How smart technology is changing the supply chain [Q&A]
Suppliers, distributors and customers alike are faced with rising supply chain costs, partly as a result of disruption caused by the COVID-19 pandemic.
The idea of smart contracts, using blockchain and the IoT to automate contract execution, has been around for a while. But is now the time for them to start coming into their own, and how can they benefit enterprises?
We spoke to William Fox, chief product officer at smart contracts specialist Data Gumbo, to find out.
BN: How is the uncertainty of rising supply chain costs due to COVID-19 impacting contract terms between suppliers and their counterparties?
WF: International supply chain contracts typically carry broad parameters on delivery and cost terms, including standard language from the International Chamber of Commerce. These international commercial terms, or 'Incoterms', define the responsibilities of buyers and sellers in a transaction and are used to clarify the tasks, costs, and risks of the parties involved. Until recently, standard Incoterms have been effective enough in limiting contract disputes.
However, these broad guideposts have been overwhelmed the past 18 months. The soaring cost of raw materials, shipping, and persistent delays are fueling regular disputes between counterparties over how to account for cost inflation and delivery shortfalls. What COVID-19 has done has accelerated the pre-existing need to eliminate all gray areas in supply chain contracts.
Every contract term must be 100 percent defined, measurable and enforceable. What was an 'upon delivery' clause is now 'when the truck crosses the geofence of the delivery location, a digital ticket with scanned bill of lading is approved by the on-site supervisor and the volume of the commodity is metered into the storage tank, triggering an automated payment.' In B2B contracts, this level of specificity is allowing counterparties to move past the traditional bill on fill model to bill on consumption -- mirroring B2C and significantly lowering the risk and costs of supply chain uncertainty.
BN: How are data silos and a lack of free-flowing information across the supply chain further inflating operational costs?
WF: Supply chain operations require event data that has historically been provided through observation and manual input by humans relying on multiple sources or independent verification. In order to execute a supply chain contract, data from 10-15-20 parties is needed and must be properly verified. Without a secure, open data sharing system in place, acquiring and processing all the necessary information is a very time- and resource-intensive process.
As a result, financing charges are added back into the commodity price: the operator gets paid at 90 days, the supplier at 150 days, and so on until there is no profit at the end of the supply chain. A lack of open data sharing between counterparties is an under-realized, yet significant contributor to increased transaction costs.
BN: With supply chains forced to operate on thinner margins, what technologies are being adopted to alleviate costs?
WF: The most in-demand supply chain technologies are those that can deliver trust between parties and automation across processes. While it's difficult to control raw material and logistical costs, the cost of executing contracts holds considerable room for improvement and organizations are turning to smart contracts powered by blockchain and Industrial Internet of Things (IIoT) technology. In fact, McKinsey recently named trust architectures built on distributed ledgers as one of its top 10 tech trends that will shape the coming decade.
At its core, commercial contract terms define the scope of product or service to be provided by the seller, determine how the delivery of that product or service will be verified by the buyer, and ultimately, how the buyer will compensate the seller when contract conditions are met. The lack of trust between a buyer and seller introduces significant complexity in the second step; verifying that the buyer has received what they agreed to pay for. Smart contracts, using real-time field and sensor level data and backed by immutable blockchain technology, provide a simple, inexpensive solution.
In a wide range of service and performance contracts, a smart contract codifies existing natural language contract terms between parties, then taps operational field data and IIoT connected devices to verify in real-time, exactly what happened and where. This becomes the mutually agreed upon, independent, single source of truth that serves as a backbone to automatically eliminate payment delays, disputes, and complicated reconciliations -- significantly reducing transaction costs.
BN: You highlight blockchain and smart contracts as key supply chain technologies, does this mean various parties are going to be transacting purely in crypto one day?
WF: Whenever people think of blockchain, there is an immediate association with crypto or mining. This is not necessarily the case. Instead, think of blockchain as a digital ledger independent of a tokenized currency. Like a page in a physical ledger, each block is chained to previous blocks, providing a digital trail of all the transactions that have taken place on the network. There are important use cases for the technology outside of tracking and storing token transactions, which are becoming increasingly realized in various sectors.
Particularly in the supply chain, maintaining a trail of transactions that reveals who has what, when, and where is invaluable. With data stored for auditability or to enable automated smart contract transactions between stakeholders (using standard currency), the time and resources dedicated to confirming the commodity custody timeline is eliminated. I expect these kinds of use cases to continue to grow in popularity as the technology matures.
BN: What additional use cases are global enterprises using smart contract technology for?
WF: An area where we've been successfully applying the technology is ESG (environmental, social and governance) reporting. Organizations can automate data reception for ESG reports instead of running an entire analyst wing to manually collect data. Tapping a company's operational IIoT field data produces an accurate picture of environmental impact, directly capturing metrics like fuel volumes and emissions levels. A smart contract network reaches across data sources, silos, and counterparty information in a supply chain, capturing and verifying real-world events and services as they unfold with a corroborated, auditable record. As organizations increasingly face pressure to accurately report on their environmental impact, this application of the technology will become more common.