Saturday, 26 September, 2020

Transforming Supply Chain Visibility – Unsolved large hidden costs, one main root cause and a potential solution

Context

Trade has probably existed for almost as long as humans have. However, the scale at which trade happens today is truly astounding. Global trade is more than 4,000-times larger than in 1913 and the World Bank has estimated global GDP at $80 Trillion in nominal terms for the year 2017. But here is the interesting bit. The global economy thrives and grows with no single entity controlling it.

Consider a beehive or an ant colony. Beehives commonly house thousands of bees. Some ant colonies have been measured at millions of ants. These are fully functioning ecosystems. They are resilient, they grow, they evolve, they adapt and they offer a stable background for conducting daily activities. While insects have colonies, we have one of the oldest human institutions – markets.

Markets exist because it is rarely possible for any single organization to create value without depending on the products & services provided by other organizations. Markets enable organizations to focus on what they do best.

Inefficient markets are costly

However, operating in markets comes at a cost.

  • Search and information costs such as in determining that the required good is available on the market, which has the lowest price,
  • Bargaining costs required to come to an acceptable agreement with the other party, drawing up an appropriate contract and so
  • Policing and enforcement costs in making sure the other party sticks to the terms of the contract and taking appropriate action (often through the legal system) if this turns out not to be the
  • Various players act as Allocation, Quality Checks and Audit are susceptible to corruption and fraud, which further increase costs.

Although markets enable competition and incentivize performance, the on-ground reality is there is an endemic lack of accountability.

In spite of the mature communication technologies, pervasive information technologies and powerful processes like TQM and Kaizen, the cost of transacting outside of your enterprise boundary still remains high. These costs multiply exponentially with the complexity of the networkFor e.g. handling a six-tier supply chain is not merely twice as hard/costly as handling a three-tier supply chain.

All of this has led to the inevitable – huge amounts of paperwork.

While attempts are made to make the paperwork efficient, paperwork still remains (either in actual paper or digitally). Excessive paperwork is still pervasive and multiple copies of the same documents are still common, which leads to complexity, confusion and high costs.

There are huge repercussions from all the above costs.

The global cost of counterfeit pharmaceuticals has been estimated to be around $200 Billion20% of overall costs of logistics is the cost of paperwork. It is not unusual to see a company spend $10 per-invoice to manage billing. This is so lucrative that many third-party providers offer this service on a no-cure-no-pay basis.

The root cause – Lack of visibility

If we were to look for the single biggest reason for all these costs, this sentence sums it up – “We do not trust what we cannot see.” Period.

There is a problem of visibility and it has not yet been fully solved for. But if solved for well, tremendous cost savings and quite honestly, a better night sleep will be a natural result.

ERPs have been around for decades. While they have succeeded in bringing in clarity and efficiency to the processes WITHIN an enterprise, they do not stand up to the task of bringing in clarity and efficiency to the transactions BETWEEN enterprises. At best, if two enterprises have ERP implementations, EDI (Electronic Data Interchange) integrations connect the ERPs.

But as the number of business partners and the nature of transactions with them grows, the required number of integrations (and costs thereof) grows super-linearly. Furthermore, not every organization involved has an ERP (e.g. SMEs, local governments, regulators, etc). Without the necessary supply chain oversight such as inventory levels, cash flow and other operational metrics, any business gets limited in its ability to quickly adapt, plan, buy or sell.

There could be a way forward for the visibility problem by the combination of two emerging technologies.

Blockchain

At its core, Blockchain is a digital, decentralized and distributed ledger. The original application (crypto-currencies, starting with Bitcoin) of such a ledger was to record transactions in chronological order with the goal of creating a permanent and immutable (unchangeable) record. The immutability of blockchain records in combination with cryptographic security creates new forms of trust that are based on transparency and traceability.

Blockchain has value because it offers a secure and distributed mechanism for value exchange. All stakeholders in the ecosystem can :

  • Access the provenance
  • Authenticate records
  • Prove compliance

A second key pillar of this technology are Smart Contracts which are pieces of software, which are:

  • Guaranteed to execute once deployed without any need for human intervention
  • The results of whose execution are stored in an immutable, shared ledger (Blockchain)

Since smart contracts are programmed in deterministic programming languages, there is very little ambiguity in what the contract will do under a given set of actions taken by agents who signed the contract. Since the Smart Contract is guaranteed to execute, this has the potential of automating contract enforcement.

 Beyond ICOs and coin prices, the real potential of Blockchains is that it may be possible to build decentralized marketplaces and economies where the services traditionally provided by intermediaries may be provided by a combination of smart contracts and individual behavior incentivized using tokens.

Data & Artificial Intelligence

The crux of this technology is that algorithms can see patterns which human eyes might miss. Once they learn enough of these patterns, it can attempt to predict the future based on current inputs. That said, enough has been written about the importance of data and the potential of deriving transformational insights from it using Machine Learning & AI. We live in a world where Volume, Velocity & Variety of data is growing by orders of magnitude.

A critical aspect of data which is discussed much less often is its Veracity or Provenance. In other words, can the data be trusted? If the data itself is not trusted, neither would be the insights therefrom. The absence of strong mechanisms to ensure the veracity of data is a key challenge if the insights derived from this data are to be trustworthy.

This is where the intersection of Blockchains & AI creates a powerful value proposition.

  • All blockchain records are time-stamped and are tamper-proof, providing a single source of data
  • This also means that the provenance of all data on the Blockchain is assured & auditable. Insights derived from mining this data are therefore implicitly trustworthy or at least have a chain of trust leading back to the data
  • Further, if the data is trusted and so are the analytics that are derived from it, then many decisions which require human intervention & subjectivity today can be taken by algorithms using trusted data and human-configured

It is important to note that advances in IoT (Internet of Things) further reduce the human error element in collecting data from a variety of sensors and automated sources.

There are some platforms available today which integrate these critical aspects for enabling enterprises to meaningfully transact with each other in a trusted manner.

Koinearth [markets]N platform uses Blockchains, AI & IoT technologies to bring in deep visibility and market efficiency for business networks (like supply chains).

By using Smart Contracts & Token Economics, Koinearth [markets]N leverages the power of blockchains to increase accountability, quickly identify bottlenecks, redesign and align incentives (using game theoretic principles), automate contract enforcement & make economic networks frictionless.

By analyzing both on-blockchain & off-blockchain data with built-in machine learning algorithms, the Koinearth [markets]N platform makes in-context recommendations about optimal prices, vendor selection, etc. to reduce search and information costs. Inter-firm contracts become cheaper to enforce and yet more effective.

In essence, there is now a method/tool for bringing in deep visibility + trust to a traditional supply chain, automate supply chain transactions and make collaborations across firms faster, smoother & more cost-effective.

Outlook

Human civilisation and its growth are due to the ubiquity of markets. Individual entities coordinate with each other. Networks collaborate with each other. But markets take on a life of its own. The idea of a market is powerful. But a market can be beneficial only if it is efficient. This analogy holds true for supply networks, logistics and distribution channels as well.

Thanks to the combination of Blockchains, AI and IoT, there exists a viable method to bring in deep visibility and therefore trust. The chasm between enterprises on the supply chain can now be bridged in a cheaper and simpler way.

With the presence of deep visibility, newer business models could arise through advanced token economic mechanisms, trusted supply chain finance could be enabled by integrating Banks/NBFCs in the blockchain network and more.

Author

Dr. Praphul Chandra
See author's post