WHAT BIT/BLOCK CAN REALLY DO IN SUPPLY CHAIN?

I must confess I was bit oblivious to bitcoin and all the blockchain frenzy of recent months and years and it was only few months ago I did my homework and properly educated myself. Describing this in one sentence I wanted to explain about this revolution and as a technology professional my words would be such as stunning, but let me be calm and realistic here.

For certainty, the way we live our lives and do our business will not be same again, the genie is out of the bottle already, but many bloggers and speakers have summarized the same already.

What I would like to write about is vision how this Fennomen and technology will impact Supply Chain and Global Trade.

As we know bitcoin came up with technology blockchain that has notably 2 key features among others that may play important role in changing and impacting supply chain – those are 1) immutable history of ownership within blockchain and 2) possibility to condition and enrich the exchange transaction itself to behave as kind of a program on its own. The second feature is referred as “smart contract”.

Now why these two and what are the use cases ?

I would like to present 2 use cases that supply chain professionals will be familiar with. Keep in mind there are some in store but for now lots concentrate on these two:

1.     Global Trade Finance

Imagine typical situation – you as a buyer purchase product from your overseas vendor, you know when they should arrive, total costs and product requirement. Your vendor confirms these and you hired your 3PL partner to manage the origin process for you. 3PL will pick up this product, count it, check its quality etc. and should all go well your 3PL issues you the Freight Cargo Receipt document confirming the pickup and change of ownership of the cargo. Also, your vendor issues the actual Invoice and you agree on payment terms. Then you need to arrange with your bank where you have prepared letter of credit documents the actual international payment transfer to overseas where the other bank counterparts and both banks takes its own fees on this “secured” transaction. This is today’s worlds, so called "as – is".

Now "to – be". Vendor right at production tag each product with unique ID (or RFID tag attached) and at packing each ID is inserted into blockchain database via scanning process (here we use IoT really). 3PL upon pickup confirms actual are same with what blockchain tells and add its own block entry to it. This is now recorded in product history, including found flaws or issues. Global Trade Finance smart contract program will also expect confirmed Freight Cargo Receipt document once issued. And lastly this smart contract program expects the vendor’s invoice. Smart contract evaluates these condition (i.e. presence of each step and products controls) and calculates amount to pay discounted by faulty products or by delays in delivery. Also, other framework discounts or reductions maybe included. Then only payment is initiated using either 1) crypto currency (like e.g. ETH) or 2) issue a token that maybe interfaced out into contemporary FIAT currency payment systems. For 1st – its more mature model as the crypto currency transfer is recorded against transfer of goods ownership on blockchain. But this 1st model is yet having some key challenges like conversion to FIAT currency or scalability. 2nd Model maybe more of intermediate model before the cryptocurrency and fintech industry matures stabilizes.

Either way the main value here is in chain traction and automated intelligence conducting smart transactions 'en mass' without any supervising middlemen agent.

2.     Trade Document ownership exchange

This use case was described in case 1 with sample of Freight Cargo Receipt, where blockchain provides immutable control of who possess (i.e. controls) given international trade document between the parties. Even better case for demonstration is Bill of Lading document which entitles its holder to pick up and own the transported cargo. blockchain can assure clear ownership and embedded code inside the transaction helps to observe contractional conditions like if vessel from origin did depart, if estimated ETA by carrier was issued or if products quality and certificates were fulfilled.

After elaborating to these most "reachable" use cases for blockchain and cryptocurrency let me still point out few notable considerations:

-         We should consider not only “how supply chain can be built on blockchain” questions but also and mainly “how virtual money (cryptocurrencies) can make international trade and logistics easier, today there are handful of “wallet-like” tools that transfers your FIAT currency (those you do real payments and balance sheets) into crypto and vice versa, so it’s very near future where business happens in crypto but legal docs and profits are in FIAT currency like EUR or USD.

-         Bitcoin money changed totally financial industry (created whole new one) but it may not happen in such precedent way in trade and supply chain itself. In Supply chain, we transfer physical goods and that is to stay, what this phenomenon of bit/block brings are the new tools and efficiency along this physical move

-         Same as previous point, current traditional visibility tools and process based on “standard” relational databases with 3-tier architecture may still remain, only conceptual enhancements are to be made to support current business

-         Again, contrary to bitcoin, blockchain in supply chain and in international trade will not be a decentralized public ledger-like Phenomenon as there is no public demand for such virtual value in supply chain; keep in mind that bitcoin was reaction on financial crises in 2008 and aims to provide independence on banks and governments, as such similar demand is not there in supply chain (maybe a part of the money that are in supply chain)

-         Block chain implementation in supply chain and global trade may be decentralized in terms of computing power and data distribution but will be centralized in terms of defining of rules and logic of smart contracts

-         Challenges of implementations now are in complication of transfer of cryptocurrencies into real world currencies (or at least the process immaturity) for industry scales and industry scalability

Let’s discus on all of these assumptions and design further, anyway the field is so HOT right now that in few months these maybe not valid assumptions and maybe altered again, but I guess this is the excitements that led me into writing this up. 

References:

1.Blockchain Smart Contracts For Supply Chain

https://www.globaltrademag.com/global-logistics/blockchain-smart-contracts-supply-chains

2. Oracle to offer blockchain platform for smart contracts in Supply Chain

https://www.businessinsider.de/oracle-to-offer-blockchain-platform-for-smart-contracts-supply-chains-2017-10?r=US&IR=T