I was startled to see yesterday that China’s freight activity has been in contraction for the past six months. Given the country’s push to increase its global footprint, and its dependence on manufacturing and exports, this doesn’t look good.
So I did a bit more digging and saw that the Baltic Dry index, which assesses the price of shipping raw materials by sea, shows that freight activity overall has been falling sharply since April (which did not happen in the previous two years), and is well below 2014 levels.
Global shipping is slowing down?
All the more reason, then, to reduce costs and streamline processes, as fast as possible.
With several enterprise firms around the world examining the potential impact of blockchain technology on supply chain logistics, progress is being made.
Microsoft’s Project Manifest platform plans to track everything from auto parts to medical devices, and as of May 2017 had 13 members, including Auburn University and supply chain tech firm Mojix. One pillar of the project is the connection of RFID scanners to the ethereum blockchain. Previously, Auburn University’s lab succeeded in combining RFID technology with the electronic data interchange transaction standard that improves supply chain traceability using centralized databases. It will be interesting to see what impact decentralized ones will have.
Earlier this year, the Danish shipping giant Maersk revealed the completion of its first live blockchain trial, aimed at reducing the amount of expensive and time-consuming (not to mention error-prone) paperwork that a global supply chain requires. A 2014 study commissioned by the company showed that an average of 200 separate transactions, passing through the hands of 30 counterparties, are involved in the shipment of a product using a shipping container. A blockchain platform can streamline the verification and transfer of the relevant documents, giving the counterparties access to the real-time information they need to process their part.
After a difficult year which saw profits decline, plus the rocky outlook for global shipping signalled above, the cost reduction a live platform could offer would be welcome.
Late last year, the port of Rotterdam formed a blockchain consortium focused on logistics, along with ABM Amro, Royal FloraHolland (which ships flowers) and several research institutions. The group plans to focus on testing the sharing of contractual and logistical information.
And there are many others.
However, given the obvious inefficiencies, and the shaky position of world freight – not to mention its importance in the global economy – it is surprising that there aren’t more.
You know the adage about complex systems not changing until they absolutely have to? That time may have come.
Yesterday one of China’s largest P2P lenders announced a surprising move into blockchain technology.
I say surprising, because on the surface it does not seem to have much to do with marketplace loans.
The report, sourced from a Chinese newspaper, claims that the project’s goal is use its ability to store and secure data on a blockchain platform to develop a supply chain tool for enterprise businesses.
Apparently it will start by integrating the service with a steel trading platform.
You can see why I’m scratching my head, right?
Creditease does have a long history of diversified investments, that does not show any sign of letting up. In this year alone, it launched a second venture fund focused on Israeli technology, and invested in the funding rounds of three US fintech companies.
Diversification makes sense in a sector being hit by additional regulatory pressure, market scandals and looming international competition.
But a blockchain platform for supply chain management for enterprises?
I wrote recently on the impact that blockchain innovation could have on the massive marketplace lending sector in China. It is, I believe, poised to take off with the introduction of new technologies and relationships, which in turn can open up new markets.
But steel trading??
If anyone can see where this strategy is going, please let me know.
Continuing from yesterday’s post, one aspect I find particularly intriguing about the potential role of the blockchain in international trade is the possibility of linking up the different parts, and what that implies for the future of commerce.
In the shipping trial mentioned yesterday, goods from Schneider Electric were transported on a Maersk Line container vessel from the Port of Rotterdam to the Port of Newark. The Customs Administration of the Netherlands, the US Department of Homeland Security and the US Customs and Border Protection also participated.
And that’s just scratching the surface. Maersk discovered in 2014 that a simple shipment of refrigerated goods from East Africa to Europe can go through 30 different stages, involving more than 200 separate interactions and ‘messages’.
Even if not all of the 30 participants are distinct entities (maybe some work for the same organization but in different departments), that’s a lot of different systems interacting. Setting up a database for all to share is possible on a programming level, but virtually impossible on a governance level. Who decides the format and function? Who controls it? Do all the participants trust that entity?
