By Susan Avery
You’ve heard the term blockchain. What does it mean? How does it work? How can companies use the technology to help make their supply chains more efficient and cost effective? And what does it all mean for procurement leaders?
To get the answers to these questions, My Purchasing Center met up with Brigid McDermott, Vice President of Blockchain Business Development at IBM. The discussion follows:
How do you define blockchain?
Blockchain is a technology. It is not one of those lightening-bolt ‘aha!’ technologies in terms of a revolution. It’s lightening-bolt in that we realized we can apply current technologies—distributed systems, cryptography, data management—in ways no one has thought of before to create a trusted distributed ledger. If I have to define blockchain in one sentence it is ‘Blockchain is a trusted distributed ledger’ and it is the technology that makes it possible.
For me, it’s important for people to understand that blockchain presents a tremendous opportunity to really transform how we do supply chain, get rid of waste and solve problems of inefficiency. To make that happen, we need the community to come together in ecosystems. That’s part of why I’m an evangelist. It is going to take getting everyone engaged and contributing. The output is making business work better, saving money for companies. But also, if we look at things like food safety, one third of the world’s food supply globally is wasted every year. Part of that is supply chain inefficiency. We can also help solve real global problems.
But what does that mean? Can you describe with examples?
Fundamentally, blockchain is about trust. It’s about creating a trusted system of record that you can use among all the parties in your supply chain. What we have now is a world in which everyone maintains his own records. Sometimes that means people accidentally have different records. I fax you a document with a nine and you incorrectly input a zero and we end up on the phone for days trying to figure out why our numbers don’t match.
Or, say, a trucking company has a four-hour window to make a delivery. It knows the location of its truck, the driver has stopped for coffee and will make the delivery near the end of the four-hour window. If we can get the four-hour window down to a four-minute window, think of how much more efficiently you can manage your warehouse, forklift and workforce.
As we think about using blockchain across supply chain and procurement, what we are thinking is, Can we get everyone looking at the same set of information and trusting that it is correct? That’s what blockchain does. It creates a distributed shared ledger that’s immutable and permissioned.
You’re a technology evangelist and obviously passionate about the technology. What is IBM’s role?
At IBM, we are basing our work on the Hyperledger, which is the open standard the Linux Foundation is running. Doing this on anything other than an open standard is unfathomable. The system is permissioned which means you know the identity of everyone using it. Once everyone party to the transaction knows they are looking at the right piece of information, you can start thinking about your business differently. You can manage inventory not only within your four walls, but also across the entire supply chain. If you have realtime data, you can potentially help facilitate customs clearance. You can drive towards longer shelf life because you can do a better job managing transit time. You can do a better job at cost management because all the paperwork and all the processes associated with getting a delivery from the factory in China to the retailer in New York are shortened and facilitated.
IBM announced in October that we are working with Walmart on a food safety project. This is about providence and traceability. To prevent an outbreak or food scare, you need to know where things come from and you need to know immediately. A few years ago there was a case in which retailers pulled spinach from their shelves because of E. coli. There was no way for anyone to tell quickly which packages were good and which bad. It turned out it was one shipment from one farm. It took years for spinach consumption to rebound. Farmers, retailers and shippers were hurt. Seeing common linkages and triangulating them helps pinpoint the issue.
How does it work?
With blockchain, the information is on the blockchain. You can set up the system so it becomes more broadly available in the case of an emergency when more companies might need to access it. You can have permissions in general, but at other times you can easily let academic statisticians get on really quickly and try to triangulate the problem if you don’t have the calculating ability in your own process. You can do all sorts of things once you have the data and everybody agrees with it.
The flip side to providence and traceability is the idea of visibility. Providence tells us the location of goods. Visibility tells us the location of the goods as they make their way along the supply chain. With visibility into data, a shipper can redirect a shipment if needed. Blockchain is not magic. It does not make all problems go away. But with information in realtime, you can make changes.
Say, a retailer has a delivery window for trucking companies. As an incentive for a trucker to deliver within the window, the retailer charges a late fee if it misses the window in an agreed upon amount of time. The retailer wants to narrow the window. Is there something the trucking company can do to ensure the delivery arrives on time? If the first truck is broken down on the side of the road, can it send another and avoid the late fee? Right now, that information is not aggregated in such a way that companies can use it. We are doing some in-house work looking at whether this is valuable to companies. From a technology perspective, how can we help make this happen?
