Supply Chains and the Future — An Interview with Professor Andreas Furrer of Center for Logistics and Transport Law KOLT
Furrer is well regarded among both the academic and commercial logistics communities, and has helped connect the Olam Foundation to standards organizations worldwide
As soon as he’d joined Olam Foundation’s board of advisors, I’ve had an opportunity to sit down for a chat with Dr. Andreas Furrer, esteemed Professor of (*deep breath*) Private Law, Comparative Law, Private International Law and European Law Director Center for Logistics and Transport Law KOLT at University of Lucerne. I wanted to understand how he anticipates the future of supply chains given his unique knowledge in the field.
To put the answers into perspective, Furrer is acting attorney, arbitrator and expert on national and international commercial and contract law, as well as international private law. His areas of focus are national and international distribution, logistics and transport law.
What in your view is something most people don’t understand about the supply chain?
First, it’s important to define the term “supply chain”: In my broad understanding we describe with this term to how a company organizes its in- and outbound flow of material and information including the internal organization and the payment methods and all the various steps in between. There are so many companies with a narrow focus on producing an excellent product, or a low-priced product for a cheap price; yet they don’t really grasp the potential that lies in optimizing its supply chain in the wider understanding.
In larger companies, many different departments are involved in a supply chain, and managers need to step back and take a wider look at their entire end to end supply chain, with all factors considered. More often this requires examining all various steps within the chain, be it the logistics at the beginning of the chain — i.e. purchasing parts or raw materials -, the company’s internal assembly or manufacturer logistics, or be it at the back end of the chain — i.e. selling the product, distributing it.
Supply chains have such a diverse savings potential. Purchase and sale are important and often overlooked stages; these are rife with incredible potential for any bottom line, from turning higher profits to cutting costs and production time.
So, it’s the manufacturers themselves who don’t understand the potential in optimizing their supply chains?
Many manufacturers can’t even recognize the potential of an optimized supply chain. If you talk with advisors in this field, most will tell you that any company which begins to take a closer look at its supply chain can assume that it will reduce expenses or increase profits by at least 20% right off the bat. That’s a lot.
These many decades of inefficiencies in supply chains the result of mishandling or ignorance, or are they the result the organic development of the ever-evolving field?
Definitely an organic process. Take a step back and consider what has grown in the past. In my own practice I’ve witnessed cases in which more than 100 different trucking companies were providing services to one company. Such a company should be able to narrow it down to maybe 2 to 10, depending on the product portfolio and the markets involved. But there’s really no reason to commission 100 different logistics providers for a single job. The moment the supply chain is picked apart and examined for what it is, they narrow choices down to the best bidders and immediately start to see results in their bottom line with better service, a better product, higher accountability, less waste and more.
How do you view the influence of Amazon and Alibaba on the logistics market? I’m specifically bringing them up due to their famous end-to-end internal logistics solution which was unheard of before recently.
It is really remarkable that newer companies have been extremely innovative in this area, to leverage the high potential of an efficient supply chain. Their ideas and approaches have really been a revolution in the logistics. If you’d asked me five years ago, I’d tell you that the automotive branch do realize the most revolutionary approaches in the supply chains. These companies however (Amazon & Alibaba) really demonstrated how far you can go using these advantages.
Do you feel many logistics companies or service providers have been “asleep at the wheel” while Amazing implemented their system, or were those developments truly pioneering?
Neither — I think the main factor is digitalization: Alibaba and Amazon started building up their system based on digital data right from the beginning. In contracts, the logistics service providers still must rely on information delivered to them be it on paper or digital, so they couldn’t be similarly innovative since they didn’t have the information. This was an ideal competitive advantage; however, they also took advantage of this!
What was the last straw to convince you to take blockchain seriously as you do now?
At the beginning I mostly was involved into the cryptocurrency aspect of blockchain such as bitcoin, which was less interesting to me at the time. Then I started learning more about other immediate advantages of blockchain, in particular the use of smart-contracts.
I realized how absolutely interesting its use would be for industrial purposes: To put it in a nutshell, it is the ability for a 3rd party to trigger transactions in a foreign contract automatically. Thus, contracting parties can agree that a third party can trigger a transaction in their contractual relationship… which so far was not possible. This means that trustworthy intermediaries such as a bank no longer need to be. The letter of credit can be processed directly via the block chain without involving a bank. The deviation of temperature can trigger directly trigger a payment of damage, a shock sensor activate a claim expert.
