The end of the centralized supply chain era?
Blockchain technology creates many possibilities within the supply chain space. From a historical view, the industrial era brought about the centralization of production. Mass manufacturing, for example, helped make centralized production more efficient. This centralization came in the form of large factories where raw commodities were turned into finished goods.
For example, Ford produced all their cars in a small number of factories, which brought together raw materials like rubber and steel and that had the capabilities to deliver finished automobiles. Centralization did not just affect production, but finance mechanisms as well. By demanding favorable terms from their suppliers, corporations essentially grew into entities that could access cheap sources of capital and distribute it to areas where small businesses in developing countries, for example, couldn’t compete because their cost of capital would be much higher.
However, since the advent of blockchain, new possibilities are now being realized. For instance, the blockchain can accurately reflect the real world, which means companies and individuals can operate on the assumption that the two are the same with greater certainty. This fact consequently leads to capital providers needing a much smaller risk premium to lend. Bearing this in mind, improvements in supply chain efficiency could have big implications on the creation of wealth globally.
The shift to decentralization
It is estimated that the supply chain industry represents over $50 trillion in annual GDP globally. In 2017, the supply chain management software industry was worth US$12.2 billion, according to Statista. The market is predicted to exceed $19 billion in total software revenue by 2021, according to global research and advisory firm Gartner. Much of this is attributable to new revenue opportunities that are being enabled by the software-as-a-service (SaaS) business models.
Considering these astounding figures, imagine the monumental change which could come as a result of, for example, the ability to give low or no-interest rate asset-backed loans that would significantly impact the structure of the global economy. Blockchain and crypto are filling the gap between the amount of money available and the amount of valuable assets using tokenization. “This will allow small businesses in the developed world to become more competitive and create more jobs,” states Anthem Hayek Blanchard — CEO of Hercules SEZC — a company in the blockchain supply chain solutions space.
The centralization premise seems to only work as long as there are no large shocks to the system. In addition, the most notable inefficiency plaguing the supply chain industry is a result of the relatively high levels of such centralization. Furthermore, centralization is most effective in a predictable and stable environment, but in an unstable and fast-changing environment, the most responsive organizations tend to be those that are smaller and less centralized. These less centralized companies are continually proving to be more adaptive and to have better economic robustness and viability in the long-term. Such insights should give corporations with supply chain monopolies and redundant legacy systems some serious food for thought, if not cause for concern.
Use case example: blockchain-based supply chain management systems in the automotive industry
Distributed ledger technology may not be necessary when used for vertically integrated supply chains where, for example, a particular entity owns all of the chain. If a manufacturer owns its raw materials and its manufacturing and distribution network, then perhaps all that’s needed is a centralized database, not a decentralized blockchain. Blockchains increasingly become an attractive option for supply chain management where the supply chain is owned or participated in by multiple parties, none of which in most instances wish to give complete control of record keeping to another party. In such cases, blockchains offer a better solution for maintaining shared databases. According to Frost & Sullivan, the penetration rate of blockchain technology in functional areas such as retailing and leasing, supply chain logistics, and smart manufacturing will hit 37.2 percent by 2025.
The supply chain of an automotive business, for example, can be a particularly impressive use case for a distributed ledger solution. The automotive industry is highly regulated and has cross-country regulators, multiple network participants and a growing data storage challenge in this new world of big data. A blockchain-based solution can help keep track of the exact record of each and every part that went into an automobile or parts that were replaced, its manufacturing and transportation history, and sales and resale history, all while providing regulators the information they need to ensure compliance. Smart contracts on blockchains can even facilitate the transfer of ownership.
Many supply chains have a dominant entity. For example, in an automotive supply chain, the manufacturer is certainly the most powerful player, and the rest of suppliers and distributors are often highly dependent on it — both for goods and the rate of technological advancement within the industry. In such a case, the manufacturer can enforce a blockchain-based supply chain implementation that everyone else in the chain will have to adopt. EY predicts a blockchain across the entire automotive marketplace.
Solving the problems of counterfeit parts by determining provenance can help tackle the problem of counterfeit parts within automotive supply chains. By deploying blockchain technology for supply chain logistics, original equipment manufacturers can finally obtain a solution to a serious challenge they have been facing for decades. The capability of tracing a part through every step of the supply chain can ensure the part shipped is the part that will eventually arrive at the destination. As IBM highlights, this isn’t just relevant to the auto industry; it can apply to any industry that relies on parts. Ultimately, blockchain is considered to offer enormous potential for improving processes and enhancing business models in logistics and supply chain management overall.