Pain of the chain

Integrating Blockchain Into Supply Chain Management, © 2020, reproduced with permission from Kogan Page Ltd.

We recognized the look on the manager’s face: uncertainty… confusion… anxiety… helplessness… put them all in a bucket, shake them up, and you’ll get some form of what we were seeing. If you had stumbled into the meeting, you might have thought we had asked him to explain the impossible—like how déjà vu works or how to understand the emotions of a typical teenager. It was even worse: We had asked about… blockchain.

The advent of new technologies—most notably blockchain—has the potential to radically transform how transactions are recorded, stored, and used throughout supply networks. The result: A transparent supply chain that, if the hype holds true, will usher in unprecedented levels of visibility, accountability, efficiencies, collaboration, and trust.

Bringing this revolution to life in a way that benefits companies and consumers alike, however, will likely take years of trial and error. It’s the “error” part that has many supply chain managers and decision makers nervous. In the high-speed competitive landscape of modern business, errors—even errors made in the name of progress—cost time and money, and that can cost a business… well… its business.

Smart leaders don’t take risks without understanding the challenges and the potential rewards, and that’s what makes any significant technology innovation so disruptively difficult. Supply chain veterans have lived through the challenges of aligning on standards for technologies like electronic data interchange (EDI) or the slower-than-predicted adoption of technologies like radio-frequency identification (RFID). At the same time, they recognize the potential benefits that new technologies might bring to their operations. So, when we talk to supply chain practitioners about blockchain, it’s not surprising that they typically respond with something like this: “I don’t really understand it. I don’t really know what to do with it. I don’t know exactly how it applies to our business, if it applies to our business, or if it ever will apply to our business. I just know that I need to figure it out. But I have no clue how to begin.”

Kevin Yoder, associate director of innovation financial management at ArcBest Technologies, is among the thousands of business leaders who are trying to “figure it out.” Yoder was a panelist during one of the blockchain conferences hosted by the Walton College of Business at the University of Arkansas in 2018, and he pointed out at the time that he and his team were working furiously to understand blockchain’s impact on their business. “We are being bombarded by interest in this from across the organization,” he told the 230 attendees.

Like other leaders, Yoder wants to develop an appropriate strategy that makes sense for his business. And while the strategy, not technology, needs to drive the business decisions, he knows you can’t develop a sound strategy around blockchain without understanding the technology and how it applies in practical, beneficial ways to real supply chain problems.

We have analyzed and synthesized countless hours of interviews and mounds of research to sort through the hype of blockchain and provide some clarity around what it really means to the future of supply chain management—and, more specifically, to supply chain professionals. And we very quickly realized that what most of them need is a toolkit that helps them understand the potential of blockchain for their business, the risks involved, and the processes for developing and implementing use cases that could lead to potentially valuable new systems and processes.

This conclusion is supported by several surveys, including our own benchmarking study. We surveyed procurement and supply chain professionals around the world, from Finland to Singapore, from the Netherlands to the United States, to evaluate the state of play of blockchain in the supply chain and to map a path towards potential adoption and implementation. The findings were both interesting and enlightening.

The bars in Figure 1 show the average scores for eight benchmark questions we asked. The scale ranges from 1 (“not at all”) to 3 (“partially so”) to 5 (“very much so”).

The first three bars paint a picture of interest. Operational management and executives are interested in and engaged in learning about blockchain because, as bar one indicates, they recognize the potential that the technology holds for the supply chain.

The final three bars, however, paint a picture of uncertainty. The survey indicates leaders are not really sure how to get started and how to tackle the opportunity. In other words, leaders are interested and engaged, but many don’t have a strategy, a roadmap, or resources allocated towards creating a solution. …

The middle two bars, paradoxically, paint a picture of activity. Companies are piloting blockchain in their supply chains and creating business cases for using it. We can learn from these companies and, as mentioned, we included several of them in our research for [our] book. They provide insights on if you should attempt a pilot, on the ins and outs of how to get started, and on what to look for during and after that process. On the other hand, as Walmart executive Cameron Geiger pointed out, there’s an obvious cause for concern in the horseshoe-shaped curve seen in these results.

