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E-commerce supply chains and the blockchain

Decentralised technologies have a range of value propositions for online merchants. Chief amongst these is the integrity of the supply chain — something that conventional solutions are poor at maintaining.

Blockchain technology has, to date, been limited to two major applications. The first is online currency: the peer-to-peer transfer of value pioneered by bitcoin. Many subsequent protocols have modified and improved bitcoin’s technology, but one way or another, digital cash is currently blockchain’s chief use case. This functionality of peer-to-peer value transfer has been leveraged by the second major application, the ICOs or decentralised crowdfunding that have emerged over the past five years and which came to global prominence in 2017.

But blockchain offers far more than the ability to ‘be your own bank’. The same properties that make it so well suited for use as a vehicle for digital money can also be used to address a raft of other pain points across diverse sectors and industries. As distributed ledger technology comes of age and digital cash becomes an accepted part of life, its potential is being recognised and deployed in use cases unrelated to financial transactions. The immutability of the blockchain — a permanent, public record of everything uploaded to it — can be used to bring transparency and confidence to industries plagued with faults that conventional technologies are ill-placed to address.

Written in stone

Bitcoin works because anyone can check the integrity of the ledger. To know what funds should be registered to which addresses, the bitcoin protocol maintains a record of every transaction that has ever taken place. When you send money using bitcoin, the miners who maintain the network first check that they are yours to spend — tracing them back to the ‘coinbase’ transaction in which they were first created. They may have moved a hundred times or sat in the same address ever since, but the transparent record of transactions that makes up your balance is one of the ways bitcoin approached a problem many experts thought could never be solved.

Everledger has built a supply chain solution over the blockchain that allows tracking the origin of diamonds, in order to verify its source without a single point of failure.

Precisely the same approach can be used to guarantee the integrity of the supply chain: tracing the movement of value throughout its life cycle. This is now starting to find application in industries as disparate as tuna fishing and diamond mining, amongst others.

Provenance allows costumers to track the origin of their food through a mobile, blockchain-based, application, with full transparency and traceability.

In both of these examples, blockchain technology can empower businesses and consumers to act more ethically. Tuna fishing is a major source of employment for the 60 million Indonesians who live in coastal communities, but overfishing, fraud, slavery and illegal, unreported and unregulated (IUU) fishing are rife. These are the problems that blockchain platform Provenance is combating with an end-to-end tracking system that offers a transparent, unalterable record — avoiding the need for trusted (and highly fallible) third parties. Everledger takes a similar approach to the diamond industry, in which stolen and conflict stones are often passed off as legitimate gems at an annual cost of $2 billion to insurers. Whether it’s digitised fishing records or the unique fingerprint of a diamond, tackling the problem of counterfeit drugs or stopping the supply of minerals used in smartphone production from funding war, blockchain can present a single, universal truth of where a product has come from and each step along the way.

The ‘bullwhip’ effect

A diagram explaining how the bullwhip effect works when there is an spike in customer orders. If there is no transparency in the whole supply chain, usually a small spike at the end of the chain will result in a disproportionate increase of production in the supplier side. This situation usually ends with over stock, and important economic losses.

Transparency has purely financial as well as ethical benefits for supply chain management. A perennial problem is the so-called bullwhip effect. This is when a small change in consumer demand has a growing impact the further up the supply chain it moves, from retailer through wholesaler, distributor, manufacturer and up to raw materials supplier. For example, if a wholesaler sees increased demand from a retailer, they will order additional units to ensure they can meet future demand without delay. The distributor will see the increase in orders and do the same, with the effect compounding as it moves along the chain. If the increased retail demand is temporary or a one-off, the result will be over-stocking of inventory.

Lack of transparency and adequate communication are the principle causes of the bullwhip effect. Once again, blockchain is well-placed to address this problem by presenting a single, unified truth about the reality at all levels of the supply chain. This revolutionises supply chain management, turning the conventional approach on its head. As HBR notes, ‘What we end up with are dynamic demand chains in place of rigid supply chains, resulting in more efficient resource use for all.’ Thanks to the benefits of blockchain over current software solutions and services, a number of large corporations, including IBM and Walmart, are actively exploring its use in the context of e-commerce.

The same bullwhip effect happens when customers buy less. A small decline in purchases often brings a great decline in production at the beginning of the supply chain, if its visibility is not good enough. The final result is a sharp decrease in production, together with problems all over the supply chain.

The last mile

Last mile delivery is probably the most complex and expensive phase of any supply chain, especially for e-commerce retailers.

e-commerce supply chain experiences particular complications at the very end: the ‘last mile’ where the product is entrusted to a courier service of one form or another. That’s often a formal, centralised entity — the postal service or UPS — which frequently suffer from inefficiencies that impact consumers and prompt unnecessary costs. Piloteo launched a smart delivery e-commerce prototype last year, using the blockchain to improve traceability and automation. But the problems of covering the last mile as efficiently as possible have inspired numerous other blockchain solutions built on a decentralised model, with faster delivery times and savings for supply chain managers. As Philip Lee, CEO of Quickquick and creator of the Volt delivery system, explains, an Uber-style service can bring greater speed and efficiency. ‘After 2018, the delivery market will be largely divided. I think the future delivery market will be divided into a centralized model of Amazon and a decentralized model of ours. While conventional hub-spoke methods may be advantageous in areas with low population density and long distance to move, Volt models are much more advantageous for the same-day or real-time delivery in cities or high density areas.’

Blockchain offers many improvements for e-commerce, then, from secure, borderless and instant payments to the effective management of the supply chain. It can also be applied to storage management, which is the next topic in this series.

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