With a blockchain-based platform, the trust issue becomes less relevant, as all participants will be able to see the information they need and verify that it has not been altered. While the system will need to trust that the data entered is correct (for instance, that the amount in the container coincides with what’s in the document), checks at each stage will pick up errors or attempts at fraud.
Beyond the trust issue, a system that allows verified sharing of information can significantly reduce redundancies. The shipment process consists largely of a sequence of documents, each relying on part of what was in the previous one, and adding new information. This implies a lot of duplicated data. Convert that data into bits and parse it into a shareable format, and duplication – if necessary – is no longer a time-consuming burden.
However, it’s not the added efficiency that most intrigues me.
This is about more than streamlining. It is the beginning of a rethinking of business structures.
We are accustomed to a vertical business world. Enterprises have vertical structures, with parent company at the top and subsidiaries underneath. And each are governed by a combination of rules from the parent domicile and the local jurisdiction.
A blockchain-based system for commerce, on the other hand, is horizontal. It unites not only different participants in different geographical locations, but also in different sectors. There needs to be someone deciding who gets to participate (after all, we are talking about ‘permissioned’ blockchains), but beyond that, it creates a new ‘entity’ with its own set of rules.
This ‘entity’ has a new type of boundary – not corporate, not sectorial, not geographical, and as such, difficult to regulate.
What we are witnessing could be the beginning of a new type of commercial structure, accompanied by a rethinking of legislation.
The result could be a reinforcement of the underlying principles of global commerce: the fair exchange of goods for mutual benefit. With horizontal structures and a changing attitude towards cooperation, emphasis could start to shift from “exchange” to “fair”.
Bloomberg’s Matt Levine published an interesting take today on the Maersk shipping blockchain trial. Ever the blockchain sceptic (insightfully so, in my opinion), he does see value in the application for the shipping industry, and by correlation, supply chain management.
Some background: Danish shipping giant Maersk has built a blockchain platform, in partnership with IBM, to streamline the management of shipments. A trial was run on a live shipment from Rotterdam to Newark, with the relevant documentation registered on the platform, and the participating parties given access to the parts that they needed to see.
Here’s why Matt finds this interesting:
“Whereas finance already has trusted central intermediaries, shipping doesn’t. Maersk has no trouble keeping track of who owns its containers. The problem that blockchain is solving here is not so much a database problem, as it is a messaging problem. The question is not “how do we keep a list of who owns what,” but “how do we communicate all our approvals efficiently and in the same format?””
The problem that blockchain is solving is a database problem. Even if the only advantage were improved handling of documents, various databases would be involved. Shipping documents are more than just messages. They are, in effect, contracts. And each carries specific information related to the material shipment.
Managing the process involves not only lots of documents, but lots of different databases. What the blockchain can do is bring all those databases together.
You can’t do that without the blockchain, because who would control the new, merged source of information? Even if that answer was obvious, why should the parties trust the central authority? They would end up keeping separate databases anyway, just in case.
He also points out that the teddy bears could be swapped for cocaine and the blockchain wouldn’t know.
“The blockchain is about taming all of the virtual attributes of the container, all of the paperwork that accompanies it. But the boundary between the physical and virtual worlds will always be a bit more lawless.”
Again, I disagree.
Perhaps the Maersk/IBM platform is not content-sensitive, but that’s by design rather than necessity. Other trials have shown that sensors can connect with the blockchain. And sensors can detect changes in content, temperature, humidity, etc. So, theoretically, a DLT supply chain platform could detect fraud and theft.
While I normally applaud blockchain scepticism (the sector needs it), in this case it’s missing the opportunity by focusing on a narrow application. And while Matt Levine has the advantage of deep well of financial sector knowledge as well as a compelling writing style, it has been fun disagreeing with him, just this once.
A couple of weeks ago we looked at the potential impact of the blockchain on supply chain management, but we didn’t go into detail about actual examples and current trials in this bigger-than-you-probably-expect sector. Even leaving aside the physical logistics sector, which is enormous, the size of the supply chain software industry has grown in recent years to over $10bn, according to research from Gartner. Research and Markets predicts 11% annual growth in this sector at least until 2020. Add in the $18bn of the trade finance market, and you have a considerable slice of the world economy, and not just in terms of strategic importance. Below are some of the startups and projects that are hoping to take a good chunk of that market away from the traditional suppliers such as SAP and Oracle, while re-thinking processes and introducing new efficiencies.