“What worries me is the gap between executive excitement and business strategy,” Geiger, a senior vice president at Walmart responsible for supply chain technology product, told us when we reviewed the results in his Bentonville, Arkansas, office. “We see that many in the industry are beginning to pilot before they have a strategy or a team. So where are they going, and who is taking them there? Is this a solution looking for a problem?”¹

MHI, an association representing material handling, logistics, and supply chain professionals, found similar results when it partnered with Deloitte to survey more than one thousand executives for its 2018 Annual Industry Report.² Only 6% of the executives reported blockchain was “in use” within their organization, but 53% predicted it would be in use within five years and 70% said blockchain would either “support ongoing improvements” in their organization or had the potential to “disrupt or create competitive advantage.” Of the 11 emerging technologies the study considered, only artificial intelligence had an adoption rate as low as blockchain.

What we’re seeing, in other words, is a curve that shows high interest in blockchain among executives but less understanding and even less activity when it comes to creating business cases and implementing solutions. Executives and managers recognize that blockchain holds potential and there is lots of interest in trying out blockchain, but most companies need help developing pilots and business cases and getting teams in place to actually develop and conduct the pilots. This comes as no surprise because the technology is emerging and everyone involved, from the programmers to the executives, are still exploring its benefits and limits. As MHI CEO George Prest told Supply Chain Dive, “Everybody is still trying to really figure out what blockchain is all about.” ³

These findings were confirmed and illuminated later in 2018 when we held an interactive workshop on blockchain in the supply chain for alumni of the Walton College of Business executive MBA program. Prior to the workshop, the 58 participants completed a survey, and we used the results as discussion points during the session. While the group was small from a statistical perspective, it was significant in its composition—the participants ranged from managers to vice presidents and represented a variety of industries, including retail (14), consumer products companies (12), professional and financial services (12), and logistics services (4).

Only 22% of these respondents said their companies were either developing use cases or pilots or implementing a blockchain solution in their supply chain. And 39% of the participating companies were not yet formally considering blockchain in the supply chain (see Figure 2).

The participants at this event echoed our other findings—that while leaders are interested in and, to a great extent, areexploring options with blockchain, they continue to wrestle with questions about things such as how it might scale and what type of return on investment they can expect.

For now, a handful of larger companies like IBM, Microsoft, Walmart, Maersk, Unilever, FedEx, and Kansas City Southern are paving the way when it comes to implementing blockchain. Dennis Gerson, an engineer and technical adviser at IBM, estimated that 75% of Fortune 400 companies had tested blockchain as of late 2018—not just played around in a technology sandbox, but had actually “tested a hypothesis and were seeing what happens.” But, he added, 90% of those never make it past the pilot.

The successful pilots, however, are not creating transformative change—at least not yet—and for supply chain managers, that’s what this is really all about, isn’t it? Creating process improvements that actually result in significantly better overall supply chains. That’s not happening, at least not yet. But there’s a clear path for making it happen using blockchain.

Consider the potential value of blockchain for supply chain networks when it’s represented in a simple two-by-two chart (Figure 3) that shows how human interactions might work with technology to create transformative change.

Most companies that are experimenting with blockchain are seeing results in the bottom left quadrant—they are gaining visibility into existing processes and access to information they can use. For example, one of the best-known test cases for blockchain involved tracking mangoes from farms in Mexico to Walmart’s stores in the United States. The initial test involved only a few key players in the supply chain and primarily offered faster visibility into the process (bottom left). The time it took to trace a mango back to the farm of origin went from six days, 18 hours, and 26 minutes down to 2.2 seconds. It didn’t fundamentally change anything about the supply chain processes that were used, but it allowed Walmart to gain access to important information much more quickly than it could before.

“Most of the use cases and pilots that we see are stuck in the bottom left,” Geiger told us. “These pilots simply bring a new technology to an old problem without really solving it. For instance, if you have bad data quality, you are just going to move your bad data faster.”

When multiple players who are involved in the supply network all have access to the information on the blockchain, however, you then move to the upper left quadrant. Internally, everyone from buyers to store managers might have an interest in seeing the information collected on the mango blockchain. Externally, that information would be valuable to farmers, the processing plants, the transportation companies, and agencies within governments.

The launch version of the famous Maersk and IBM blockchain partnership falls in this quadrant. TradeLens, the blockchain platform created by the two companies, launched an early adopter program in August 2018 and expected to have a fully working version by the start of 2019. Even in early adopter mode, the platform had more than a hundred participants providing global shipping data and literally hundreds of millions of “shipping events” for all the partners to see and use. So, they are sharing more shipping documents and information across the supply chain faster and earlier. This does not mean they have changed anything about what they do with this information, but they are enabling across relationships the ability to “see more together.”

Piloting blockchain almost always provides greater visibility—it puts you in the two boxes on the left. The question then becomes, what do you do with it? Can the technology actually be used to improve processes? Can you work with partners to develop systemic improvements throughout the chain? If you can’t, then blockchain may still be worth using for the visibility benefits alone. But if you can, then blockchain becomes transformative.

