The Blockchain - What does it mean for the supply chain?

There is much hype around the newest technology darling - Blockchain. There is no question that Blockchain, (or for the purposes of this article we will also call it the distributed ledger), will impact the supply chain in profound ways. It has the potential to deliver incredible benefits ranging from product security to dramatic cost savings. However, we must understand what is real today (and what isn't!) and appreciate what the future promises.As Fortune magazine wrote on Sept. 1, 2017, “No term [blockchain] at present is more hyped and poorly understood.”What is the blockchain? In this blog when I refer to Blockchain I am really referring to all those emerging technologies that use a Distributed Ledger. Simply stated, a distributed ledger is a massive spreadsheet of transactional data. The distributed ledger will capture virtually any physical or financial information.Distributed ledger technology is extremely powerful. Validation occurs for each and every transaction by multiple parties. This ensures unparalleled levels of data visibility and reliability. The distributed nature of blockchain means that it resides on every node of the network. As validation occurs on transactions and transactions are compiled into validated blocks and stored throughout the network, tampering becomes virtually impossible.

The Promise of the Blockchain

Blockchain technology may eliminate the need for intermediaries, or dramatically reduce the cost when intermediaries exist.A derivative technology to blockchain is an artifact called smart contracts. Smart contracts digitize objective terms of an agreement. Based on predefined triggers, they are self-executing. These activities can be financial or physical. The purpose of the smart contract is to define a contract between two or more parties. The contract automatically executes upon meeting certain predefined, quantifiable, and objective conditions.For international financial transactions, the blockchain may mostly eliminate the need for banks to facilitate settlement transactions (payment and drafts) and significantly reduce associated charges. Smart contracts, used alongside blockchain technology, enable the parties to write the terms and conditions associated with contract securely and encrypted into the distributed ledger. Validated fulfillment of the contract by one or both of the parties results in the contract settlement and transfer of funds.Both the purchaser and supplier have the same level of security as in a traditional payment scenario without the need for intervention of a bank and its associated fees. It should be fairly clear that blockchain can streamline the letter of credit process and reduce the costly bank charges while protecting the process.

The Blockchain guarantees the highest levels of data protection.

Blockchains are virtually impossible to alter, meaning they cannot be hacked. Multiple independent parties will validate transaction information before committing them to the ledger. And, the distributed nature of the ledger mean that everyone can access to it, making the process completely transparent. The blockchain is tamperproof.To this end, Walmart, among other behemoth food companies, is exploring blockchain technology to trace products from “farm to consumer". Using the blockchain a company can track an item back to its source in the event of a problem. This has exceptional potential to increase product and customer safety. The blockchain has the potential to eliminate product tampering, increase traceability, and the speed of traceability from days and weeks to seconds or minutes.Because of this incredibly high level of security, the blockchain will increase the level of trust among actors in the supply chain and enhance collaboration among the actors.

The Blockchain will lower supply chain cost.

Smart contracts will eliminate costs associated with manual interventions through automatic validation of terms and conditions.This has serious implications for efficiency gains across the supply chain. Some estimate that the banks will be able to eliminate as much as 60% of their costs by using blockchain technology. A recent study underwritten by Santander, a Spanish Bank, estimates that the blockchain will save the banking industry $20 Billion by 2020 - less than three years from now.In the area of logistics, a study commissioned by MTI (a logistics technology company) and verified by scientists from the University of Copenhagen, suggests that up to 90% of the administrative costs associated with managing global logistics can be eliminated.

What the Blockchain isn’t

The blockchain is not a relational database. It does not manage processes. And, it is not a data warehouse that supports business intelligence or artificial intelligence. It does not replace the business network.Current IT systems will not necessarily need replacing to participate in, and take advantage of, the potential of the blockchain. Management will require enterprise systems to interface to, and exchange information with, the various blockchain technologies. However, just interfacing to and exchanging information with the blockchain will not make your organization better if it cannot manage the information and use that information intelligently.

The challenges of making the Blockchain work

For the average company, the blockchain is very much a future technology. It is in the “proof of concept stage” and not nearly ready for full-blown commercialization. Systematically, challenges exist that we must work together to overcome:

1. Which distributed ledgers - There are, and will be, many distributed ledgers being used for many purposes. In the financial sector, there is Bitcoin and Ethereum among many, many others. IBM and other tech companies are teaming up with the largest retailers, food manufacturers, pharma companies, and consumer goods companies to form consortia to establish consensus and dominance for their respective blockchains. While blockchain and distributed ledgers are all about consensus, there is no consensus right now about which distributed ledgers will win out. Yet, over the next year to 18 months, it should become more clear as to how consortia are coalescing.
2. The cost of running the blockchain - One of the downsides of the blockchain technology is that it requires incredible computing power. Blockchain (or other distributed ledger technologies) proliferation will result in exponential growth on the requirement for computing power. What this means for the cost of managing these blockchains is unknown. But it likely means that blockchain itself will yield to other forms of distributed ledger technology...call it 'distributed ledger 2.0'.
3. Adoption - There is lack of clarity as to how and when distributed ledgers will become available, and for what purposes. This lack of clarity is likely to result in extreme latency in the uptake of the technology. Across the global supply chain, there is a staggering disparity in the use of technology. For broad blockchain adoption, companies must address their technological limitations. History has shown us that technology adoption is much slower than the hype machine would lead us to believe.

The Blockchains implications for companies and their supply chains

The blockchain has exceptional potential to remove costs related to validating and authorizing any transaction within the supply chain. But, it will not remove the inefficiencies that come with poor supply chain processes.

• A company whose supply chain processes are inefficient will not miraculously have efficient process because of distributed ledgers. In fact, companies will experience a magnification of their poor processes by distributed ledger technology.
• IT systems that can't capture, manage, analyze and report on all the data that the distributed ledgers will provide will not improve the organization’s ability to make better tactical or strategic decisions.
• For organizations that don’t support integrated internal processes, the blockchain will not streamline the processes and eliminate the cost of redundancy, poor communication, and undifferentiated data.

So, distributed ledgers are revolutionary and the benefits will be dramatic. The winners in the supply chain, will be those companies that have the best internal systems to capture and share the data in a meaningful way to enable communication, collaboration, and decision support.Like most technologies, distributed ledgers are an enabler. Distributed ledgers are not a “silver” bullet for poor supply chain processes and data management. Therefore, it will take several years before the infrastructure of blockchain supply chain networks become real. Like previous great supply chain technologies, RFID, EDI, etc., the adoption of blockchain will take time.Distributed ledgers will make the supply chain more efficient, safer, and quicker. It will not make an individual company better or more competitive. Organizational excellence is a result of internal systems that streamline supply chain processes, optimize communication and collaboration, and capitalize on information reporting and analytics. Internal systems make the organization more efficient, effective, and responsive, not blockchains.

About 3rdwave:

3rdwave simplifies global trade through automation. 3rdwave is a GTM platform that delivers total global supply chain visibility, minimizes manual data entry, streamlines business process, and provides contextual information enabling its users to make informed decisions to reduce global supply chain risk. It's a cloud-based platform that requires minimal IT resources for quick implementation. 3rdwave ensures that companies meet the highest levels of GTM execution and Trade Compliance conformance.Ned Blinick is Chief Product Officer of 3rdwave.co. He has been involved in global trade for too many decades. He loves making the global supply chain simpler for everyone. If you would like to engage with Ned he would really enjoy speaking with you or your boss. He can be reached at (416) 510 8800 ext 234 or at ned.blinick@3rdwave.co.