Blockchain technology touted for supply chain efficiency
The more things change, the more supply chain transactional processes face the same fundamental challenge: the endemic lack of confidence, if not trust, between the various links in the chain, inefficiencies in dispute resolution, and a general lack of visibility.
“The system has tried to find ways to instill trust into it,” said IBM’s Brigid McDermott. But when companies partner with other types of companies to ship across multiple borders — often connected through remote communication or via an equally remote third party — building that confidence and trust is costly, exhaustive, and labor-intensive. Intermediaries such as banks, and mechanisms such as stamped documentation, while helpful to a certain degree, can create inefficiencies of their own.
Enter blockchain, a technology that is increasingly exciting to many business sectors because it says, “Let’s put trust into the technology so we can solve the key problems that have plagued supply chain and logistics for centuries — and maybe millennia,” said McDermott, IBM’s vice president of Blockchain Business Development & Ecosystem. “And then we can create the efficient supply chain processes that we’ve all dreamed about. People can get things they need in their lives faster and cheaper. Everyone will be better off. This sounds Nirvana-ish, but as a long-term vision, that’s where we are.”
Blockchain, or distributed ledger technology, got its start nearly a decade ago enabling bitcoin transactions but is rapidly gaining interest in multiple industries as a secure and cost-effective means to facilitate transactions. It aims to share a digital ledger across a network of computers without need for a central authority such as a bank. Under the concept, no single party can tamper with the records because transparency keeps all participants honest.
Today, more than 40 large financial institutions and a growing number of companies across several industries, including freight movement, are experimenting with blockchain technology as a secure and transparent means to digitally track ownership of assets, according to The Wall Street Journal.
“There is a spectrum of how you would apply this technology,” said Joseph Bradley, senior business development manager at Gem, which develops infrastructure for companies that deploy blockchain. “On the far left, there is a permission-less blockchain. This is a rare occurrence that is something like the bitcoin blockchain. This means anybody can hop on. On the far right, you have a permissioned blockchain, where the people who are running this protocol know each other, or they have had exposure to each other before. A company might say that ‘moving forward, for my vendors, in my supply chain, everyone has to participate and run this blockchain protocol.’ You don’t want everyone to participate,” because there wouldn’t be any advantage for the company.
Numerous examples of permissioned blockchains are sprouting up in various corners where supply chain partners need to trust the data they send and receive, whether it involves banks, diamond sellers, food chains, or other stakeholders (Story, page 92).
In one of the strongest demonstrations of the technology’s long-term business value, IBM has built a blockchain for its global financing unit, a $44 billion business that handles millions of transactions a year. Blockchain already has saved IBM Global Financing as much as 75 percent in time tied up in transaction disputes with its network of more than 4,000 partners and suppliers, McDermott said.
“At any given time, there are a hundred million dollars in capital tied up because of disputes — such as ‘Is this taxed in New Jersey or taxed in New York?’ ‘Is this a 9 or a 7’ (on a paper document)? The average dispute-resolution time was 40 days,” she said. “But when we put a blockchain in, very quickly — within a couple of months — we dropped the average dispute resolution time to 10 days. And we freed up a lot of capital.”
The goal, McDermott said, was to use blockchain to reveal real answers and to eliminate confusion.
The key benefit of blockchain is that it guarantees that everyone in the supply chain — those permitted, that is — is looking at the same information. “That makes a difference in terms of (avoiding) everything from outright fraud to silly mistakes,” McDermott said. “If you and I are trying to do a business transaction, and as I am typing it in, and you tell me I am going to owe $904, and I type it in that I owe you $409, that’s my mistake, but that’s going to be three days on the phone with us trying to figure out whether it’s $904 or $409. How do we make sure that we know what the price is, and that we are looking at the same information?”
Blockchain does that, she and other experts say. “What blockchain created was the ability to say that I can send a digital record to you, and when I do that, I can now be prevented from sending a copy of that record to anybody else,” said Dan James, director of financial markets at IHS Markit, parent company of The Journal of Commerce. “Only one person can actually hold that record at a given time. Even though it is digital, there is no way for me to send the same record to five different people.”
Importantly, he said, blockchain does it without having a central party trying to track everything.
“By using a blockchain, privacy and availability are not mutually exclusive,” Bradley added. “This one unified record of what is happening — the insight into one particular transaction — can be permissioned only to those parties it affects. Now our supply chain is working on the same blockchain. And all the transactions are being reported on this blockchain.”
When it comes to logistics and supply chain, McDermott said there are “tremendous opportunities,” especially considering some of the major issues over the last decade:
Supply chain visibility: “You are looking at a single blockchain, and everyone has access to all information, not just the information that sits in their own system, but about every transaction related to that. That’s a big change.”
Supply chain optimization: “You are sure that the information is correct,” McDermott said. “There is no double-checking. You can take out costs of that process because you don’t have to validate. You can think differently about what you’re trying to do.”
Demand forecasting: If your containers have to be rerouted suddenly because of a freak storm, blockchain gives you a much better idea of what your supply chain looks like. “Now you know every data point, and you can be very dynamic in real time about what you want to order,” McDermott said. “Therefore, you do a much better job with inventory management.”
Because of the nature of the blockchain protocol, all transactions are forever committed or recorded in the sequence in which they occur, Bradley said. “All of the transactions and participations in the transactions are being immutably logged onto this protocol,” he said. “Why is that important? Because the data record does not exist with you or me. That record of those transactions exists in precisely the same form with every single participant in the supply chain. That means everybody has one unified version of what is actually happening in the supply chain.”
Still, blockchain technology is still in its infancy. “The nature of the technology is that in order for it to be valuable, a lot of people have to participate,” Bradley said. “There should be multiple participants.”
Much like the Internet in its early stages, a critical mass of companies has to be using it in order to prove its broad potential to many companies, including shippers, that would benefit from it. Hence the focus on proof-of-concept’ projects today.
To avoid a repeat of the dot-com cycle of the 1990s — when excessive hype about the Internet was followed by disappointment that the Internet did not change everything — Bradley said the focus for potential blockchain users shouldn’t be on how it functions as a technology, but on the benefits a broad range of industries and services will derive from it.
If blockchain follows the path of the Internet, it’s safe to say that some of its biggest benefits have yet to be imagined, even by its advocates.