When Supply Chain Meets Blockchain: The Top 5 Challenges

When we talk about supply chain, we immediately think of logistics and shipping. Why is that? Well, a product needs to travel through a delivery system from the raw material supplier into the hands of end consumers. We have all heard how important supply chain management is, but have not seen a straightforward comparison showing direct impacts until now. Check out this graph below from the World Bank Global Logistics Indicators Survey.

Does that mean the United States, Japan, and Germany have lower transaction process times due to stronger supply chain systems? Probably. Impacts from a supply chain system can even determine your GDP for an economy that relies heavily on global trading. (For example, Toyota’s just-in-time manufacturing, or later in the 1980’s, TPS, produced a spike in profits).

A lot of companies are now adopting blockchain somewhere in their supply chain systems to create an even more linear process. For example FedEx has launched a pilot program aiming to ease disputes between customers sending and receiving goods. Chinese logistics giant JD’s BaaS service will provide blockchain tools for developing apps in areas such as supply chain data tracking. Even the South Korean government has made efforts to improve the process of clearing items through customs. So what is the actual challenge? When will we arrive at the perfect combination of blockchain and supply chain?

Challenge 1: The Unforeseeable Benefits

Blockchain is viewed as possessing the potential to change a lot of things. Indeed, it can bring visibility to a supply chain, enable traceability, transparency, provenance and even workflow automation. But what do these all actually mean? Further, can they be transformed into figures that tell a better story? Unfortunately, no. Not at this early stage. Blockchain use cases are still just being developed, and it will take a good 3 to 5 years to calculate the results and impacts it brings. A blockchain provider won’t be able to tell you precisely how much cost can be reduced by enabling workflow automation. Even if they can, the long-term benefits are difficult to assess just because the risk factors involved are too broad.

For example, your supply chain could be perfectly safe if no human errors are made in the coming 10 years. But it could also be ruined if something is constantly reported wrong but no one finds out for 10 years. Just like the Volkswagen group and Audi Emission Scandal. Or the Nissan Recall Campaign, where piles of money was spent on locating the vehicles equipped with Takata airbags without a reliable and trustable track and trace system. Allegedly, the cost spent on recalling is higher than paying out for a new vehicle for all the unhappy car owners. Although no complete estimate or guarantee results from implementing DLT, what I can tell you is that, no false data can enter a supply chain system if blockchain is adopted in the correct way. So, that already reduces one significant risk for the future!

Challenge 2: The Allegedly-Enormous Setup Cost

How much do you have to spend on deploying nodes in a private blockchain network? The answer is, unsurprisingly, “It depends.” Go to IBM Hyperledger and they will tell you they need to assess a whole bunch of factors first. There are some good reasons behind this.

The scope. The functions you want the smart contract to perform. The complex interactions between different participants, aka nodes. The thousand what-if-A-then-B, what-if-A but-C-then-D combinations of conditions and actions required. Now put them all into codes for the smart contracts. Nonetheless, after all the ‘assessment process’ (at Activeledger we call it consultancy, discovery and analysis), the real implementation cost is another story. Only a small number of companies have actually reached this phase.

To quote the MTI (Marine Transport International) and Agility Sciences’ whitepaper: “Supply chains suffer from old and legacy IT systems, and the overarching challenge is the cost of transitioning to new tools.”

In essence, the difference in costs between ordinary blockchain solutions and Activeledger depends on whether the solution disrupts and replaces or disrupts and compliments incumbent solutions. Activeledger has built connectors and adapters designed to work with legacy systems making the process of inclusion simpler to implement and significantly cheaper.

Challenge 3: Lack of interoperability and scalability

“Do I have to ditch all the legacy IT systems that are currently in use?” This is a common question when enterprises are considering DLT. The answer is no, provided that there is good interoperability on the private chain you choose. More and more blockchain providers are offering enterprise solutions in which the underlying infrastructure can communicate with most legacy systems. Activeledger is one of those. Do keep in mind that good IoT devices and modern software, such as ERP and CRM, can also help maximise the use of blockchain.

What about scalability? It won’t matter when you’re not doing hundreds of transactions per second. The key is whether the network can load as much data as is flowing. The techniques of handling data streams or ‘blocks’, is important to create a network that doesn’t congest and is therefore scalable.

Challenge 4: Regulatory Approval, and most importantly, Trust, for Digital Documents

We probably shouldn’t do anything involving blockchain without keeping an eye on the regulatory boundaries. GDPR and other laws previously stated “a right to be forgotten” for individual customers.When it comes to blockchain, that records everything for eternity, it’s fairly obvious about who needs to back down. In an enterprise environment, however, the question is whether the regulation approves (or believes in) the blockchain’s ability to provide unchangeable and immutable data. Digital documents like Word docs or Excel spreadsheets can be altered by people and the activity record could be deleted forever. On a blockchain you don’t get to change any data before going through verification and gaining consensus. The trust issue from a regulatory standpoint is beginning to be solved, fortunately, thanks to Maersk, FedEx and other big logistics companies who are trying hard to work out this problem.

Challenge 5: The Meaning of Data Sharing

Blockchain in essence is about data sharing and automated administration. Putting a company’s data on the distributed ledger does not mean publishing your commercial secrets to other parties. It only means that under certain conditions, a certain set of data can be seen by a party who needs to see it. For example, a supplier can of course see whether their goods have arrived safely and do not have pieces failing to arrive at the buyer’s warehouse. However, shipping companies intuitively will feel the confidentiality of their data is being reduced by using a distributed ledger: “Most of them are reluctant to share information with their competitors, and different players are usually not linked from beginning to end in the supply chain. This is not something that port authorities want to invest in, especially as it is difficult to get all of the players to agree to operate on one system.[1]” In the end it’s about promoting the benefits that “sharing of true data” will bring and putting trust in the system as well as the underpinning technology.

Lastly, I would like to quote from Mr Frederick Smith, Founder and CEO of FedEx:

“If you are not operating at the edge of new technologies, you will surely be disrupted. If you are not willing to embrace new technologies like internet of things and blockchain to face those new threats, you are, maybe subtly, at some point … going to extinction.”

[1] Tauber Institute for Global Operations, University of Michigan, Maritime Transportation:The Global System of Shipping and Ports, WDI Publishing, case 1–428–712, December 23, 2008

(Agility Sciences created Activeledger, a powerful distributed ledger technology that provides enterprise solutions for the wider supply chain sector and the banking industry. Follow us on Twitter for live updates and insights.)