What Will Drive Supply Chain Adoption of Blockchain Technology
Retailers, manufacturers and shipping companies are becoming more aware of blockchain technology and its potential to reduce inefficiencies and expand revenue opportunities in their business operations.
The common thread that binds these industries together is their reliance on centralized and inefficient supply chains. Yet for many companies, the pathway to using a decentralized database solution remains unclear.
We know from history that radical new innovations require driving forces to help push their target industries from awareness to swift incorporation.
In the case of supply chains adopting Blockchain technology, I believe the early adoption will be driven by 3 factors:
- Government mandates (specifically the need to reduce high compliance costs and efficiently resolve trading disputes)
- Bottom line revenue justifications (understanding whether the technology can be adopted on a mass scale while minimizing fixed costs)
- Customer service improvements (offering Chinese-menu type logistics solutions to all customers)
Government mandates
The shipping industry is governed by the ‘Hague–Visby Rules’, which are a set of International rules for the transport of goods by sea and a legal framework that establishes the relationship between shippers and carriers.
Under these rules, a carrier’s main duties are to “properly and carefully load, handle, care for, and discharge the goods carried, exercise due diligence to make the ship seaworthy and properly man, equip and supply the ship”.
The rules also imply that the carrier must not deviate from the agreed route or even from the usual route (unless in saving or attempting to save life or property at sea).
By contrast, the shipper is simply obligated to pay freight, package the goods sufficiently for the journey, describe the goods honestly and accurately, not ship dangerous cargoes (unless agreed by both parties) and have the goods ready for shipment as agreed. The disparity in obligations means that the bulk of compliance costs are placed on the carrier. In a blockchain ecosystem, network participants could be incentivized with tokens to provide additional support (in the form of information sharing, secondary due diligence or even just manual support from other qualified carriers) when handling disputes through arbitration.
Furthermore, the inability to properly enforce these rules has led to many controversial disputes that could have easily been avoided or resolved through the use of smart contract technology.
Smart contracts offer the ability to introduce 3rd party verifiers who are incentivized with tokens to provide honest testimony regarding who is liable for any damages to the cargo. For example, if there were a dispute between a carrier or shipper, or a carrier and insurance company, the case would be investigated by multiple autonomous 3rd party participants who could vote on which party was liable based on their verification and interpretation of the available evidence.
Once the verdict is decided, the law would instantly be enforced by automatically transferring token funds from the carrier to the shipper, the shipper to the carrier or the insurance company to the carrier.
Sagewise is paving the way to swift arbitration through their smart contract SDK that, when incorporated, has a library of functions that would help carriers and shippers swiftly resolve their disagreements.
Managing disputes and reducing the costs of compliance in today’s shipping industry is more challenging than ever, which is why the value of a standardized set of rules that are immutable and enforced through codified smart contacts should drive the adoption of blockchain technology.
Furthermore, collaborating with Governments is necessary in order for blockchain technology to be adopted by the shipping industry. Complying with the rules set forth by custom agents, or simply being contacted by the Government to ship goods will open up opportunities to leverage blockchains to streamline the process.
Bottom line revenue justifications
The shipping Industry is marred by transportation inefficiencies that lead to high operational expenses and mediocre profit margins. It is therefore necessary for shipping companies to have a bottom line revenue justification for adopting blockchain technology.
A 2014 research report conducted by the Federal Reserve Board analyzed the introduction of Containerization to the shipping industry from 1956 to 1977. The report found that the transition from awareness to adoption (at the enterprise level) was heavily influenced by the network effect created by International trading ports and the standardization of intermodal shipping containers. Containerization is a complex intermodal system that allows the swift movement of goods across the world. Shipping containers are loaded, stacked and transported via different modes of transportation (trucks, ships, trains, etc) under a fully mechanized process.
Adopting containerization required significant upfront fixed costs to pay for the acquisition of intermodal containers and the construction of container ports.
For this reason, large and wealthy nations like the US and Australia led the initiative to adopt containerization as a means to improve international trade. At the same time, shipping companies faced fixed cost barriers that would eventually decrease over time due to the network effect of country-built ports and the standardization of containers.
We can draw parallels from this report to the current rift between awareness and adoption of blockchain technology in shipping.
To achieve the cost benefits of containerization, ports, equipment manufacturers, asset-based carriers, governments, rail lines, terminal operators and more had to modify their infrastructure.
Justification for those costs came in the form of the industry agreeing that container-based shipping was cheaper, and that standards in size and shape allowed for significant investments.
Today, the shipping industry consists of multiple players who are all trying to build their own Blockchains, as opposed to working together to create a global ledger that would benefit all carriers. This isolated form of adoption only serves to increase the fixed costs (or reduce the bottom line) of all shipping companies by making it more challenging to grow networks en masse.
Blockchain interoperability (i.e sharing important data such as shipping item specifications and transport routes) will create the necessary network effect and standardization required for shipping companies to adopt blockchain technology on a mass scale with minimal fixed costs and maintained bottom lines.
In other words, the network effect and standardization created by forming a community of shared shipping databases provides the bottom line revenue justification for any individual shipping company to adopt blockchain technology.
Customer service improvements
Companies like Amazon, Wal-Mart and FedEx are spearheading the integration of blockchain technology into Supply Chains for Retail and ecommerce.
For companies that primarily sell and deliver consumer goods to adopt blockchain, the technology must demonstrate an ability to improve customer service operations. This means more efficient packaging and delivery processes, faster dispute resolution and better transparency on the source and quality of ordered items.
The benefits of such technology could also extend beyond consumer good companies.
For example, a manufacturer could extract from the blockchain the exact time and condition of their raw material arrivals for planning purposes.
FedEx and Amazon are well experienced when it comes to assessing the validity and possible implantation strategies of highly disruptive technologies.
Back in 2007, FedEx announced that they were launching a limited pilot that coupled sensor technologies to track a packages temperature, location, humidity levels and delivery status with Web 2.0 tools such as Google Earth.
Today this package tracking technology is expected and has played a significant part in how retail and e-commerce companies service customers.
Blockchain technology can enable Amazon and FedEx to create a distributed network of participants who are incentivized with tokens to deliver packages locally. The mode of delivery would transform from institution to customer via centralized channels, to peer to peer via localized channels.
Token economic models can enable these companies to increase their workforce by 100x without incurring any significant additional cost.
Amazon has already announced a new program aimed at helping people start their own businesses delivering packages for a minimum investment of $10,000.
With a Blockchain network, the startup costs would be much smaller, opening up the doors for more people to take advantage of their program.
Similar to the shipping industry, delivery disputes could be resolved by a group of autonomous members who vote on which party was liable based on their verification and interpretation of the available evidence.
Lastly, Blockchains can store and track all available data relating to the production, storage and delivery of food items, providing clarity on how fresh the item is, what it has been exposed to and whether it is safe for consumption.
Conclusion
Analyzing the driving forces that will lead supply chains to adopt blockchain technology requires a fundamental understanding of the challenges that shipping, retail, manufacturing and all other industries influenced by the supply chain process face.
For companies in each of these industries, the question comes down to; how can we produce and/or deliver products efficiently while reducing costs and complying with regulations? Solving this problem using centralized and closed off supply chains have only led to unnecessary compromises in one or more of these areas. Therefore, supply chain adoption of blockchain technology will be driven by an understanding that open, distributed and collaborative database networks enable producers, sellers and transporters to reliably tread the fine line between cost control, efficiency and regulatory compliance.