The startup with the most VC funding in the sector is US-based Fluent, with $2.5 million in seed investment from firms such as ff Venture Capital, Draper Associates, 500 Startups, Digital Currency Group, SixThirty and many more. Founded in 2014, its aim is to streamline supply chain finance with a custom-built blockchain based on bitcoin’s architecture. Invoices can be tokenized once a buyer approves them, avoiding duplicate and fraudulent invoices across the network. Companies can send and receive payments on the Fluent network. The platform also includes a peer-to-peer working capital marketplace which can provide financing for invoices, whole or partial.
California-based SkuChainhas also received seed funding from Digital Currency Group among others, although of an undisclosed amount. It wants to open up trade finance to small- and medium-sized businesses by removing the need for Letters of Credit (payment guarantees issued by a bank). This could have a positive impact on exports from developing countries, while reducing the global economy’s dependence on banks and large freight companies. Using the bitcoin network as well as SkuChain’s own technology, the platform hopes to enhance transparency for all participants in the supply chain, while at the same time improving access and broadening the base of its participants.
Wave, based in Tel Aviv, was one of the first startups in the supply chain sector to sign a deal with a big bank. After graduating from Barclays’ fintech accelerator last October, the startup has focussed on developing a platform to help the banks’ clients reduce their supply chain financing costs by substituting physical bills of lading with blockchain-registered digital versions that streamline the shipping process.
London-based Provenanceis working on a chain-of-custody solution on both the Bitcoin and the Ethereum blockchains. Founded in 2013, it focuses on not only the verification of origin, but also the authenticity of the data. One of their more interesting projects involves the tracking of fish from the boats in Indonesia to the high-end sushi restaurants in Japan. If this pilot works as expected, we should soon be able to confirm that the steak we ordered at the restaurant did, in fact, come from the plains of Argentina, and that the olive oil that we purchased at the supermarket was, in fact, pressed from arbequina olives in Spain.
Everledger, also based in London, is building a system to track the movement of diamonds from the mine to the jewellery store, creating a provable provenance as well as facilitating diamond trade. This should significantly increase not only the security of the gem supply chain (which still relies largely on paper documents which can be amended or forged), but also the insurance costs.
Australia-based Blockfreight, launched in April of this year, is developing “an open network for global freight” that combines blockchain apps with smart contracts and RFID sensors. Clients will be able to access the platform with the Blockfreight token, launched last month and run on the Counterparty rails, which can be purchased from the company and eventually from licensed agents (I couldn’t find any active exchanges that deal in this token, but it’s early days still), for $1 each as of a few days ago.
CargoChain, still at development stage, won the Shanghai Blockchain hackathon in January 2016 with their chain of custody innovation that records the Bill of Lading on the blockchain, providing a transparent and traceable record, and uses RFID sensors to track the physical shipment. Built on Ethereum, it also plans to offer a smart contract escrow system, which removes the need for the parties of a trade to either rely on a bank to facilitate the transaction, or to know and trust each other. Other planned functions include automatic payment release upon document receipt, and built-in penalties for delays.
While Barcelona-based Consentiowill also use the blockchain to digitize and store the documentation, its main focus is on the financial side. Working with regulated payment platforms, it will use smart contracts to offer financial services such as proof of deposit, deposit release and payment upon delivery.
It’s not just startups that are pushing the innovation boundaries in the supply chain field. The Finnish city of Kuovola has received €2.4 million of European funding to develop a project called SmartLog that applies the blockchain and smart contracts to shipping containers. The city is a hub for trade between the EU, Russia and Asia, and its region is host to around 700 logistics companies.
Pressing problems yet to solve are the Know Your Client (KYC) requirements that 80% of sector participants cite as the main barrier to sector growth. Since this requirement is tied to the thorny problem of identity, especially difficult in online, automated processes, it would be optimistic to expect mass migration to blockchain-based supply chain solutions. But the potential economic savings and increased transparency and efficiency make the end goal worth the pursuit. And with a wide assortment of business models and technologies working on this potentially very lucrative objective, it certainly will be an interesting space to watch.
