It is estimated that the supply chain industry represents over $50 trillion in annual GDP globally. In a 2017 report by Statista, the global blockchain technology market is predicted to reach 339.5 million U.S. dollars in size and is forecast to grow to US$2.3 billion by 2021.
The supply chain management software industry was worth US$12.2 billion in 2017 according to Statista and the market is predicted to exceed $19 billion in total software revenue by 2021, according to global research and advisory firm Gartner.
Current supply chain solutions are expensive. It is also a fact that companies with global supply chains could be standing on a cost base of which 90% is attributable to supply chain expenditure. According to a survey by Deloitte from 2014, 79% of companies with high-performing supply chains achieve revenue growth greater than the average within their industries. Conversely, just 8% of businesses with less capable supply chains report above-average growth.
According to the Logistics Bureau, a 2014 survey conducted by PwC revealed that businesses with optimal supply chains have 15% lower supply chain costs, less than 50% of the inventory holdings and cash-to-cash cycles that are at least three times faster than those not focused on supply chain optimization. In another study conducted by Aberdeen group in 2013, top-performing companies that implemented supplier performance management initiatives had achieved average cost savings of around 12%.
Transforming supply chain with blockchain
Blockchain has tremendous potential for transforming supply chains and disrupting the way we produce, market, purchase and consume goods. Managing supply chains involves managing flows between the source of the raw materials all the way to the end customer. According to the Fidelity Global Institutional Investor Survey: The Future of Investment Management, 73% percent of institutional investors agree that a new asset class will emerge due to advances in technologies such as blockchain.
Traditional supply chain management systems make it difficult for customers or buyers to accurately determine the value of products due to the lack of transparency. Even when there is suspected illegal or unethical practices, the current state of supply chains makes it extremely cumbersome to investigate and get to the root of the problems. All this makes centralised supply chains very inefficient, but the elasticity of blockchain offers a much-needed solution because it can be modelled in different ways to fit different processes, network node architectures, and participants.
The built-in chain of command offered by blockchain ultimately means the technology can increase efficiency and transparency of supply chains and positively impact everything from warehousing to delivery to payment.
Blockchain-based supply chain management systems offer a decentralised approach to data management and sharing by minimising the involvement of intermediaries such as bankers, insurers, and brokers. In addition, these new supply chain management solutions help to establish better proof of quality, provenance, payment, and performance to minimise counterfeiting and fraud.
Furthermore, blockchain technology enables time-stamping, tracking, automation of transactions, and even real-time verification and auditing. Through blockchains, companies gain a real-time digital ledger of transactions and movements for all participants in their supply chain network. According to EY Global Innovation Blockchain Leader, Paul Brody, “It’s important to clarify that the blockchain isn’t merely a prerequisite piece of software to buy. It’s actually the opposite — a solution to current fragmented supply chain infrastructure.”
Blockchain enables triple entry accounting. Instead of simply having debits and credits, there is another entry on the blockchain which makes real-time auditing possible. When it comes to the US$64 trillion supply chain industry, the impact that blockchain technology will potentially have on this enormous industry is enormous.
Some of the areas of supply chain management which can benefit from blockchain include:
· Fraud prevention due to the immutable records on the blockchain
· Increased transparency and better authentication protocols
· Overall improved efficiency and better business relations which positively impact the business involvement.
· Recording quantity and type of goods or commodities being shipped
· Maintaining order tracking and logistics information
· Payment automation via smart contracts
· Process management to improve client service delivery
Benefits
At the rudimentary level, the core logic of blockchains means that a single piece of inventory cannot exist in the same place twice and that every movement of a product or asset is visible to all supply chain participants in near real-time with full traceability back to the point of origin.
Provenance in supply chain is vital to prove the authenticity of a shipment or the origin of a product. Not only is this important to end-consumers but also to all participants in a specific supply chain. Blockchain applications make use of this by tracing back along the information flow to certain verified data points. Tracing a product back to its original manufacturer to assess its genuineness can be crucial especially where a distributor or retailer is not able to trust the wholesaler.
Using blockchain also means that businesses can negotiate procurement deals based on total ecosystem volumes, not just what they purchase from an individual supplier. Ultimately, blockchain-based solutions enable:
· Calculations of exact volume discounts based on total purchasing
· Proof of transaction data accuracy
· Preservation of privacy of each company’s individual volumes and protection of their competitive advantage
· Better visibility into procurement
· Increased trust among all participants in supply chain networks
· Accurate and reliable data for analytics
· Better procurement which means more visibility and more savings
· Improved data and analytics and consequently better outcomes
Identifying areas where blockchain could enhance supply chain processes, but also where distributed databases would be better than a blockchain database, will be key to achieving maximum efficiency. To give maximum viability to any blockchain-based supply chain management company’s value proposition, understanding that the processing power of decentralised blockchain databases may not be as efficient as a centralised system due to performance speeds is important, because only then can an innovative and new approach be introduced.
