The blockchain mania hits the supply chain. Will it deliver on its promise?
Proponents of blockchain call it the next big thing. IBM is taking the lead on the supply chain blockchainization. Is its technology ready to transform the global supply chain?
The blockchain mania
We are back in the days that one single word will drive irrational behavior and make investors willing to throw money at your project. This frenzy behind blockchain – the technology behind digital currencies like bitcoin – is reflected in the amount of capital raised year-to-date by companies exploring the technology: more than $2.7 billion in funding [1], most via initial coin offerings (ICO), an unregulated fundraising tool that raises money through the issue of a new digital currency [2].
Year-to-date, ICOs have closed more than $2 billion in funding for blockchain-based projects
The value behind the technology
There is a reason behind all this frenzy. The blockchain technology is presented as a piece of innovation on a par with the introduction of the internet itself [3]. It is a secure, decentralized database that everyone can inspect but no single user controls. It is a trust machine that lets people who have no particular confidence in each other collaborate without having to go through a central authority [4]. The problem of trust in a system goes far beyond the financial markets and, it turns out, this technology can be applied in many other use cases.
The silver bullet for supply chain digitalization
The complexity and diversity of interest derived from global supply chain relationships pose exactly the kinds of challenges blockchain technology seeks to address [5]. Traceability of items along the supply chain is one example of such challenges. Information is often siloed on systems developed to serve the information needs of each individual actor, making extremely hard to trace back items on the chain and to have a complete picture of the process [6].
Blockchain technology can deliver a new way of tracking shipments and transactions of supply chains of all kinds, from food to prescription drugs to diamonds. Because all the participants would be keeping their own live version of all the data, without a central authority, they could immediately see everything that was going on and trust that no one else had tampered with it [7].
IBM doubles down on blockchain
IBM has been one of the pioneers to explore blockchain technologies in the supply chain use case. In order to showcase its solution, IBM partnered with leaders, such as Walmart and Maersk, and delivered compelling practical tests.
- Safer food supply chain
- IBM is working with large food suppliers like Walmart, Dole, and Nestlé to incorporate its blockchain technology into the global food supply chain. The technology offers a more efficient way to figure out when and where food items are contaminated, which can help producers and public health officials limit contagions [8].
- Less paperwork and more efficiency in the global trade supply chain
- IBM is working with Maersk to simplified the paperwork processes in the global trade industry. A single container could require stamps and approvals from as many as 30 people, including customs, tax officials and health authorities [7]. The total annual worldwide extra costs due to administrative burdens are estimated in the range $100-500 billion [6].
In order to push its technology for being the standard in the industry, IBM created the Hyperledger Foundation, made its software “open source” and attracted other companies that are now working on the project. It has 650 employees dedicated to the technology and 400 clients testing its solutions [7].
Recommendations: public blockchains for massive adoption
Corporate-designed blockchains – like the one IBM is creating – miss the extremely decentralize structure that made the case for this technology so compelling. It concentrates power in a handful of entities. IBM has faced questions from companies worried that it has too much control over the system and could make them dependent on IBM for years to come. The director of the Hyperledger Foundation, Brian Behlendorf, acknowledged that IBM is still the single largest contributor to the project [7].
The company should move away from its private blockchain and use a public blockchain as the foundation from its technology. This move could booster adoption from other companies in the supply chain and focus the efforts of its engineers on building applications and functionalities rather than reinventing the wheel of the blockchain.
Microsoft is going exactly in this direction. It has announced the release of its blockchain framework that is developed using Ethereum as the public blockchain provider [8].
What’s next?
Moving forward, IBM has this hugely ambitious plan to transform the world’s supply chain using blockchain technology. How can it boost adoption from the many players that still use paper-based processes for their day-to-day operation? How far will data be shared across supply chains that comprises many competitors? Will it deliver on its promise to create one system that will rule the entire global supply chain?
