Commentary: Three observations about the adoption of distributed ledger technology in supply chain

On August 4, the University College of London’s Center for Blockchain Technologies (UBL CBT) published Distributed Ledger Technology in the …

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On August 4, the University College ofLondon’s Center for Blockchain Technologies (UBL CBT) published Distributed Ledger Technology in the Supply Chain,“a market report looking at the adoption of Distributed Ledger Technology(DLT) in physical supply chains.” The CBT added that the report “is the firstcomprehensive outlook on the state of DLT in the global physical supply chainsector.”

In this article, I synthesize threethemes that the authors of this report identify as affecting the broad adoptionof distributed ledger technology in global supply chain networks.

The report assessed 105 DLT projects.

Track and trace is the most common use-case across industries

The globalization of supply chains presents an advantage – goods can be sourced at lowest cost from any part of the world. However, that advantage comes with an attendant disadvantage – individual consumers, business customers and regulators all require information about products that have been sourced from far-flung parts of the world.

Track & Trace DLT Projects | Source: DLT in the Supply Chain

Given the size of the global food retail market, the complexity of food supply chains around the world, and the need to monitor and minimize outbreaks of food-borne illnesses, it is not surprising that retail food supply chains account for the majority of track and trace DLT in supply chain projects.

Projects by Sector and Focus | Source: DLT in the Supply Chain

The report highlights IBM Food TrustTM,an ecosystem of food industry participants who share information with oneanother to create a more transparent and secure global food supply chain. Thisproject already counts some of the world’s biggest food companies as members.

Onepromising early application of DLT is the digitization of manual, paper-basedprocesses in supply chain logistics

Onearea in which we may see rapid adoption of DLT is in the digitization ofmanual, paper-based processes and record-keeping related to supply chainlogistics. This is particularly relevant for the record-keeping required by theregulatory bodies involved in the import and export of goods around the world.Some port authorities are experimenting with blockchain-based bills of lading.One of the startup projects that the report highlights is CargoX, whose chiefoperating officer was a presenter at The New York Supply Chain Meetup’sone-year anniversary event in November 2018. Projects like CargoX haveapplication across several industries.

Onthe other hand, as the authors state, “However, since supply chains typicallyinvolve many and varied participants it is also among the most complex usecases to implement. As with all blockchain deployments, benefits are only realizedat scale once critical mass is obtained. Consequently, whilst a raft of proofof concepts have been completed over the past three years, rollout at scale isstill a work in progress. This is challenging because it requires a collectiveapproach with industry-level engagement.”

I have written that the cultural obstacles toDLT and blockchain adoption in supply chain logistics may be more difficult toovercome than the technical difficulties. This is because private, permissionedimplementations of DLT in supply chain need to be interoperable with oneanother. This requires intra- and inter-industry collaboration. It requirescollaboration between once sworn competitors. It requires collaboration betweenstartups and established companies.

DLTin financial applications may take longer to gain widespread adoption than onewould expect

In my opinion, applications of DLT insupply chain finance or trade finance are possibly the most exciting and mostsignificant in terms of their potential economic impact. However, I believethey may be the last to gain broad adoption amongst enterprises. Applicationsin supply chain management and supply chain logistics will need to become moremature and widespread before applications in supply chain finance gain wideradoption. The authors of this report explain why this may be the case.

Applications in this area include: payments enabled by smart contracts; selling directly to individual consumers; and alternative methods of obtaining and deploying working capital. The chart below shows how the projects studied for this report are distributed.

Financial Transactions Projects by Sector | Source: DLT in the Supply Chain

The authors point out two reasons financial transactionapplications of DLT in supply chain could take longer to gain adoption than theothers. First, distributed ledger technologies and cryptocurrencies are stillpoorly understood. The lack of understanding of the technology creates negativeperceptions. This creates barriers to adoption in financial transactions.Second, financial transactions must adhere to a high degree of regulation andlegal scrutiny. It takes time for a regulatory framework that accommodates newpayment methods to be developed. As I wrote above, supply chain financeapplications of DLT will become more prevalent once supply chain management andsupply chain logistics applications become more prevalent.

Conclusion: DLT in supply chain is here to stay, even ifit takes time

The authors conclude by stating that DLT is set to transform physicalsupply chains, even though there is still much work to be done beforedecentralized systems become a reality for real-world applications at scale.They end the report with three observations. First, data quality remains aconcern in DLT in supply chain applications. Second, input and outputconnections between DLT supply chain applications and physical supply chainsmust be built and defined. Lastly, “the new co-opetition model of consortia isnot an easy one to implement. It requires a new way of working for companiesand also is potentially challenging from a regulation and antitrustperspective. New collaborative forums can play an important role here to bringstakeholders together and drive industry level adoption.”

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