(This article was originally published on LinkedIn.)
Almost everything you touch during your day is the result of a supply chain. The product originated somewhere. It then moved somewhere else, and after that somewhere else, and so on until it ended up in your life. Your toothbrush, your breakfast cereal, your clothes, your car or bus or bike… You get the picture… We hardly ever think about this, nor should we have to. Because we trust that its sourcing did no harm, that the quality is acceptable and that it’s going to do what it needs to do.
What if you could know so much more? That your toothbrush was made in Texas? That your T-shirt was made in Nepal? That your shoes were designed by someone in Turin but manufactured in Romania? Too much information, you might say. But think about how it would change our relationship to things. Which would change our attitude to consumption. Which could lead to a new commercial culture, one based on transparency, trust and process.
Now let’s stop for a second and zoom out. Let’s picture all those toothbrushes and T-shirts and shoes criss-crossing the world to reach their destination. Most by container-stacked ships, some by truck. And all with reams of paperwork to accompany them from one stage to the next. There’s the “pull” order from the end retailer, which probably gets passed to an international distribution agent, which probably gets passed to a local distribution agent before ending up with the actual manufacturer. Of course, there are new forms along the way. Then there’s the “push” paperwork, in which the manufacturer documents the exit from the factory, in which someone else documents the reception and the placing on in the container, in which the goods are expedited from one off-loading stage to another. In this day and age, still, much of that paperwork is physical, using paper, often in triplicate.
That hardly sounds efficient. Or safe, since paperwork can be falsified, mistakenly rerouted, or simply lost. Even most digital versions consist of pdfs or similar, which have the same potential vulnerabilities.
Surely there has to be a simpler way? Of course there is: blockchain-based supply chain management. Here’s how it could work:
The documentation could be digitized, and stored on a blockchain (if you’re not familiar with how they work, see here). This will make it impossible to change or tamper with, without everyone knowing. It would also make it easy to pass from one stage in the journey to the other. And each receipt can be programmed to trigger an action, such as a payment, or a message, or the emission of another document. This could be made even more secure if we include sensors in the containers that automatically inform that the container has physically arrived. Smart contracts could be written that say something like “when the container is loaded onto the distributor’s truck, issue payment and the corresponding documentation”. More automated, more verifiable, more transparent. Retailers and/or end clients could follow the merchandise’s progress, which reduces uncertainty. And the considerable manual work needed to process the transactions could be reduced considerably, which at the same time will lower costs and friction.
This will not only streamline the process of trade, potentially saving billions. It will also make the progression of the merchandise more transparent, allowing more trustworthy documentation and greater confidence in the end product. The manufacturer is happy because it costs much less to get the merchandise to the end user. The end user is happy because he or she feels better about the sourcing and quality.
And the middlemen? It’s easy to assume that they would be happier at having less paperwork to handle, which would require fewer employees, overheads and risk. But their very usefulness is called into question. Would we still need middlemen in a blockchain-based supply chain world?
Yes, of course we would. No amount of automation can replace the need for a flexible and agile supervisor, to make sure that the routing is taking place as planned, and to react when nature and/or man intervene. But less checking of documents, stamping of bills of trade and filing and/or sending the appropriate pieces of paper means not only lower costs, but fewer opportunities for human error.
The lowering of costs would improve distribution profits, as well as perhaps lower the costs for the final customer. Lower costs and smoother processes should lead to increased trade. Increased trade leads to economic growth. And economic growth leads to increased trade. A nice, mutually-reinforcing circular process, based on code, connections and confidence.
An increasing number of startups and established businesses are getting involved in this potentially very lucrative sector. Just last week IBM announced the launch of a new platform that allows businesses to experiment with the “blockchainization” of their supply chains, a sign that this is serious business and that the shift will happen sooner or later. The potential impact will transform sectors as diverse as electronics and agriculture, while spreading the efficiencies along the whole supply chain and benefitting a broad range of communities and economies.