(789 words)
References
[1] CB Insights. “Blockchain In Review Investment Trends And Opportunities” https://www.cbinsights.com/reports/CB-Insights_Blockchain-Review-Briefing.pdf
[2] Techcrunch. “WTF is an ICO?” May 23, 2017 https://techcrunch.com/2017/05/23/wtf-is-an-ico/
[3] The Economist. “The next big thing. Or is it?” May 9, 2015 https://www-economist-com.ezp-prod1.hul.harvard.edu/news/special-report/21650295-or-it-next-big-thing
[4] The Economist. “The trust machine” Oct 31, 2015 https://www-economist-com.ezp-prod1.hul.harvard.edu/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine
[5] Harvard Business Review Digital Articles. “Global Supply Chains Are About to Get Better, Thanks to Blockchain.” Mar 13, 2017
[6] Jensen, T., Bjørn-Andersen, N., and Vatrapu, R. 2014. “Avocados Crossing Borders: The Missing Common Information Infrastructure for International Trade,” in Proceedings of the 5th ACM International Conference on Collaboration Across Boundaries: Culture, Distance & Technology – CABS ’14. Kyoto, Japan.
[7] The New York Times. “Blockchain: A Better Way to Track Pork Chops, Bonds, Bad Peanut Butter?” Mar 4, 2017 https://www.nytimes.com/2017/03/04/business/dealbook/blockchain-ibm-bitcoin.html
[8] Business Insider. “IBM wants to use the technology that underlies bitcoin to help prevent major foodborne outbreaks like salmonella” Aug 22, 2017 http://www.businessinsider.com/ibm-and-walmart-are-using-blockchain-in-the-food-supply-chain-2017-8
[9] Fortune. “Big Business Giants From Microsoft to J.P. Morgan Are Getting Behind Ethereum” Feb 28, 2017 http://fortune.com/2017/02/28/ethereum-jpmorgan-microsoft-alliance/
Thanks for introducing this interesting topic, Cesario!
I wish you had elaborated a bit more on the mechanics of how blockchain technologies improved supply chain safety or reduced paperwork. Being ignorant in this space, I remain unsure of how it works.
You mention the ICO funding which is very interesting although I would have spun it off since this supply chain essay is not directly related to funding. That said, ICO’s are fascinating and raise many issues as seen in the Chinese ICO ban [1].
The most interesting part of your essay is, in my opinion, the limitation of the blockchains technologies when control is handed to a single entity. You are absolutely right that it is a real risk and that it is against the purpose of blockchains themselves. Even for (relatively) more mature blockchains such as Bitcoin, this problem exists with mining being more and more concentrated in the hands of a few entities [2].
A concern you didn’t mention is the cost of running blockchains. If each transaction needs to be verified by the network, how much energy/money does each transaction cost? Is it sustainable as the complexity of blockchains keep increasing?
To build up on your last question. Does IBM really need to create one system to control all the supply chains of the world? Or is each of them a separate system. Is blockchain actually a system? Or is it the absence of system? Personally, I imagine supply chain management as becoming a composite system of many independent blockchains.
[1] Forbes, https://www.forbes.com/sites/kenrapoza/2017/09/25/after-crackdown-nearly-every-chinese-ico-returns-cash-to-investors/#35f0c86a19ff, Published September 2017
[2] NY Times, https://www.nytimes.com/2017/09/13/business/bitcoin-mine-china.html, Published September 2017
Cesario – thanks for sharing this ‘intellectually’ provocative piece.
I would disagree that blockchain is innovative as the internet. The internet has a wider application of impact from new distribution channels (commercial aspect) to universal access to information (social impact). I believe the social impact outweighs the business arguments, which has not been covered in this essay. Perhaps it is too early to assess the society impact given blockchain is in it’s first phase.
Albeit difficult to quantity the social impact, the internet has changed the way our generation – the ‘millennials’ – has grown up and views the world. Compared to an era one or two generations ago where neighbours such as the French & British viewed each other with hostility and suspicion, the internet has broken barriers, facilitated conversations and engagement with other corners of the world making us more intrigued in travel and tolerant to new cultures. I’m very interested to see the wider effects of blockchain technology in generations to come!
From a commercial aspect, given the hype around blockchain, do you not expect new entracnts to join rapidly and challenge IBM’s dominance? Also, how secure are these blockchain technologies from hackers disrupting global supply chains?