In 2015 The Economist magazine famously dubbed blockchain technology “the trust machine” owing to its ability to create trust in business networks. This capability resonates strongly in the supply chain world, where a lack of trust is a major obstacle to high-level collaboration. The promise of blockchain may be fulfilled in time, but at present its progress is impeded by – ironically – a lack of trust in the technology.
To some extent the problem has its roots in the industry’s healthy skepticism of much-hyped innovations. But there are other trust issues related to the way that supply chains operate. The challenge for blockchain developers and proponents is how to reconcile the technology with these misgivings.
This was a central theme at the recent Blockchain in Supply Chain: Looking Beyond the Hype round table hosted by the MIT Center for Transportation & Logistics in October 2017. At the event, some 30 organizations including carriers, shippers and technology companies talked frankly about the potential benefits of blockchain in the supply chain domain.
Delivering on the promise
Blockchain is a secure, distributed ledger of transactions that can update all authorized users in real time. All records are timestamped and unchangeable. It has the potential to be a powerful technology from a supply chain perspective, because it offers the possibility of a single source of truth that facilitates the kind of collaboration that the industry has long struggled to achieve.
That’s the promise. And a slew of test projects in 2017 – with many more slated for 2018 as well as some possible deployments – suggest that the promise is attainable.
But supply chain is far from a greenfield application. To deliver, blockchain must adapt to ingrained supply chain practices and behaviors.
Smart contract conundrum
An example discussed at the roundtable is classic “tragedy of the commons” situations, were the inclinations of trading partners mitigate against the proper execution of service agreements.
Cargo overbooking and no-show problems in the ocean transportation sector involve this type of behavior. Container shipping companies hedge the risk of sailing with empty slots by overbooking their vessels and bumping booked cargo when they don’t have enough space to carry it. Shippers reserve slots on ships but fail to deliver the cargo for the slots (i.e. a no-show), leaving the carrier with revenue-draining empty cargo spaces.
Using smart contracts housed on blockchains could potentially eliminate these long-standing practices. Essentially, a smart contract encodes the terms of an agreement, and the terms are triggered automatically when the required conditions are met. The process has been likened to a vending machine, which receives an input (a coin), verifies that the input is genuine, and responds by triggering the delivery of an item and change if necessary. Such a mechanism could act as a deterrent to overbooking/no-shows by establishing consequences for agreement failures in advance, and then automatically executing those penalties on the carriers and shippers that ignore agreement terms.
In practice, however, a smart contract might create some awkward situations by automating decisions that remove the potential to consider commercial implications. Imagine a large-volume shipper that knows it will not be able to fill the cargo space it has booked on a container vessel. If it’s very near to the time when the shipper and carrier are due to renegotiate their service agreement, will the carrier willingly allow a smart contract to exact punishment on the shipper, knowing that this major customer might take its business elsewhere?
Supply chains are replete with situations like this. A change in its service network –volumes have dropped in a lane making it unprofitable, for instance – persuades a trucking company to reject loads in that lane from a shipper, even though it has contracted to move the cargo. The shipper is planning for a peak season; will it risk losing the carrier’s capacity in a tight market by calling out the shipper for not accepting its loads?
Some wiggle room could be built into smart contracts, but allowing such discretion undermines the advantages of automating the contract process. Also, a pattern of non-enforcement recorded on the blockchain – which is supposed to be immutable – could weaken a company’s legal case should it decide to go to court over accusations that it contravened the terms of a contract. Such an outcome could be construed as positive for the injured party.
Improved traceability is often touted as a major benefit of blockchains. The technology excels at recording the status of product based on inputs from supply chains, and disseminating detailed information to authorized parties.
Several retailers at the MIT CTL blockchain roundtable agreed that a blockchain-based tracking system could be extremely valuable – with some important riders.
Consider, for example, a recall operation that involves food infected with salmonella. Even if the blockchain solution rapidly pinpoints the whereabouts of infected product in supermarket outlets, the retailers concerned might have protocols that require each store to clear entire shelves and not just the affected lot numbers. Perhaps the companies fear legal action should they miss an infected item, or don’t trust store personnel to remove all the tainted product.
A general lack of trust could blunt the potential of linking IoT technology to blockchains.
A sensor in a reefer container activates a high-temperature alert. The sensing system indicates that the perishable cargo could be spoiled. A smart contract receives and verifies the data, and triggers a payment for damages as it has been programed to do. Later, the parties discover that the sensor was defective. Or perhaps they find out that the device was tampered with. Either way, catching and fixing the error can be more complicated when the transaction is committed to a blockchain.
Whether doubts like these are justified or not, they need to be addressed if blockchain technology is to move forward.
The number of test projects is on the increase, and this is encouraging. However, another concern is that these initiatives are fragmented and there needs to be more cross-industry and cross-company sharing of information.
Perhaps these qualms also present an opportunity for the technology. If blockchain activities force practitioners to examine trust and behavioral issues that have long impeded the efficiency of supply chains, that will benefit the industry and spur interest in the technology.
Meanwhile, let’s not be afraid to wade into the weeds to determine where blockchain might deliver real value.
This post is based on an article written by MIT CTL’s Ken Cottrill (email@example.com) and published in the January/February 2018 issue of Supply Chain Management Review.