Iain C. Steel, Chief Procurement Services Officer at UK law firm TLT, identifies how supply chain savings can be made using blockchain
When procurement and supply chain professionals see headlines like “blockchain saves money!” proclaiming a new method to help release savings, it is usually enough to pique a buyer’s interest. While this appears to be the conventional wisdom (or the result of the first few pages of a Google search, at least), when we delve a little deeper into the source of these purported blockchain savings, the glossy headlines can start to lose at least some of their lustre. Where precisely are the savings coming from?
For procurement and supply chain professionals, the first port of call to identify savings through blockchain is usually through the implementation of smart contracts. These are essentially pieces of code that sit within an individual block on a blockchain and automate actions where predetermined conditions are met. This allows the author to define rules around a transaction and enforce any obligations automatically, for example triggering payment on completion of a task that is identified via an external data point. This is one of the uses of blockchain technology that is most often mooted as a mechanism to generate savings.
The immutable nature of the blockchain, aligned with distributed verification throughout the network and subsequent ‘chaining’ of the blocks, serves to ensure that the content of the block is generally considered trustworthy. While process automation can be undertaken through a wide range of ‘traditional’ technologies, a key USP of blockchain is that trust is built from the nature of the technology rather than through the more traditional relationships between parties or intermediaries. Removing party-based trust issues, therefore, allows for a new, more streamlined process to be serviced based on defined triggers, irrespective of the number of parties, hand-offs or data-points.
Therefore, a self-executing smart contract could remove the need for expensive, labour-intensive processes (for example, data verification, reconciliation, settlement) facilitating the resultant cost savings and process efficiencies. If these processes are streamlined effectively, the rewards are not insignificant. As an example, admin and processing typically account for around 20% of overall shipping and logistics costs, and this may well be an area that sees a blockchain-based future.
However, this level of transactional automation based on trust makes the age-old ‘rubbish in, rubbish out’ problem more significant. The automation serves to remove the intermediaries and, therefore, there is a heavy reliance placed on the integrity and quality of the data used to serve as a trigger. This introduces us to the ‘oracle problem’.
The oracle problem
The source data utilised by smart contracts to act as triggers are called ‘oracles’. Smart contracts on their own are simply coded instructions, and they rely on these oracles to provide data that is unquestioned at the point of receipt as this will then move forward the self-execution without further action. The result of this is that the code that is fed into the smart contract from an oracle is a very high risk where there is any potential for error or, worse, for malicious action.
The knock-on effect is that there could be a significant benefit to streamlining processes to remove intermediaries, but these intermediaries in many instances perform a function that may be desirable to retain. Removing the intermediary simply moves the risk to a different part of the process and, depending on the remedial action required to assure the data, potentially eroding the anticipated cost saving.
Beware of unintended consequences!
Process automation also brings in another risk factor when considering savings. Usage cases for blockchain generally incorporate some form of payment automation. This is a positive for the payee, but at what cost? Depending on the nature of the payer’s business, this automation could impact cashflow, could lead to unmanaged payment spikes (where dates of payment are not factored into forecasts), and other unintended consequences. If we are looking at high volume or high-value transactions, there could also be lost interest revenue to be considered. The cost-benefit analysis and risk appraisal may still lead to an overall (cashable) benefit, but this assumes a level of organisational maturity that will be present in many businesses, but by no means all businesses who may be looking to ‘cash in’ through blockchain savings.
“Where are my savings?”
When investigating the savings potential for any process revision or automation through the supply chain, it is essential that the tail doesn’t wag the dog. The underlying technology to any process is an enabler, not a driver, therefore, if we are considering using blockchain as the background to a process, we must first understand what makes blockchain the obvious choice for the architecture. Databases have been successfully automating processes for decades before blockchain was available, so we must consider what makes this technology special over any other. Only then can we consider the usage case against these positive attributes.
This, for me, makes blockchain technology a contender for projects where the benefits will be realised by harnessing the positive attributes of improvements to authentication and transparency, and where streamlining against this background will lead to process improvement and/or a cashable saving. To go one step further, the best examples will enhance the customer experience, manage risk and generate savings.
There are undeniable benefits to using blockchain technology in the supply chain, and I have no doubt that the inherently distributed nature of blockchain technology will provide opportunities to drive true savings to businesses. However, for most usage cases, the structure of the technology itself is not the driver of savings. The hype associated with the technology is the clickbait to catch the eye, but any savings will be realised by professionals chasing innovation, questioning the ‘old’ ways of doing things and by working closely with their wider supply chains to identify and drive out inefficiencies in processes and systems.
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