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Blockchain Could Transform Supply Chains, But Is Not Yet Mature Enough

Bank of Canada Test Shows Blockchain Can Settle Equities

Blockchain technology presents promising opportunities to improve the existing logistics and transportation industry. It can enhance supply chain transparency, traceability, and reduce administrative costs. However, while there is a lot of support for the emerging technology, it is currently too immature and has significant underlying problems to make a global impact.

In the past few weeks, the Blockchain in Transport Alliance (BiTA) welcomed large industry leaders such as FedEx, BNSF Railway, UPS, and JD Logistics as new members. Together, they will discuss the challenges of integrating blockchain technology to the supply chain industry. These include network effects, the current lack of blockchain standards in the industry, the issues concerning blockchain and scalability, and the scarcity of technical talent.

BiTA’s goal is to embrace the new opportunities that arise from blockchain technology. Their proactive approach ensures that the industry can leverage blockchain when the technology is ready and mature in the next few years.

Network effects build a supply chain

For a blockchain based supply chain to have value, it needs to scale and have a large percentage of active users. Overcoming network effects is a difficult challenge, especially in the beginning when there are so many companies involved in a supply chain.

“Blockchain has the potential to revolutionize multi-enterprise processes, but this will add the challenge of connecting a far-flung network of trading partners,” said Andrew Stevens, research director at Gartner, strategic research and advisory company.

Although BiTA is constantly growing, the enterprises that join are large giants in their industry. Even with the support and expertise of supply chain giants, a blockchain based supply chain only becomes valuable once a large number of smaller supply chain partners join the network.

Convincing smaller supply chain partners to shift their existing cloud-based solution onto the blockchain, though, is not an easy feat. It involves a lot of change, disruption, and chaos despite the benefits it may yield in the long run.

Lack of standards

There is currently a lack of standards concerning blockchain technology and the global supply chain industry. One of BiTA’s primary goals is to create basic standards for the industry by hosting events with important industry members so open and active discussions arise.

An example is the term ‘smart contract’. The organization and the key members are analyzing whether a smart contract is a confirmation sheet, a confirmation of a contract, or a forward contract – an informal agreement to buy and sell assets at a future date. Other topics of discussion include freight payment, collecting payment, settling freight bills, freight tendering, asset maintenance and ownership history, and transparency and chain of custody in freight.

While there are a lot of ambiguous terms, the Alliance is taking a proactive step forward to welcome the different opinions and ideas from industry members and the general public.

Lack of scalability

Unfortunately, even with standards, the underlying blockchain technology is not yet mature enough to handle large volumes.

A decentralized supply chain may provide increased transparency, security guarantees and a reduced risk of fraud, but this comes at the cost of scalability. Decentralization limits the number of transactions the blockchain can process to the limitations of a single fully participating node in the network.

“Scalability across supply chains will need to be carefully planned and aligned with other high-priority supply chain initiatives and stakeholders,” said Stevens. “Supply chain leaders should understand blockchains limitations and lack of maturity before making near-term strategic investments.”

Rarity of technical talent

The lack of technical talent is also a significant hindrance to the development of the technology. Technical talent is scarce and expensive.

Although enterprise spending on blockchain technology is estimated to reach $9.2 billion USD (approximately $11.5 billion CAD) by 2021, the lack of talent may be slowing the growth and progress of blockchain in the global supply chain industry.

“The technology and associated business protocols are currently most prevalent in the financial industry. [Longer term], blockchain could have a major impact in supply chain once some hurdles are cleared, particularly around scalability, flexibility, confidentiality of data, efficiency, governance, and interoperability,” said Stevens.

Blockchain has the potential to be transformative in the industry. However, like the internet, early technology adoption will progress over the next three to ten years. Mainstream adoption will take ten or more years into the future.

The transportation and global logistics industry must resolve the business processes, lack of standards, lack of technical talent, and scalability issues before blockchain technology can reach its full potential.


Image credit: Wikimedia Commons


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