Get ready for blockchain in the supply chain – part 1

Main visual : Get ready for blockchain in the supply chain – part 1

Supply chains have always been driven by innovation. So much so, that we now consider many of those advances to be ‘normal’: the Toyota Production System, shipping containers, Distribution Requirements Planning, the assembly line, Apple globalization, and so on.

As for Apple, for example, globalization allowed it to build a supply chain based on East Asian manufacture by Foxconn of product designs and software conceived by Apple in California and chip architectures devised by ARM in Cambridge, UK.

A sure-fire success for nearly 40 years now, this recipe currently looks less reliable as tariff barriers return to the political arena after decades of decline.

What’s the next development in supply chain management?

The next step for supply chain innovation is, amongst others, blockchain and other Distributed Ledger Technologies (DLTs). I’ve covered how DLT works elsewhere, and how they create foolproof authentication of transactions in digital ‘ledgers’ so that participants are prepared to act on the data.  

The unique selling point for DLTs is that they create trust in transactions at any scale, even when the participants have never met and do not even know each other’s identities.

By increasing transparency and making it possible to automate processes and payments, DLT has the potential to reduce trade costs significantly. According to a recent World Trade Organization report about the potential of blockchain, “Cost reduction estimates in the financial sector and the shipping industry range from 15 to 30 percent of total costs.”

Perhaps you get the same queasy feeling as I do about projections like this. Here is another: the World Economic Forum (WEF) calculates that the removal of barriers due to blockchain could result in more than US$ 1 trillion of new trade in the next decade.

Can numbers like these really be true? Well, let’s break it down.

First, there is simple redundancy and efficiency.

“IBM and Maersk recently ran a test shipment of flowers from Kenya to the port of Rotterdam, the Netherlands,”, says the WEF report, “which resulted in a stack of nearly 200 communications documents – a big pile of paper accumulated along the way… Centuries-old paper process can introduce errors, risks and delays, and make real-time updates and tracking more difficult. In contrast, DLTs, operating as secure, shared databases, will reduce waste, delays and transportation costs.”

Analog gaps in digital processes

Next comes inventory control.

Technology companies have a rule of thumb, says global consultancy EY, that keeping $1 of inventory costs 20 cents to 40 cents per year, factoring in the cost of capital and the rapid depreciation of technology products.

In the world, as we know it today, there are analog gaps and potential errors in each of the many handovers from a digitally controlled process - manufacturing, for example - to delivery.

The system, of course, produces a docket to say the item is in the distribution network, but there is no definitive evidence that the promised item is actually in the box on its way to you.

With a distributed ledger, you can be certain that no piece of inventory exists in the same place twice, thus allowing you to manage your risk. Once the manufacturer hands it over from finished goods to in-transit, the transaction status is updated for everyone, everywhere, within minutes, with full traceability back to the point of origin.

This means that excess and error in the supply chain can be squeezed out, identified or eliminated, with significant savings not just on inventory, but on working capital and troubleshooting costs too.

In the next part of this blog, I’ll look at how DLT optimizes other aspects of the supply chain, including the use of smart contracts to control working capital, maximizing discounts across an entire ecosystem and the savings from cutting out the middleman – ‘disintermediation’ as it is otherwise known.

We’ll also look at how extracting these benefits from DLT implementations is neither complex nor does it involve taking your people on a voyage into the unknown. If you would like to explore that further, I’m always available for a discussion.