As Financiers Argue Over Bitcoin, Others See Potential for Blockchain in the Supply Chain
By now, most of us have heard about Bitcoin, a digital currency that divides opinion in the finance sector. But while Bitcoin is alternately being hailed as the future or decried as a fraud, its underlying blockchain technology is the real treasure for other industries.
So what are the potential applications for blockchain in the supply chain environment?
That's one of the questions we'll explore in this article, as well as the potential restrictions and downsides of the technology.
What's the Difference Between Blockchain and Bitcoin?
First and foremost, let's make some distinctions. Bitcoin and blockchain are overlapping but separate concepts.
While Bitcoin takes all the headlines, it isn't the part of the technology that most interests supply chain managers. Not unless they're moonlighting as cryptocurrency traders -- and remember, Jamie Dimon recommends firing such characters on sight.
Bitcoin is a digital currency that is built on blockchain technology. The latter is what holds true potential for supply chain applications.
The complexity of global supply chain relationships, alongside divergent stakeholder interests, provides exactly the kind of challenges that blockchain technology is designed to address.
Bitcoin? Let's leave that for the finance guys to fight about.
Transparency and Trust: Blockchain in the Supply Chain
"When it comes to privacy and accountability, people always demand the former for themselves and the latter for everyone else."
While accurate, David Brin probably hadn't considered blockchain technology when he came up with those words. Blockchain is a system that allows us to have our cake and eat it too.
Accountability is key in any supply chain. Customers rely on brands, which in turn rely on suppliers to deliver the component parts, manufacturers to make a quality product, and shippers to get that item into customers' eager hands. There are any number of issues that can disrupt that process, not all of which will be flagged in a timely manner.
By using a distributed yet commonly shared ledger system, blockchain could speed all of this up.
Blockchain entails the distributed processing and storage of transactional data. A distributed network of literally thousands of computers works together to record and store every transaction that is entered into the system. And this network is comprised of computers like yours and mine (Everyone who participates is eligible to collect cryptocurrencies, and that's the link between cryptocurrencies and blockchain, but it's a story best left for another column).
Each piece of data, each transaction, that is held in the system is processed and stored as a discrete digital block of information. Each block is connected to those that came before it, and will be connected to those that come after, forming a chain of blocks, thus the term "blockchain." In each case, the block logs a timestamp that becomes cryptographically secured and cannot be changed or altered. With every adjustment logged and encrypted, the system provides real-time tracking and accountability.
The potential benefits of this shared ledger system are broad, including:
- Error rate reduction
- Faster document processing
- More immutable documentation, free from date manipulation and other adjustment common to logistics
- Fewer delays related to administrative issues
- Real-time exception management and quicker issue resolution
- Increased trust between internal partners and external customers.
In the long-term, it's not hard to see how blockchain technology could be applied at every step of the supply chain. For the immediate future, the focus has been heavily on improving the flow of documentation.
If you've ever been buried under a pile of shipment papers, prepare to start rubbing your hands in glee...
Testing Blockchain For Supply Chain Applications
Of all its potential uses in our industry, few have committed more time and resources to blockchain technology than IBM and Maersk.
At the time of writing, IBM has more than $200 million and some thousand employees committed to blockchain-powered projects. Transparency and traceability are the company's guide words for all of those at work in the supply chain, especially its collaboration with shipping giant Maersk, the world's biggest container ship operator.
The duo recently tested a pilot program that utilizes the unique strengths of blockchain technology. Their system created a shared digital record that served as a single online location for the various documents referring to a shipment. (i.e. every step along the way is recorded in the blockchain).
In another projected pilot by a company called T-Mining, personnel – like a truck driver – will be cleared to pick up a load after it has been securely logged in on the blockchain. For its advocates, blockchain technology offers a much more secure transfer of authority than traditional IT solutions with fewer opportunities to corrupt the process.
With fraudulent cargo pickups on the rise, the FBI estimates that up to $30 billion worth of product is lost due to theft in transit. That includes unreported incidents, which according to Freightwatch International are often not logged due to the fear of rising insurance rates and negative publicity.
The claim is that T-Mining's blockchain solution would mitigate the risk of fabricated insurance documents and pickup documentation - they wouldn't be recorded in the blockchain - and help prevent the associated thefts. Given the large value of many shipments, fraud prevention is high on the list of potential solutions that blockchain technology might bring.
RFID-tagged pallets could potentially communicate their position and a request to move to a new location. Including a time-bound deadline would allow this job to be "electronically tendered" to carriers, who could submit a proposal for the job based on its unique requirements. In theory, the technology underlying the process would then be able to award the job and release the cargo based on the shipper's chosen criteria.
In theory, the technology underlying the process would then be able to award the job and release the cargo based on the shipper's chosen criteria. This would not only automate the bidding process, cutting down the time it takes to process a shipment, it would also be able to track the movement of those pallets as the job progresses.
Challenges and limitations of Blockchain Technology
For all of its potential, like any other emerging technology blockchain will face some challenges to overcome before it is accepted as a mainstream solution.
- Regulatory concerns: It only takes one wayward regulation to slow technological development to a crawl. Just ask drone operators in the U.S. for proof of that. Lawmakers have only recently started pondering the question of how blockchain should be regulated, so we have a long and winding legal road ahead of us on this front.
- Resistance from established industries: Whenever a business model is challenged, expect some opposition from existing stakeholders. The disruption that blockchain will bring to the supply chain isn't yet fleshed out, but there will undoubtedly be pushback from any company or entity whose livelihood is affected.
- Is it all a fraud?: Following on from the above, words from those in power are inevitably powerful. When the CEO of JPMorgan stands up to shout fraud people listen, some of whom have great influence in the sectors were blockchain could be useful. That being said, his company is investing in the underlying technology at the same time, so perhaps the Jamie doth protest too much? Bitcoin itself may prove to be overvalued, but thus far there is little evidence to suggest that anyone is misrepresenting what blockchain technology is or could be.
- Proof of concept before wider adoption: Change is essential! You go first. Often, business leaders like to talk a good game but fail to lead from the front. Although IBM and Maersk are putting a lot of faith - and, more importantly, funding - in their blockchain-driven projects, they're still only experiments. At some point, a major player in the supply chain will have to go all-in on blockchain technology to get the wider industry on board.
- The complexity of the system: Even if you followed most of the advantages we covered above, chances are you'll need to read up a lot more on the underlying technology and the details of how it works. That kind of technical depth can put people off and prove to be a larger barrier to adoption than one might think. As someone impatient once said, presumably in exasperation at the latest technology trend: "keep it simple, stupid."
- Lack of flexibility for data modification: Part of the ledger chain's appeal could also be a major hurdle for some: its fixed log of events. While an unchangeable record of transactions is highly auditable and tailor-made for accountability, it might not be as appealing for those who like to make revisions for prior oversights. In some cases, it could even contravene existing legislation, such as European privacy law.
Before the decade is out, some analysts put the value of blockchain research at $6 billion. Even if that proves an optimistic valuation, the potential and excitement around this technology are such that it will be an unavoidable topic for businesses in many sectors.
Along with finance and healthcare, supply chain applications are set to take on the "early adopter" mantle for blockchain technology. Professionals in our sector would be well advised to become familiar with the potential now, so as to be well-positioned if and when clients ask about blockchain-based supply chain solutions.
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