In some cases, the visibility could lead to technology-based process improvements (bottom right). For instance, blockchain has the potential to eliminate time-consuming paperwork at ports and other border crossings, which could move the mangoes from farm to store more quickly, thus providing longer shelf life for the product. Michael White, the TradeLens leader for Maersk, told us the most basic fix for the global shipping industry by using their blockchain-enabled platform involves the ability to efficiently answer the simplest of questions: Where is my container? “Instead of having five different people check ten different companies to find out the status of boxes or a shipment,” he told us, “they can do it with one person with one platform.”⁴

ClearWay, the beta product released by TradeLens, focuses on digitizing documents in global shipping, which figures to create enormous efficiencies for importers, exporters, brokers, customs and other government agencies, and nongovernment organizations as they collaborate to ship goods. Ultimately, blockchain users want to move towards a better supply chain, which comes from sharing those types of process improvements throughout the supply network. That’s the holy grail represented by the upper right quadrant.

Note that as we move from the bottom left to the top right, the focus shifts beyond adopting blockchain as a new technology and moves toward leveraging a new technology in how we build and run supply chains. This requires human beings who provide analysis and insights and then act upon the technology’s potential. The technology might expose bad data and broken processes, but it’s not going to clean up data or fix broken processes. Humans need to do this. And that is why a toolkit, a collaborative team, and the hands-on engagement of supply chain managers are key to reaching the upper right quadrant. There are no shortcuts to victory and the technology itself does not excuse us from needing to do the right thing—to build better supply chains.

We know of no instances where a company or industry using blockchain has truly reached the nirvana of the upper right quadrant. But such a transformation takes time, and several pioneers appear at least headed in the right direction. In the mango case, former Walmart Vice President of Food Safety Frank Yiannas points out that the value of blockchain is not what it did with the mangoes but what it can do with the complex food supply chain.

Shortly after announcing the results of the test case with mangoes, Yiannas said he was talking to the leader of a large dairy company about the pilot. “Why do we need blockchain to do that?” the leader asked Yiannas. “I can do that in our system.”⁵

There are existing systems, Yiannas acknowledged, that could replicate the mango test case. But, he added, “You can’t do that with 70,000 food stock-keeping units (SKUs) that have different suppliers that don’t all align with your system. Everybody isn’t in your system, and you don’t have interfaces with everybody else’s system. Blockchain is a game changer for being able to do all of these transactions.”

It’s those “game-changer” types of promises that have supply chain leaders—in small companies as well as large—intrigued about blockchain. But, as our survey indicated, most of them are lacking a strategy or roadmap. …

Yiannas once considered himself a blockchain sceptic, but now he’s one of its biggest champions, not just as a way to improve food safety but as a tool that can add value throughout the supply chain process. He’s quick to advise other leaders to start planning for the possibility of incorporating blockchain into their future business.

“My advice in general, especially if you’re of any size, is to not wait too long,” Yiannas told us. “Some of these technologies can emerge really quickly, and you can get left behind really fast. I go back to the idea that this will allow people to be smarter and run a smarter supply chain. You don’t want to be left behind and find that everyone competing with you is a lot smarter than you. That’s a bad place to be.”

Fred Smith, the founder and CEO of FedEx and another blockchain proponent, expressed a similar warning during a panel discussion at Consensus 2018, a three-day conference on cryptocurrency and blockchain. “If you are not operating at the edge of new technologies,” Smith said, “you will surely be disrupted. If you are not willing to embrace new technologies like Internet of Things and blockchain to face those new threats, you are, maybe subtly, at some point… going to extinction.”⁶

But even an ardent blockchain believer like Yiannas realizes the predicted revolution is in the early stages of a long journey to maturity. He believes pioneer investors (like Walmart) will lead to early adopters that eventually will lay the foundations for long-term, large-scale sustainable uses of blockchain among businesses. “It’s the equivalent of building the interstate highway system,” he said. “We’re pouring cement. Once we pour all the cement, things will start to happen. Goods will start to flow, and people will start to travel.”

