From Automation to Blockchain: Digitization at UPS
UPS has always been a leader with digitization in the supply chain. Can they further this trend with the same technology behind the infamous Bitcoin cryptocurrency?
Pressure has never been higher to innovate for the package delivery and logistics industry. Whether it’s handling a 2-day Amazon delivery at rock bottom costs, or helping Wal-Mart track all of the bad apples in their store network, these customers are sending a message that you better reduce your costs while continuing to innovate, or we’ll find someone else who can.
UPS is seeing this trend and, as it has in the past, is using digitization to improve both its internal and external processes to continue being the leader in technology and efficiency.
In the short-term, UPS is investing in accelerating automation within their facilities to grow efficiency and productivity. These automated hubs will fully integrate into their network-planning technology, the combination of which will enable optimized package flow within the network [1]. From a financial perspective, this further reduces both variable costs and costs associated with the human error that automation can eliminate.
The next step for UPS is to improve efficiencies not only internally, but externally as well. They are striving to become something called an extended enterprise, one in which a firm can fully integrate its internal network with the internal networks of its supply chain partners [2][3]. By introducing complete information sharing and collaborative resource planning, UPS can eliminate the same nasty bullwhip effect we’ve seen previously in supply chain, further cutting costs from holding inventory and backlog. On another note, what if the same strategy could enable Wal-Mart to finally track the source of their bad apple, along with the destination of all of the other apples from the same batch? Here is where their latest digitization strategy comes in.
On November 7, 2017, UPS announced they will be joining the Blockchain in Trucking Alliance (BiTA), a move to become an extended enterprise [4]. Blockchain, the technology behind BiTA, first came to light with the introduction of Bitcoin, a cryptocurrency platform released in 2009. With a new cryptocurrency came a new need to transact said currency. On top of that, how do you address this need in a way to not rely on an intermediary such as a bank or some other financial institution? The answer was blockchain, a decentralized ledger that allows for a transfer of goods or information between multiple parties without the need for a separate intermediary to verify the transaction. The transactions take place with just an agreement between verified parties for verified amounts. Obvious benefits from this consensus mechanism include faster and more secure transactions (see [5] for security details).
Figure 1: IBM Application of Blockchain in Supply Chain [6]
For the usage by UPS, blockchain is the ledger to enable UPS to have an extended enterprise with their partners. It’s a system accessible by everyone in the supply chain to know where everything is and has been. Quoting John Larking, a Stifel analyst: “The theory is that the blockchain enabled supply chain participants will be able to handle transactions, more quickly, more securely, with fewer errors and less labor cost involved in the overall process” [4] Looking at examples of market numbers, Craig Fuller, CEO of TransRisk, mentions how $140 billion is tied up daily from payments disputes from shippers claiming nothing has been received [7]. That’s a lot of money to make a quick fix for by just enabling accessibility for everyone.
The only challenge from here is how long will the rollout take. John Larkin believes it will just take three players to really invest in enough technology to drive consolidation, three key players to drive BiTA. Alongside this, Deloitte has predicted that by 2025, 10% of the GDP will be stored on blockchain [5][8].
Considering other steps to take, UPS needs to pull its supply chain partners into the fold. Some will come through membership within BiTA. Others will be other points in the supply chain that are already getting orders from someone like an Amazon to follow suit. Synergies across the parties involved can ensure a timely and successful rollout for the benefit of everyone involved.
Moving forward with digitization and blockchain at UPS there are definitely questions that need to be addressed. Does UPS have the capability internally to perform this migration or does it need to be outsourced? Can blockchain development be initiated in a way that’s compatible with existing systems as they transition? Do partners even have the capital to fund this transition effort?
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References
[1] “UPS 2016 Annual Report” http://nasdaqomx.mobular.net/nasdaqomx/7/3521/5025/
[2] “Why Blockchain Matters” https://longitudes.ups.com/15785-2/
[3] “Stages of Supply Chain Management Evolution” http://www.threadpunter.com/supply-chain-management/stages-of-supply-chain-management-evolution/
[4] “UPS dives into blockchain technology as trucking company seeks to evolve” https://uk.finance.yahoo.com/news/ups-dives-blockchain-technology-trucking-211700520.html
[5] “Blockchain & Cybersecurity”
[6] “How to achieve supply chain visibility in the Chemical industry”
https://www.slideshare.net/ibm/how-to-achieve-supply-chain-visibility-in-the-chemical-industry
[7] “Blockchain in trucking: What about the middlemen?” https://search-proquest-com.ezp-prod1.hul.harvard.edu/docview/1953333330/?pq-origsite=primo
[8] “Logistics at future trucking and logistics trends” http://www.fleetowner.com/fleet-management/looking-future-trucking-and-logistics-trends
Great post! I did on a similar topic, but more on shipping. I really enjoyed that you focused on the aspect of an extended enterprise. I do agree that collaboration with external parties is the key for UPS’s success in digitization of its supply chain. As you pointed out, however, I am not sure if their external partners all do have capital to fund this movement. I also think that standardization is required to achieve the collaboration among parties. Although Bitcoin is the most application of blockchain technology, I do not think it is suitable for this case. The question is who will set the standard for supply chain. Will it be Amazon again??
Great article! I was wondering if a logistics player can extend the blockchain. They are a super critical player in the entire piece of the puzzle but will a manufacturer move to blockchain because UPS is? I am inclined to think that maybe not. On the other hand, if a manufacturer wants their logistics partner to have blockchain (which I feel can happen), then UPS will be a preferred partner because they are ahead of the curve. I feel its a great strategy and a recognition of how UPS is changing with the times. Waiting to see how things pan out!