How Blockchain Can Build Stronger Supply Chains

Overview

Back in 1956, U.S. trucking company owner Malcom McLean sat down with engineer Keith Tantlinger to design something that would spark a revolution in world trade: the modern shipping container. Now, a little more than 60 years later, with supply chains both business-critical and ever more complex, the global supply chain is about to make another step-change. This time it’s with the help of technology: blockchain.

The technology’s impact on supply chains and the logistics industry promises to be truly revolutionary. Blockchain – simply put, a shared digital ledger that allows transactions to be recorded and verified over a network of computers – will increase supply chain transparency while dramatically reducing costs, particularly in the area of costly and cumbersome paperwork. It also will increase understanding of overall flow of trade, tracking specific items at each step of the way as well as the risks associated, allowing them to be better managed and mitigated. While some questions remain about how blockchain will be introduced into the supply chain, a number of major companies and technology providers are already finding the answers.

In Depth

Technology already plays a major role in the daily business of logistics companies. Applying technology to documentation and information exchange has helped those companies tremendously. “Today technology and information move cargo,” said Aon’s Chief Executive Officer of Global Marine, Lee Meyrick. Gathering more data and squeezing better insights from that information can only improve efficiency across supply chains and in the logistics process.

Blockchain provides a mechanism for tracking data across complex supply chains more effectively and definitively. In this way, it will add efficiency, reduce human errors, and clarify responsibilities and liabilities along the supply chain. For example, a part from Bangladesh can make its way to Canada with all details tracked, such as the climate in a warehouse to ports of entry across the globe. If there is a disruption anywhere in that chain, that information is captured and available to the stakeholders.

Blockchain could provide a secure chain of custody for items as they pass along the entire supply chain, eliminating any arguments about who had what when. It also could significantly reduce the cost of moving goods by driving down expenses associated with supply chain documentation. Meyrick states that the maximum cost of the required trade documentation to process and administer many of these goods is estimated to reach one-fifth of the actual physical transportation costs in the coming years. If companies could reduce their administration burden by using blockchain or similar technology, the added efficiency could increase world trade by 15 percent.

“Blockchain certainly will have implications for the logistics industry,” said Tom O’Donnell, Logistics Practice Leader, Aon. “If you look at an international shipment today, see all the hands that touched it, all the filings involved with the shipment, duties paid, and the like as it moves from A to B, there’s a tremendous amount of manual work.” All the while, even as logistics companies have increased their reliance on technology, events such as WannaCry underscore the importance of increased security as more and more processes move to the cloud.

Recognizing Data’s Value
Many businesses recognize the value of data, and a growing number are finding ways to apply blockchain to gather – and act upon – more data from their supply chains. FedEx is one company that has already introduced blockchain to its daily operations. The company joined the Blockchain in Transport Alliance (BiTA) and is part of the organization’s standards board. A FedEx pilot program focuses on creating a permanent data ledger to be used in dispute resolution between customers sending and receiving goods.

Shipping company AP Moller-Maersk is also introducing blockchain into its operations. Working with IBM, the company has created what’s been called the first blockchain-based electronic shipping platform. The system is designed to provide real-time insights into international cargo shipments, digitizing the supply chain.

The system developed by IBM and Maersk also will introduce new efficiency to shipping records, automatically providing detailed shipping information for regulators, with the potential to replace the paper records and the electronic document systems currently in use. Those record-keeping improvements alone could save the shipping industry billions of dollars annually, according to IBM and Maersk.

The information gathered and contained by blockchain could also benefit the insurance markets covering supply chains, O’Donnell said. The ability to track supply chain exposures more accurately and gain real-time knowledge of cargo movements should ultimately reduce supply chain risks and allow insurers to understand better the exposures they are covering.

Driving Out The Risks
Blockchain’s use across supply chains may still be in its infancy, but its potential is clearly vast, particularly in reducing supply chain exposures. “Forward-thinking companies are already grabbing that data and finding ways to drive risks out of the supply chain,” Meyrick said.

For example, the current manual process of tracking and paying duties as goods enter a country is complex, and the liabilities associated with errors can be significant. Paperwork mistakes can leave customs brokers liable not just for unpaid duties but for related penalties and fees stemming from the improper customs filings.

“It’s a very cumbersome process and it’s very difficult to be good at it all over the world,” he added. “If companies are able to implement the full blockchain system for this process, it significantly reduces the risk.” Relying on blockchain to navigate the customs process should reduce both the frequency and severity of errors.
Blockchain can reduce supply chain risks for other businesses as well. For example, Walmart and nine major food companies are working with IBM to introduce blockchain to the food supply chain to increase food safety and track sources of food-borne illness.

The food supply chain can be particularly complex as products make their way from the farm through food manufacturers to supermarkets or restaurants and ultimately to the consumer. Walmart and the food companies see blockchain as providing a means to trace food products along the entire supply chain and maintain detailed records along the way. Among other benefits, blockchain’s digital record should dramatically reduce the time and effort required to identify the source of food-borne illnesses.

In general, the more data you have and the better you understand your exposures, the better your risk analytics can be, according to Meyrick. With the information it can provide, blockchain can dramatically improve supply chain risk analysis.

The Coming Revolution
Looking back to the rise of containerized shipping, O’Donnell noted that such revolutions didn’t happen overnight, but once it gained momentum the transformation happened quickly. The introduction of blockchain to supply chains could follow a similar course.

Blockchain adoption will likely come more quickly in certain segments of the logistics industry and in certain regions of the world, O’Donnell explains. The technology will likely find its way into supply chains in the U.S. before some areas of Asia or Eastern Europe, for example.

Meyrick suggests the momentum for making blockchain part of the supply chain is already building. Major companies such as FedEx and Maersk are paving the way, and its use should become more commonplace within five years, he said.

There are issues to address before blockchain’s supply chain benefits can be fully realized. Among them are developing common standards that will make the technology universally applicable across all supply chains, something organizations such as BiTA and companies like FedEx are working to create. Also, for blockchain to offer maximum value, it will be necessary to get buy-in from all the players along supply chains. But, given blockchain’s transformative potential, it’s a good bet the next supply chain revolution is already under way.

Overview

In Depth

Further Reading