Are some companies using blockchain?
No one is currently in production. But, as you may know, IBM runs its own global financing organization. It’s a $44 billion business. At any given time, we have $100 million tied up in dispute, with an average dispute of 40 days. When we first got excited about blockchain a year ago and approached our CFO about it, he, like every CFO, wanted proof. He asked us to figure out how to make the disputes go away.
In late spring, we started putting together a system with a group of suppliers running blockchain for dispute resolution in parallel with our existing system. We were able to reduce the length of time spent on disputes by 75%, from 40 days to 10 days, and reduce the capital tied up by 40%. This is in a matter of months. Our CFO is now a believer.
For me, this is a good proof point because disputes occur is so many places in the supply cain. Companies have people in the back office on the phone all day. They’re not customer service advocates who make people happy, improving the brand, making it worthwhile. No, they are spending days cleaning up discrepancies. Blockchain makes it go away.
What is it going to take to get to this point?
While I may be dating myself with this example, let’s look at VHS and Beta technology. Beta was great, but VHS won because it was a great technology and it built an ecosystem where we could not only watch movies, but movies we wanted to see. So, with supply chain, while there’s some great technology, there also needs to be investment to build the ecosystems. We are starting to see a groundswell. How do we build an ecosystem? How do we get all the participants who are interested in making supply chains work better, making business more efficient, making customers happier—farmers, manufacturers, packagers, logistics companies, carriers, customs agents, government regulators—engaged and aligned to share information? How do we make this happen? It’s going to take real work.
Could cost be a burden, especially on smaller companies?
This is one of the fun things about thinking about the business model. For an ecosystem, you may need someone to participate who does not see as much direct benefit as you do. Using a hypothetical example, say there was a way for a retailer to use blockchain that would reduce its costs by 50%, but it needed information and participation from small manufacturers which put a 1% burden on them. The answer then is the retailers to figure out a way to pay the manufacturers to participate in the system. There are potential cost savings that can help pay for the investment to build the system.
From a technology infrastructure perspective, we are at a place where we can build these ecosystems. That’s what software as a service (SaaS) lets you do, by working in the cloud you can put systems out there that everyone has access to.
We can take advantage of things that already exist. Most people have smart phones. Designing a lightweight app a trucker can download to his smart phone that allows him to update his location is not a burden.
Are we on our way? When you mention using SaaS and smart phones, do you see us moving in the right direction?
If you think of blockchain as a trusted set of data, then the more data you have as input, the better. Changes over the past 10 years or so are enabling this to happen now.
You spoke of having and giving permissions to view data—how secure is blockchain? Is security a concern?
Security is one of the fundamental reasons to use blockchain. Look at bitcoin. It came into being because people wanted a secure way to spend cash. It’s been running for years and no one has been able to break into it. As IBM sees it, the success of blockchain is going to depend on making it enterprise-class encompassing security, scaleability, reliability, auditability. That’s why IBM supports Hyperledger, the Linux Foundation’s open standard. I like their approach and the way they are building Hyperledger because they are thinking about the way enterprises would use it. They are considering security from the beginning.
From an IBM perspective, we have a high-security network offering which leverages our experience. IBM runs ATM networks. You cannot let people break into ATM networks. You have to have security that involves hardware and protected crypto keys leveraging that with the immutability and security inherent in the software. You end up with something impressive. Enterprises we are talking to feel comfortable with this from a security perspective.
Are there competing technologies?
There are competing standards. IBM looked at them and decided that the permission nature of blockchain is necessary, that there wasn’t another technology that’s an open standard, open governance and built from the ground up with permission as a fundamental tenet. That’s why we decided to go with this one. Using databases is another option. Databases are great when you’re working inside an organization, but when you work across organizations, they don’t imbue trust into the technology in the same way that blockchain can.
Editor's note: Share your thoughts on this topic with your colleagues at My Purchasing Center by responding to this blog or by contacting Susan Avery, Editorial Director at email@example.com.
Susan Avery is Editor-in-Chief at My Purchasing Center. She writes articles, blogs and white papers and manages and creates other content for the online procurement and supply management publication. She produces and moderates roundtable discussions, podcasts, webcasts and video interviews. Susan has 30 years experience covering procurement and supply management for Purchasing magazine and Purchasing.com.
George E. Krauter
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