Distributing Production: Can Distributed Ledgers Fuel a New Wave of Supply-Chain Innovation?

Distributed Ledger Technology (DLT), often referred to as blockchain, has garnered a lot of attention in the past few years. Is it just “a solution in search of a problem” or, does it offer answers for real-world policy questions such digital identity and remittances? This six-blog series, by Rodrigo Mejia Ricart and Camilo Tellez, aims to foster a better understanding of the technology. The first three blogs discuss what is DLT, the debate around key stated benefits and the evidence around different use cases. The last three blogs discuss DLT for digital identity, supply chain and remittances in detail.

In 2018, an E. coli outbreak in the United States resulted in 210 contaminations, 96 hospitalizations and five deaths. It took two and a half months to identify romaine lettuce from the Yuma, Ariz., growing region as the source of the contamination. It was the worst outbreak since 2006. Authorities often struggle, or even fail to identify the source of such outbreaks, often leading to significant human and financial costs. Almost 1 in 10 people are affected by food-borne diseases causing around 420,000 deaths globally each year.

Similarly, tragic events such as the collapse of garment factories in Rana Plaza in Bangladesh, causing 1,134 deaths and 2,500 injuries, have driven awareness of working conditions in the garment sector. These and many other such examples have reinforced to companies the human, business and reputational risks inherent in their supply chains.

Supply chains are often complex and fragmented, with a large number and diversity of processes, actions and stakeholders involved. Companies participating in a given supply chain usually develop their own approach to management, quality control and accounting systems. However, the frequent lack of harmonized processes or information can result in a lack of transparency, oversight and accountability, as well as significant record-keeping and reconciliation costs.

Can DLT drive supply-chain transparency?

In these circumstances, the growing interest in distributed ledger technologies (DLTs) as a tool for supply-chain management should come as no surprise. If fit for purpose and properly designed, distributed ledgers can improve the traceability of goods throughout the supply chain, create a shared and reliable record of transactions and events, reduce reconciliation costs, and improve transparency across the overall supply chain.

For instance, Walmart has partnered with IBM to test DLT for food traceability and food product safety, providing one of the largest proofs of concept in the industry to date. The solution was tested in the United States and China with mangoes and pork products, respectively. It allowed Walmart to input into its system a range of product information, including farm, batch, factoring and processing data, expiration dates and shipping details. Using this software, Walmart was able to reduce the time needed to trace the origins and all other relevant information of their sliced mangoes in the United States from almost a week to 2.2 seconds. The software that delivered this dramatic improvement also allowed for better time management—a crucial advantage in relation to perishables products. Walmart claimed that, thanks to the solution, it noticed that it took three days for some mangoes to get from the customs broker to a processor. The company calculated that cutting down this time could extend the shelf life of the product in stores or in consumers’ fridges by a full day or more. This enabled the consumer to access fresher food, helping avoid food waste and delivering a range of other health, economic and environmental benefits. Yet, it is unclear that a DLT solution was needed to notice the delays in customs.

Other leading global brands and organizations striving to stay at the edge of digital innovation have started to test DLT’s potential applications for supply-chain management. Coca-Cola and the State Department have partnered on a pilot of a DLT application to help fight forced labor in countries where Coca-Cola sources sugarcane by gathering data on compliance with labor standards. In December 2017, Unilever launched a one-year pilot of a DLT application in Malawi that aims to improve the transparency and traceability of its tea supply chain. In addition to quality controls, a key objective of Unilever’s pilot is to improve its ability to provide accurate sourcing information to customers about sustainably sourced products.

Can DLT empower smallholder farmers?

Various initiatives have also examined how DLT can help advance financial inclusion in supply chains. FairFood has implemented a pilot to verify origin and fair pay in coconut supply chains in Indonesia. FairFood’s solution allowed coconut farmers to use their mobile phones to report the number of coconuts harvested (automatically creating a batch). Each coconut was assigned a QR code that could be used to trace it throughout the supply chain. The solution also recorded payments made to suppliers and other partners. This empowered farmers by giving them the means to validate payments received and to report incomplete payments.

