How blockchain can create more resilient supply chains
”Fiat Chrysler Automobiles announced in mid-February that it was temporarily halting production at a car factory in Serbia because it could not get parts from China. Hyundai has made a similar announcement for factories in Korea. International air travel transported a significant amount of trade cargo prior to COVID-19 but has seen its flights decrease by 55% since the beginning of the pandemic. Because COVID-19 has led to lockdowns, suppliers in the chain are temporarily ceasing production, and logistics providers can no longer transport goods as seamlessly, particularly across borders.”
World Economic Forum outlines changes that would need to be made to supply chains in order to make them more transparent and resilient.
1. Move away from paper to digitization
Protective measures for COVID-19 have made clear that operations dependent on physical assets, such as paper, can face serious disruption when physical presence is not a possibility. Wet signatures and paper printouts are usually handled by operations personnel who must come to the office, or another place of work, and coordinate with others.
Digitizing, then, is not simply a matter of cost, but primarily of visibility and managing supply chain risk. To limit the impact of points of failure in the value chain, it is important to make data available through digital means.
2. Ensure data privacy for suppliers
Most digital communication in the supply chain happens via Electronic Data Interchange (EDI) and Excel spreadsheets. When passed back and forth only between two parties in the supply chain ecosystem, data privacy is easily controllable and not a concern. When the data in these communications needs to be distributed to more parties, however, traditional supply chain systems, which are centralized, cannot grant independent and auditable access controls to each individual party. A decentralized system that is nevertheless is the best way to give suppliers the privacy they need and buyers the visibility they want. A blockchain with either private or public permissions meets this criteria. When created properly, suppliers can audit their data-sharing permissions directly on their own blockchain node. At the same time, their data can be securely distributed to others in the blockchain network without requiring the point-to-point integration that centralized systems do.
3. Give suppliers an incentive to share their data
For buyers who value data highly, they may consider paying their suppliers for the data itself, in addition to the physical goods they’re sourcing. A more cost-efficient and profitable method is to institute supply chain finance programs that offer the buyer’s own competitive interest rates. Many buyers already offer such programs. However, the lack of visibility is a problem that stems from other suppliers. The financing needs to reach these suppliers as well. Blockchain is the ideal technology to ensure that data on performance and risk, which underpin all supply chain finance transactions, can be shared in an authenticated manner with financiers and other parties to a transaction, even when there is no direct relationship between them. Using blockchain, buyers can, for example, use payment commitments on the blockchain as alternatives to a Letter of Credit, pay suppliers later, reduce cost of goods sold, and insulate themselves from supplier bankruptcy. Suppliers, in turn, recognize revenue sooner and replace their current supply chain finance arrangements with much lower financing terms. These benefits multiply as the network grows. The result is a financing ecosystem that makes data sharing pay for itself.
4. Start early – don’t assume the current disruptions will never happen again
Supply chain initiatives take time to roll out. The most effective move to take now is implement supply chain finance programs to support suppliers in financial straits and make the value chain more capital efficient. If companies begin to institute data sharing in their supply chains at the same time, they will be in a much better position to deal with a future shock. Global trade and supply chains are going through an unusual and massive shock, which strikes from both ends – the supply and the demand side. Companies, whether buyers or suppliers, are facing tremendous challenges in keeping the goods and services flow at a time of global lockdowns.
As the COVID-19 situation changes daily, it’s crucial for all parties to have visibility into the supply chain, to share data, and communicate effectively.
Article written by Rebecca Liao, Co-Founder and Executive Vice-President, SKUChain and Ziyang Fan, Head of Digital Trade, World Economic Forum LLC.
The views expressed in this article are those of the author alone and not the World Economic Forum.