In the wake of supply chain disruptions due to coronavirus, several experts have reiterated the need to obtain more visibility across the chain. Companies that sell finished goods generally know production and shipment schedules for their suppliers, but they usually have little to no knowledge of suppliers further up the chain.
A report by Rebecca Liao, Co-Founder and Executive Vice-President, SKUChain, and Ziyang Fan, Head of Digital Trade, World Economic Forum, have written a report on the potential impact blockchain has on supply chains now that many supply chains have been disrupted by the pandemic.
“Obtaining visibility is considered key to optimizing supply chain efficiency and agility during normal production. When critical supply chain disruptions hit, this visibility becomes crucial to understanding the impact of the disruption on the rest of the chain so that others in the ecosystem can plan and take action, such as developing routes to alternative suppliers”, the researchers write on the WEF website.
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.
Liao and Fan mention a few examples, like Fiat Chrysler Automobiles announcing in mid-February that it was temporarily halting production at a car factory in Serbia because it could not get parts from China. 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. China plays a central role in global supply chains.
“This is not a new problem”, the researchers say, adding that “companies have been trying to uncover this data for decades, but suppliers are not forthcoming with the information”. The solution would be to achieve visibility across the entire value chain, which according to the researchers are:
1 — Move away from paper to digitization
Trade is notoriously reliant on paper-based processes and notices filled out by hand; bills of lading, paper copies of packing lists from each logistics carrier, where physical paper copies are required by law.
“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”, they write, adding that “value chains that rely on information in these paper documents lose access to that visibility very quickly and cannot react to changing conditions”.
According to the researchers, digitizing is therefore not simply a matter of cost, but primarily of visibility and managing supply chain risk. Therefore, to limit the impact of points of failure in the value chain, it is important to make data available through digital means. “In the current COVID-19 pandemic, governments and businesses with strong digital infrastructure and enabling regulations such e-signature and e-transactions laws, are dealing with the supply chain disruptions much better than those without”.
2 — Ensure data privacy for suppliers
Liao and Fan point out that the reason why upstream suppliers will not reveal information to end customers, even if it’s easy for them to do so, is that they fear losing commercial advantage if their customers know even more about their operations, pricing and sourcing. “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 owned by a large buyer 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. “We’ve therefore solved a key technology problem in getting suppliers to participate in supply chain visibility initiatives”, the report states.
3 — Give suppliers an incentive to share their data
The researchers propose that buyers who value data highly 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 programmes that offer the buyer’s own competitive interest rates. “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”.
According to the researchers, the result is a financing ecosystem that makes data sharing pay for itself, because by 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.
4 — Start early – don’t assume the current disruptions will never happen again
Liao and Fan remind that supply chain initiatives take time to roll out. “The most effective move to take now is implement supply chain finance programmes 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”.
Image: NASA on Unsplash