These automatic transactions will require parties to rethink how they negotiate these contracts, which may be a bit tricky at first. We have the next few years to work out scenarios of conflict resolution with lawyers for example, but there’s no doubt that despite the work needed it will be a massive change for the industry. This is what convinced me blockchain is the solution.
As a lawyer yourself who deals with contract and trade law, do you follow closely potential changes in Europe resulting from developments like Brexit could affect the international logistics arena, or is it business as usual for the most part?
[Deep breath] It will affect the world trade, but not as quickly as people may think because we are ultimately subject to a particular country’s national law. It is important to make some thought on jurisdiction/arbitration and the choice of law. However, the issues of customs and export compliance will become more difficult.
Who’s we in this case?
When negotiating on a contract you need to decide which party’s country’s law it would be best to base it on. With blockchain in the picture, we have to think not only which county’s law is better, but which is best to execute the contract via smart contracts when they are involved.
Something like Blockchain Law?
It’s difficult, there are many approaches to establishing a law which is not dependent on a particular jurisdiction… It is unlikely however. In Liechtenstein for example they have now developed blockchain law to facilitate the implementation of smart contracts while in Switzerland there have faced several obstacles with perusing the automatic execution of laws. Actually, we are now launching research on exactly that, hopefully the Swiss National Fund will give us a grant for our investigation so that we can best understand what jurisdictions pose which problems for deploying smart contracts. We are only at the beginning of this kind of research.
Another aspect which needs to be considered is the categorization of the various legal problems you might face where, and how they may or may not come into play depending on the functionality given to a smart contract. We may indeed learn that different types of smart contracts are best deployed under particular country’s laws vs another.
What do you think it the next front for logistics? Does any particular area (e.g Africa) have untapped potential, and if so what are the challenges?
Within the logistics world we need many trusted 3rd parties which allows us to bridge the uncertainties of doing business with unknow partners or in foreign cultures. Blockchain relieves the need for these relationships with 3rd party service providers, and since, in today’s world, the playing field is filled with such service providers, it is the area in which we will see the most immediate change. Banks, insurance providers and other 3rd parties usually take such a big cut. If parties can avoid these expenses, the will do it: I expect a change of the landscape because this lead to huge reduction in costs for everyone involved.
Will smaller logistics providers be able to compete?
While we aren’t quite there yet, it’s absolutely possible that smaller companies will be able to bid on logistics contracts which today only massive companies can compete over.
It will require new structuring: The logistic industry is a very conservative industry in which one transaction doesn’t make you a profit, you need many transactions to turn a profit. Carriers are careful to change the system because a small change can move profits around too much; they need a clear view of what the consequences of a change in the system will be before they go for it.
Other groundbreaking tech you see fueling the logistics market’s evolution?
I think there are two main fronts, one legal and the other technical:
On the legal front, handling of documents is a forefront to modernization because form a legal perspective these are crucial. In international law there is a close link between transportation documents and legal consequences. So, what we still need are very profound document handling procedures by which the legal consequences are bound to paperless transactions. In each modality there is a different stage of development: In air freight they are already way ahead of maritime law for example (excluding some private systems).
There are several attempts to facilitate digital transactions. UNICTRAL just enacted a Model Law on transferable records which is a proposition on how to handle digitalized data and transferable docs, so they are really a functional equivalent. This should be an international standard for national legislators and institutions. There are many such approaches, we will have to see. However, the legislative processes are very slow. First, we need to find technical solutions to circumventing the existing obstacles in the existing laws.
Therefore, in each such project of digitalization, it is important that the lawyers are involved at an early stage of the project. It doesn’t make sense to develop a great system if the transactions triggered within such a system have no legal effect. In smart contracts, it is the “contract part” that matters, not the “smart part”.
On the technological front I see artificial intelligence becoming increasingly important: Smart contracts are not as smart as we think, they are still if-or executions. AI will help optimize decisions taking things like account price, the optimal reaction in case of unforeseen factors such as natural disasters or calculating an optimal choice between several modalities. AI will be best for this, and smart contracts are not enough to unlock that potential yet.
Tell us about the books you are writing!
Presently I’m writing a book on Swiss transportation law, a big project funded by the Swiss National Fund, an academic institution. Aside from that I’m writing book on freight-forwarding law and another on road contract and transportation law which will be published this year. Maritime, railroad and air transport law will come in the next book, to be finalized in 2020. Further, I publish several articles on legal problems in the field of blockchain, smart contracts and digital contract law.
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