Blockchain technology has already begun to impact several aspects of businesses because it provides a complete chain of custody for items that are stored on these distributed ledgers from their origin to point of sale. In addition, users are able to trust the data on the chain due to its immutability. Blockchain’s tracking capabilities also enable full audit trails, which give companies confidence in the authenticity and quality of goods. The distributed nature of the decentralised platforms allows for better oversight and control of products, while real-time tracking via smart contracts offers supply chain participants the flexibility to make faster decisions and keep more accurate track of inventory levels, ultimately reducing working capital inactivity.
One of the most universally applicable aspects of blockchain is that it enables more secure, transparent monitoring of transactions. Supply chains are basically a series of transaction nodes that link to move products from point A to the point-of-sale or final deployment. With blockchain, as products change hands across a supply chain from manufacture to sale, the transactions can be documented in a permanent decentralised record — reducing time delays, added costs, and human errors.
Use Case Example:
The supply chain of an automotive business, for example, can be a particularly impressive use case for a distributed ledger solution. The automotive industry is highly regulated and has cross-country regulators, multiple network participants and a growing data storage challenge in this new world of big data. A blockchain-based solution can help keep track of the exact record of each and every part that went into an automobile or parts that were replaced, its manufacturing and transportation history, and sales and resale history, all while providing regulators the information they need to ensure compliance. Smart contracts on blockchains can even facilitate the transfer of ownership.
Many supply chains have a dominant entity. For example, in an automotive supply chain, the manufacturer is certainly the most powerful player, and the rest of suppliers and distributors are often highly dependent on it — both for goods and the rate of technological advancement within the industry. In such a case, the manufacturer can enforce a blockchain-based supply chain implementation that everyone else in the chain will have to adopt. EY predicts a blockchain across the entire automotive marketplace.
Solving the problems of counterfeit parts by determining provenance can help tackle the problem of counterfeit parts within automotive supply chains. By deploying blockchain technology for supply chain logistics, original equipment manufacturers can finally obtain a solution to a serious challenge they have been facing for decades. The capability of tracing a part through every step of the supply chain can ensure the part shipped is the part that will eventually arrive at the destination. As IBM highlights, this isn’t just relevant to the auto industry; it can apply to any industry that relies on parts. Ultimately, blockchain is considered to offer enormous potential for improving processes and enhancing business models in logistics and supply chain management overall.
Developments
Several blockchain startups are innovating into this sector: Provenance, for one, is building a traceability system for materials and products, enabling businesses to engage consumers at the point of sale with information gathered collaboratively from suppliers all along the supply chain (and thus substantiate product claims with trustworthy, real-time data).
Others include Hijro (formerly Fluent), which offers an alternative platform for lending into global supply chains, and Skuchain, which builds blockchain-based products for the business-to-business trade and supply chain finance market.
Ocean cargo giant A.P. Moller-Maersk and technology powerhouse IBM announced plans for a joint venture aimed at “providing a jointly developed global trade digitization platform that is built on open standards and designed for use by the entire global shipping ecosystem.” They are hoping by utilizing blockchain they can address the need to provide more transparency and simplicity in the movement of goods across borders and trading zones. Walmart and Sam’s Club joined IBM’s Food Trust network, which uses a blockchain distributed ledger.
The government of Rwanda is working with UK-based startup Circulor with the goal of tracing and removing sources of funding for conflict materials. In June 2017, The Federal Maritime Commission issued a press release about hosting a Brown Bag presentation on blockchain technology, including its applications, for use in government and shipping.
The One Belt One Road project linking Hong Kong and Rotterdam, is already using the blockchain for trade finance where buyers, sellers, various shippers, escrow agents, tax authorities and other players have access to a shared network database in real-time.
DHL released a trend report that noted that “global supply chains are notoriously complex, with a diverse set of stakeholders, varying interests, and many third-party intermediaries — challenges that blockchain is well suited to address.” The report includes initial findings on a working prototype developed by DHL and Accenture, which tracks pharmaceuticals from the point of origin to the consumer, preventing tampering and errors.
Conclusion
Blockchains increasingly become an attractive option for supply chain management where the supply chain is owned or participated in by multiple parties, none of which in most instances wish to give complete control of record keeping to another party. In such cases, blockchains offer a better solution for maintaining shared databases. According to Frost & Sullivan, the penetration rate of blockchain technology in functional areas such as retailing and leasing, supply chain logistics, and smart manufacturing will hit 37.2 percent by 2025.
Our team is ready to work with businesses wishing to explore the benefits of introducing blockchain technology to better manage their supply chains and create value chains that are transparent and reliable. Since distributed ledger technology may not be necessary when used for vertically integrated supply chains where, for example, a particular entity owns all of the chain, we consider such factors when making recommendations for blockchain-based solutions to ensure that clients get tailored, practical and scalable solutions that truly benefit their business.
At Block Patrol we advise entities on the opportunity to recalibrate their approach to supply chain management at the ecosystem level to go from a narrowed perspective to an integrated global outlook.