By scanning the QR code on the coconuts, consumers can see where the coconuts came from and what was paid to the farmers. Photo Credit : Fairfood coconut project

BanQu, a startup, is using DLT to provide farmers, workers and micro-businesses in vulnerable regions with a means of identification that records their personal and financial transactions. Property records, payments, input purchases, harvest and product quality, health and training records, and credit history can all be stored in the user’s profile. These data can be validated by third parties, such as service providers and other current or potential commercial partners. Users remain in control of their personal data and are able to decide what to share and with whom. The resulting expansion of authenticated data allows governments, banks and payment companies to make better assessments of the user’s financial situation, potentially granting the user greater access to financial services. Connecting to the network requires only a simple mobile phone with a data connection.

The opportunity

What none of these pilots have yet explored is the ability of these DLT applications to drive the broader digitization of supply chains. A recent report by the Better Than Cash Alliance highlights that every year the equivalent of trillions of dollars in supply-chain payments are still being disbursed in cash, imposing onerous costs in cash handling and management activities for companies and other supply-chain participants. For instance, companies that digitized their payments through the HERfinance program in Bangladesh, an initiative of the global nonprofit Business for Social Responsibility, generated a 53% time saving for the administration and finance teams of their suppliers in just one year, making a compelling business case for digitization.

The enduring prevalence of cash in supply chains is also an important obstacle to financial inclusion. About 230 million private-sector workers and 235 million unbanked adults in the agricultural sector globally are paid in cash. This prevents them from building a transaction history and frequently, from accessing financial services. In this light, integrated end-to-end digital payment solutions in DLT-enabled supply chains present one of the major opportunities to improve financial inclusion, economic opportunities and, ultimately, living standards.

However, it is important to note that for all the attention it has garnered, DLT is a nascent technology that is still yet to prove its ability to scale and deliver impact. A report by the Stanford Graduate School of Business found that most DLT applications in agriculture are less than two years old, with 40% barely at the concept stage, and as many as 53% still in the pilot phase reaching fewer than 1000 people.

The challenge for innovators

A key objective of supply-chain systems is to track a physical, often perishable object, rather than its digital representation. This means a system will only be as good as the data inputted into that system. DLT by itself will not ensure data quality unless it is complemented with other technologies, and other means of capturing accurate data.

However, Gartner, a technology consulting firm, estimates that as many as 90% of DLT-based supply-chain initiatives could suffer from “blockchain fatigue” by 2023 due to lack of robust use cases. The firm suggests that most initiatives have remained at the pilot stage due to a combination of:

• Technological immaturity
• Lack of industry standards
• Excessively ambitious scope
• A lack of a clear, high-value use case for supply chains
• The complexity of DLT projects, which may impact supply chain management

Given the level of maturity of the technology and its specialization to this use case, and the lack of clarity in terms of return on investments, businesses might not want to rush into DLT-adoption in supply chains. As Gartner notes, the focus at this stage should be on “proof of concept, experimentation and limited-scope initiatives that deliver lessons.”

The jury is still out on whether DLT will one day become a viable solution for supply chains or help drive the financial inclusion of smallholder farmers. However, innovators willing to experiment and test solutions stand to reap the potential first-mover competitive advantage that this technology could create, while also delivering significant social and economic benefits in the process.

READ THE BLOCKCHAIN SERIES

• Introduction: Framing of our blog series on distributed ledger technology
• Blog 1: Distributed Ledger Technology: What Is It and Why Do We Care?
• Blog 2: Distributed Ledgers: Looking Past the Hype
• Blog 3: DLT: Keep Calm and Let the Evidence Speak
• Blog 4: Distributed Ledger Technology and Digital Identity: Prospects and Pitfalls Ahead
• Blog 5: Distributing Production: Can Distributed Ledgers Fuel a New Wave of Supply-Chain Innovation?
• Blog 6: Paying across borders - Can distributed ledgers bring us closer together?