Because this evolution will likely take years to mature into something widely accepted and used, some observers believe blockchain is a foundational technology as opposed to a disruptive technology. Marco Iansiti and Karim Lakhani, who are professors at Harvard Business School, have said it won’t “attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly.” Instead, it potentially will “create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum.”⁷

For supply chain leaders, however, blockchain feels disruptive because of the enormous hype. It seems very much like a storm they know is coming, but they aren’t sure whether to batten down the hatches, abandon ship, or hang ten on the coming waves. They hear about it from colleagues, in industry blogs, and in the popular press. And they rightly worry that failing to prepare for blockchain is the same thing as preparing them to fail. They want to know the value proposition blockchain brings, or doesn’t bring, to their business so they can make informed, practical, timely, and business-savvy decisions about how it applies to their work. But they need help sorting through the jargon-laced promises, understanding what this technology really does, and figuring out if, when, and how they should adopt it.

The future of this transparent supply chain is, in many ways, yet to be defined. That’s the nature of an evolving technology. But in researching blockchain and its potential uses across supply networks, we’ve come to one undeniable conclusion: Business leaders need to sort through today’s hype and prepare for a future that includes the technology—regardless of what it is today or what it morphs into over the coming years—or else, as Yiannas and Smith both warned, they’ll soon find themselves scrambling to catch up with their competition.

Michael J Casey, a senior adviser for blockchain research at MIT’s Digital Currency Initiative, put it this way: Blockchain is “a technology of tomorrow, not today … [but] the future to which blockchains belong is coming so fast that a failure to properly strategize and to consider the widest range of design possibilities could eventually prove fatal for many businesses.”⁸

Paul Lothian, for one, is keeping a watchful eye on the technology’s progress. Lothian is a business solutions architect for Tyson Foods Inc, which makes him what we’ll call an “interested party” in the blockchain discussion. He has worked at Tyson since the late 1970s, and, as he put it, he’s been involved with most of the company’s “operational and distribution systems at one point or another” while learning the ins and outs of its ever-evolving role in the global food industry.

Over the years, Lothian has become deeply involved in issues like standards, traceability, logistics, and supplier–vendor relationships. He’s served on a variety of committees for GS1, the nonprofit that establishes global product standards like labelling systems and universal barcodes. And he was part of a multidisciplinary group formed by the Institute for Food Technologists, which works on solving food safety issues. So, Lothian vigilantly tracks developments in blockchain and the technology’s potential impact on Tyson, its business partners, and the supply chain industry. “Most of the people I’m around who bring up blockchain have no clue how it works, but they’ve heard about it,” he told us. “The question becomes, ‘Do I need to know more about it?’”⁹

And how does he answer that question? “I believe it will be important,” he said, “but the average Joe doesn’t need to know it’s affecting him until it’s already affecting him. I remember attending a conference back in 1984, and a guy from the university was there talking about this new network they had that was allowing them to share all this information among all the academic institutions. They were using TCP/IP. Did that become a big deal? Yeah. That’s the internet. But did I have to learn anything about the internet? No, it just evolved. There will have to be players initially who understand the technologies around blockchain, but things will get developed, and it will evolve.”

While Lothian has little interest in learning the ins and outs of the programming, he has developed a basic understanding of what blockchain technology does and how it works. And that’s the approach we’re seeing from more and more supply chain professionals. Some organizations, including Tyson, have created an in-house cross-functional committee tasked with investigating the potential of blockchain technology. Other supply chain professionals are doing research on their own. Most are taking a wait-and-see approach when it comes to actually investing company funds and resources into blockchain. But very few are ignoring it.

Notes:

1. Interview with the authors, August 22, 2018.

2. MHI/Deloitte, “The 2018 MHI Annual Industry Report: Overcoming Barriers to NextGen Supply Chain Innovation,” 2018: www.mhi.org/publications/report 

3. J. Branch and E. Lopez, “11 Technologies Set to Shape Smart Manufacturing,” Supply Chain Dive, May 21, 2018: www.supplychaindive.com /news/11-technologies-set-to-shape-smart-manufacturing/523576/

4. Interview with the authors, August 28, 2018.

5. Interview with the authors, December 22, 2017

6. W. Zhao, “FedEx CEO: Adopt New Tech Like Blockchain or Be Disrupted,” Coindesk.com, May 14, 2018: www.coindesk.com/fedex-ceo-adopt-new-tech-like-blockchain-or-be-disrupted/

7. M. Iansiti and K. Lakhani, “The Truth About Blockchain,” **ital{Harvard Business Review,} January–February 2017: hbr.org/2017/01/the-truth-about-blockchain.

81. M. Casey, “How Blockchains Will Turn Supply Chains Into Demand Chains,” Coindesk.com, November 3, 2017: www.coindesk.com/blockchains-will-turn-supply-chains-demand-chains/.

9. Interview with the authors, September 22, 2017.