How Blockchain is alleviating operational risks in supply chains

Published on Mon, 21/06/2021 - 12:45
Susanne Chishti, Non-Executive Director, Supply@ME
Susanne Chishti, Non-Executive Director, Supply@ME

Distributed ledger technology offers risk management benefits of improved speed, security and traceability, writes Susanne Chishti, Non-Executive Director, Supply@ME.

As shops, restaurants, pubs and bars across the country lift the shutters battened down by Covid-19 for so long, it is starting to feel somewhere close to ‘normal’ again. But, as any business beginning to welcome back customers knows all too well, it is no mean feat to deliver products and services in the same way as before the pandemic.

Many businesses, from manufacturers to traders, are guilty of taking for granted the smooth-running of their complex logistical operations, simply because they had worked so well for so long. But when non-essential retail and leisure closed last year, the unprecedented supply and demand shock meant supply chains were heavily disrupted worldwide.

Emerging from the pandemic, the supply chain model is shifting from a lean ‘just in time’ model, which sees stock delivered just when it is needed for the next step in the chain, to an abundant ‘just in case’ model, which will see more goods manufactured and stockpiled, just in case of future supply chain delays.

Successful operations will prioritise this new way of doing things. Risk managers must consider the complexity of a supply chain model that deals with significantly higher levels of stock produced and stored than ever before.

To facilitate this shift, a seismic digital overhaul is already underway. An October 2020 survey by Pandemic Supply Chain found that 48% of shippers and 57% of LSPs (Logistical Services Providers) have accelerated their technological adoption and spend, because of the dislocation caused by Covid-19.

This shift is long overdue, given the clear benefits of deploying the latest technology to manage evolving supply chain risks. Not least of these is blockchain technology – also known as a distributed, digital ledger.

The ledger records transactions (or each step in a supply chain) as a series of ‘blocks’ which are linked together on a chain. Once on the chain, a block cannot be altered or tampered with. Instead, new blocks are formed when there is a change or if a transaction progresses. The ledger itself is connected across multiple computers, which are updated each time the blockchain is updated.

In risk management terms, the primary benefits of blockchain are improved speed, security and traceability, because no records can be replaced, destroyed or lost. The information held on the chain is verified and uncompromisable, which has the potential to eliminate costly manual tasks.

For example, consider the shipment of wine from South America to Europe. A chain involves more than 30 organisations and some 200 interactions; it is complex and often lacks transparency, with unknown partners dotted across the globe.

By adding a simple QR code to wine bottles and batches, each bottle can be scanned, verified and accounted for on the blockchain without the need for manual intervention. When the shipment reaches each next destination and fulfils a contract deliverable, payment can be triggered automatically, minimising the need for banks and clearing houses.

We are presently at the early stage of blockchain adoption. But more sophisticated platforms are continuously in development, from IBM and ADNOC’s automated oil supply chain to fashion houses like Martine Jarlgaard tracking the ethical production of clothing. Regardless of industry, a chain with fewer steps equals greater efficiency, and cost savings that can be re-invested back into other operations.

Supply@ME, an inventory monetisation platform, relies on its proprietary blockchain technology to help companies relieve pressure on their supply chains, by unlocking immediate cash from non-perishable stock that is yet to be sold.

Supply@ME purchases unsold inventory under a monetisation scheme and sells the value back to clients at a later date, once ordinary trading conditions resume. Meanwhile, clients’ inventory is digitised and tracked on the blockchain. The client maintains physical possession of and can continue to sell its inventory through a commercial contract (aiming for balance sheet derecognition), thus minimising trading disruption.

Additionally, from the third-party financing perspective, the digital security serves to reduce counterparty and credit operational risks and enhance trust. This blockchain-backed process releases working capital that a company could use to pay suppliers and creditors in its supply chain, thus releasing the pressure upon it.

Operations have become significantly more complex over the last few years, exacerbated by the struggles of Covid-19. As the world emerges from the pandemic, the winners will be those that prioritise efficiency and deploy the latest technology to mitigate supply chain risks, well before the next global catastrophe arrives.