By Antony Francis antony.francis@lakehillpartners.com
April 11, 2109
About 20 years ago, I produced a diagram showing that there are 3 interconnected supply chains: The Physical, the Informational and the Financial. All three, of course, interconnected and feeding off each other.
This interconnection is important. The quicker you get information into the transaction set from physical activities, the quicker you get an ASN and the quicker you get a POD and can invoice your customer. Time is money.
There was also much talk about Global Inventory Visibility. We dreamt of the ability to know what was inside each box on a pallet, but the private batch processed networks and lack of internet-driven transactions made this a pipe dream. I remember discussing with a client in the late ’90s whether we could know within seconds at the UK HQ whether an item had been sold in a store in Tokyo and immediately pulse out a replenishment shipment that same day. Of course, today we would say: “no brainer, we can!”; back then, the lack of inter-connected systems and batch processing of file exchanges made this a dream scenario.
So, where does Blockchain come into the picture? Firstly, it is important to define what we mean by Blockchain. There are two pieces to Blockchain when it relates to supply chains. One is the distributed on-line ledger that enables one to track the work-flow process from PO to an approved A/P transaction on the buy-side and a sales invoice into A/R on the sell side.
A recent article described Blockchain as an open, distributed ledger that can record transactions between two parties efficiently, securely and in a verifiable and permanent way.
Some of the key elements of Blockchain were explained by Iansiti and Lakhani in a recent Harvard Business Review piece:
- Users of a Blockchain have access to all the data so that no one person has control over the information
- Each record is linked to the ones before it, once entered any alteration would create a snowball effect in the blockchain. Algorithms are employed to ensure the accuracy of the data.
- There is no need for a centralized entity, for example, a bank, individual transactions can be executed directly.
- Each user has a password to access the blockchain, each user can share their personal information or remain anonymous. (Ed. I differ with this last point because, in my opinion, and as explained above, we need a full audit trail on each transaction).
So, let’s focus on the transactional work-flow process side initially, the Distributed Ledger. Transparency is becoming increasingly important for retailers; more and more people want to know how and where goods are made. This goes hand in hand with ethics and sustainability. For retailers to understand if they are operating in the most sustainable way, if the products they buy are made in the factory they believe it to be, they need to know information about the supply chain. Blockchain can help with this type of data tracking. When transactions occur along the supply chain, a digital record occurs at each step, thus providing a full audit trail.
Consider how business works today. Keeping ongoing records of transactions is a core and necessary function of any business. Those records track past actions and performance and guide planning for the future. They must, however, operate as an event manager and keep a fully detailed history of who made changes and when. Many organizations have no master ledger of all their activities; instead, records are distributed across internal units and functions. The problem is reconciling transactions across individual and private ledgers takes a lot of time and is prone to error.
In a blockchain system, the ledger is replicated in many identical databases, each hosted and maintained by an interested party. When changes are entered in one copy, all the other copies are simultaneously updated. So as transactions occur, records of the value and assets exchanged are permanently entered in all ledgers. There is no need for third-party intermediaries to verify or transfer ownership.
“Smart contracts” may be the most transformative blockchain application. These automate transaction approvals as negotiated conditions are met. For example, a smart contract might send a payment to a supplier as soon as a shipment is delivered, and the 3-way match is completed. If the product had a GPS beacon, it would automatically log a location update that, in turn, would trigger receiving data. Some IoT devices can even record if there was a change in temperature or shock damage.
When the Internet cloud emerged and started achieving widespread use, technologies like XML were predicted to replace EDI. Rumors of the death of EDI have been greatly exaggerated. The short answer is that EDI works. Companies have invested in it over many years. It may well have been moderately painful to get it up and running, but now it works. Even today, a certain set of core EDI messages (around the buy-sell-ship-pay transaction lifecycle) have and continue to enjoy widespread adoption and are almost universally required by major retailers and manufacturers. It is very prevalent in the Freight Forwarder community. The good news is that Blockchain feeds of all of these data sources.
Consider the situation today with B2B networks: Suppose a given supply chain process involves a buyer, seller, and third-party logistics provider. Today, information flows between these entities are typically one-way and point-to-point, either through EDI or XML-based messages or other mechanisms, such as API-based interactions. It is often the case that a buyer and seller might exchange certain messages, but an intermediary logistics service provider doesn’t see those messages. Or a seller and logistics provider might exchange certain messages not exchanged with the buyer. Events representing the exchange of B2B documents, for example, could be recorded on a blockchain and made visible to all participants in a supply chain process. In addition, blockchain could record supplemental events, such as those provided by IoT and smart devices, providing a more detailed synthesized record of all information flows. The actual exchange of B2B documents that occurs today can continue to operate as is, and a blockchain could simply provide a shared visibility “overlay.”
Such platforms will save the global shipping industry billions of dollars a year by replacing the current EDI and paper-based systems, which can leave containers in receiving yards for weeks. What if tariff codes, classification data, origin information, import and export certificates, customs values, clearance status, and all further required information about goods were available for all involved parties to access and complete through one unique ID, anywhere and anytime, and protected against manipulation thus delivering the same significance as certificates, seals, and signatures?
Permissioning inside blockchain gives you the confidence that you can control your information and grant access only to those you want to grant access to.
Lakehill Partners has a long history of systems integration and business process redesign. Let us help you manage the way forward.
For more information on this subject, please contact Antony Francis at antony.francis@lakehillpartners.com.
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