manufacturer and finished products to the retailer. There may be any number of distribution and marketing channels in between. The process that links all the parties involved in delivering the product to the consumer is called the supply chain and managing it is what SCM is all about.

SCM has many components but logistics is a very key one. Products are shipped, stored, customs cleared and quality checked, among other things, before they reach the final consumer. These processes are time-consuming, expensive, and very often complicated. Global trade also involves dealing with parties across the world including foreign organizations, importers, exporters, national & international government & quasi-government agencies and a host of others. Hence, traders have to deal with plenty of political outcomes, international law, and high tariff regimes. With the introduction of blockchain technology, companies gain what is termed as a real-time digital ledger of transactions and movements for all participants in their supply chain network. The tool, viz. blockchain, may look very simple and facile, but it is tremendously disruptive and transformational. Blockchain technology can provide novel ways to record, transmit and share data. These are some of the most urgent and burning issues facing supply chains.

So, what then is the blockchain? In essence, it is nothing but a unique database system created and maintained by participants in a decentralized network. It offers a secure and reliable architecture for conveying information and transactions. This is all recorded digitally. It could include the exchange of data and assets among participants in a supply chain. The distributed ledger is decentralized. Also, every stakeholder maintains a copy of the ledger. For these two reasons, a single point failure or data loss is prevented. This further implies that blockchains are impervious and highly resistant to alteration and/or tampering. It also makes regulatory compliance simpler and easier as records are tamper-proof. The ultimate result is that blockchain can increase the efficiency and transparency of supply chains and positively impact everything from warehousing to delivery to payment.

Every party involved, from the beginning to the end of the supply chain, every participant, every service provider, is aware of the situation when blockchain technology is used. This includes everyone involved in the transaction as well as movement, storage, and handling of the product and, at all times. The implementation of blockchain technology in supply chains also ensures that products can be tracked and traced throughout their entire process.

Another key feature of the technology is that blockchain data is immutable. Besides the reasons stated above, is the fact that digital signatures are required. This confirms information ownership. So, if multiple companies work together, they can use a blockchain system to record data about the location and ownership of their materials and products. The data is stored in the blockchain. This offers a full history of all items in the supply chain. Any member of the supply chain can see what is going on as materials move from location to location or company to company. None of these data records can be altered. Also, the data stored, along with every transaction and movement, is highly traceable. If a product or component is defective, the source of the problem can be identified with ease and so much more quickly. This improves the effectiveness and efficiency of product recalls and grievance resolution between stakeholders in the chain. Having a traceable and immutable record on every transaction and also a transparent and complete inventory of product flow help businesses make better decisions. It gives stakeholders and customers more confidence in the products’ quality. The improved transparency is also a tool for fighting fraud and counterfeiting.

Cost savings are another huge benefit of blockchain technology. There is no doubt that inefficiencies in the supply chain create a lot of waste. This is especially prevalent in industries that have perishable goods, such as the food industry. Blockchain technology provides for a much-improved tracking and data transparency system. This can help the business identify flaws and correct them almost instantly. These wasteful inefficiencies thus prevented can also lead to the implementation of targeted cost-saving measures.

The use of blockchain can also eliminate fees associated with funds passing in and out of various bank accounts and payment processors. These bankers’ fees and other transaction costs eat into profit margins of companies to a very great extent. Therefore, being able to remove them from the equation will lead to a significant drop in costs.

One of the greatest problems with current supply chain technology and methods is that one is not able to integrate data across every partner or participant in the process. In contrast, blockchain technology is the exact opposite. Blockchains are built as distributed systems that maintain a unique and transparent data repository. All parties in the network contribute to adding new data and verifying its integrity. So, every party involved in the network is able to access it. The result is that one company can easily verify the information being broadcasted by another.

Finally, last but not the least, manual data interchange is replaced by electronic data interchange (EDI) systems, not really a new phenomenon. More and more companies are relying on EDI systems to relay information to one another in real-time rather than in timed batches. If a shipment goes missing or there is a sudden change of price, every party in the supply chain will get this information automatically.

One can safely conclude from there that blockchain technology is the future of supply chain management.