Block by Block: Supply Chain

Block by Block is a series where we dive into different industries and examine the entry-points for decentralization.

One of the more popular applications of blockchain technology is for the supply chain. In a recent Deloitte survey of 1,000 executives, 53% of respondents stated that their companies are working on “blockchain use cases” for supply chains.

And it is not hard to see why. Many companies are currently struggling to gain visibility and capture data on the movement of their goods throughout their supply chains. These issues paired with the ongoing concern of disease outbreaks associated with poor supply chain management and the estimated $12B market for supply chain management software has attracted investors and entrepreneurs to fix the supply chain with blockchain technology.

Where are the points of entry for blockchain supply chain platforms?

  • Limited Visibility: Supply chain visibility is a significant need for companies. However, obtaining full visibility is extremely difficult, if not impossible. A 2017 survey of supply chain professionals revealed that just 6% of firms had achieved “full supply chain visibility.” A Deloitte survey also shows that visibility is one of the top challenges for supply chain risk management. Limited visibility of a supply chain could produce harmful results to consumers because it leaves room for defective products to slip into the supply chain, ending up in the hands of consumers. Take the recent E. coli outbreak linked to romaine lettuce which impacted 59 people in the U.S or the infamous Firestone and Ford tire controversy which resulted in over 270 deaths and over 800 injuries in the U.S.
  • Supply Chain Fraud: The complexity and opacity of supply chains result in multiple fraudulent activities such as thefts and counterfeiting. Because firms have to work with a complex web of suppliers and subcontractors, there are many opportunities for fraud. Fraudulent acts can result in conflict diamonds (blood diamonds) and counterfeit drugs illegally entering the supply chain. Theft-related frauds also result in billions of dollars losses for shipping firms. The SAP Center for Business Insight estimates that $3.7T was lost due to supply chain fraud.
  • Payment Issues & High Administrative Costs: The supply chain industry faces high administrative costs. According to EY, “the average U.S. Fortune 100 company has more than 60 days of sales outstanding.” That is, companies have to wait 60 days to get paid after delivering a product or completing a task. EY added that this statistic is odd because “nearly all these companies are interacting with each other in contracts that specify payment upon receipt or, at most, within 30 days.” EY cites the “analog gap” that contributes to this delay. For supply chain contracts, customers typically manually enter their invoices and decide when they want to pay them. These customers are incentivized to pay their invoices as late as possible to leverage the float produced from having both the delivered product/service and the cash on hand earmarked for payment in 60 days. While favorable for customers, this situation puts firms at risk of a liquidity crisis — being unable to pay for the cost of the product or services they have delivered in the short-term. Additionally, the supply chain industry also faces the high cost of their documentation process. According to Forbes, “costs associated with trade documentation processing and administration are estimated to be equal to the actual physical transportation costs.”

With the problems facing centralized supply chain platforms, how do blockchain supply chain platforms solve them?

  • Limited Visibility → Increased Visibility: A blockchain-enabled solution distributes records and transmits information on the supply chain to all users of a supply chain network in real-time. This, in theory, would mean that the movement of goods from point A to point B is constantly updated for members of the network to monitor. Furthermore, because blockchain networks generally have consensus mechanisms that require every member to agree to a change, before the change can be accepted by the network, no changes can be made without confirmation from each member of the network.
  • Supply Chain FraudReduced Fraud: Immutability is one of the primary benefits of a blockchain solution. As such, data recorded onto a blockchain can, in theory, never be deleted or tempered. This immutability, paired with RFID tags and sensors already employed by firms, makes it difficult for fraudulent activity to take place. Any attempts at changing data points of a blockchain will be immediately noticed by nodes on the network and rejected.
  • Payment Issues & High Administrative Costs Digitizing Documents through Smart Contracts: Some blockchain systems (Hyperledger, Ethereum, etc.) enable the use of smart contracts that can automatically execute upon the completion of a pre-programmed event. If properly employed, a proof of the delivery of a product or service would automatically trigger payment for that delivery. This would lower the day sales outstanding for firms delivering these products and services. Furthermore, the increased digitization of documents could dramatically lower the cost of the documentation process.

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What are the barriers to entry?

  • The Human Aspect: While blockchain networks can fix issues in the digital realm, they can’t fix problems in the physical realm. Blockchains do not stop bad actors from being bad. While these actors may not be able to manipulate a blockchain database, they can manipulate the physical products that these blockchains track. For example, say a firm wants to track the authenticity of a luxury handbag with an RFID tag, which logs the bag’s details onto a blockchain to confirm its authenticity. A bad actor, attempting to force a counterfeit bag into a supply chain, can physically reattach the RFID tag of the authentic bag onto the counterfeit bag. This is all done in the physical realm without the blockchain noticing. The end result is that the blockchain network tracking the reattached RFID tag of the authentic bag will now assume the counterfeited bag is authentic when it’s not.
  • Immutability: While immutability is touted as a benefit of blockchain systems, it can be a drawback for supply chain managers. There are many situations where old data points need to update. For example, if an airplane part is mislabeled, supply chain managers would want the ability to update the label, unless they want to ship a wrong part for the production of an airplane. While immutability has benefits in specific verticals, like keeping records of monetary transactions, they have huge drawbacks in verticals that require constant adjustments and updates.
  • Startup Competition: Blockchain supply chain platforms don’t only compete with legacy firms like IBM but also hundreds of startups trying to take market share. These startups have raised hundreds of millions of dollars to compete for the same market share as blockchain supply chain startups. Furthermore, these startups have developed blockchainless solutions that customers actively paying for. If these solutions are applicable to current supply chain problems, potential users of blockchain solutions may find no need for them.

Blockchains and supply chains seem like perfect matches (and not just because they both have chain in their names). However, as we’ve seen with IBM’s recent launch of their blockchain-enabled supply chain platform, TradeView, there is still a long way to go before firms begin adopting these solutions — TradeView, itself, is struggling to onboard shipping carriers onto its platform. To sum it up, while blockchains do provide some benefits for supply chain managers, they can not change human action, which is a fundamental aspect of a supply chain. 

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Block by Block: Supply Chain written by Steven Zheng @ January 2, 2019 Steven Zheng

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