Blockchain: The supply chain prototype of tomorrow
• At a time when global investors have decided to move supply chains outside China, the government is looking for ways to make India a global production hub.
• One measure that will go a long way in supporting Indian firms tap emerging opportunities is the use of blockchain technology in the field of trade and commerce.
• As a peer-to-peer technology, blockchain is an open-source, distributed database built on state-of-the-art cryptography and based on trust.
• In the case of manufacturing and supply chain management, it can go a long way in paving India’s entry into the global value chain at a time when the entire world has become skeptical about indulging in trade.
One of the most striking impacts of COVID-19 has been the manner in which is turning the current trade ecosystem across the world on its head by exposing the vulnerabilities of our supply chains. From a time characterized by the Chinese hegemony in world trade to a time where all the major multinational companies across various countries realized that there is a need to diversify supply chain – Coronavirus has reversed the equation, or perhaps hastened the inevitable. As an economy that has similar growth and scale potential, India is trying its best to establish itself as a lucrative investment and manufacturing destination for global investors.
In the new global scenario that’s emerging, Indian companies need to proactively identify opportunities to quickly scale up, identify new and emerging value chain combinations and also leverage appropriate mechanisms for risk management. Significant risks exist in the supply chain itself. Value chains can be incredibly complex for even a product as simple as a pencil. In a conventional scenario, several disagreements can occur on terms, who got what, what was committed, etc. This can lead to delays and inefficiencies, as well as losses. Such losses can be debilitating for any exporter, and deter businesses from aggressive expansion into global markets.
Banks, regulatory bodies and governments play a key role in mediation for these issues, but they have their own issues like lack of transparency, apathy, rent seeking behaviour, etc. In this context, blockchain technology offers a viable solution – “by encoding the rules of the game as computer programs and by allowing different entities with differing interests to collaborate on an immutable ledger”. The technology essentially creates a system that adheres to rules and can be trusted to not allow transactions that do not comply with agreed conditions.
Recently, the World Economic Forum (WEF) observed that thoughtful blockchain implementation is key to improving supply chains in a post-COVID world. The technology can be used to help organizations improve future pandemic preparedness and accelerate an economic rebound post COVID-19 by strengthening the flexibility of international supply chains. The Geneva-based organization sees trust, transparency and integrity as the key ingredients to build a resilient global supply chain and this is exactly where blockchain technology becomes useful.
The blockchain technology is an open-source, distributed database built on state-of-the-art cryptography. This peer-to-peer technology doesn’t require powerful intermediaries to authenticate or to settle transactions. This database has information on any structured information and is truly a platform encompassing trust established through mass collaboration and clever coding. This tamper-proof & decentralized system creates a permanent record of digital transactions. This ‘trust machine’ of time-stamped transactions entail smart contracts – i.e. computer programmes that self-execute when certain conditions are met.
The World Trade Organization it its paper, Can Blockchain revolutionize international trade? (2018), has said that blockchain could help trade move closer to becoming a paperless transaction. It could be a game-changing experience since it could digitalize and automate trade finance processes, in particular letters of credit, and ease supply chain finance. This digitalization of trade processes, from trade finance & customs to transportation and logistics, would play a significant role in facilitating cross-border trade transactions. It can also simplify government procurement processes.
Further, the computerization of processes through the use of smart contracts could help condense administrative procedures and costs, handle claims and administer multinational insurance contracts. Blockchain technology would also help administer intellectual property (IP) rights in a more efficient and transparent way, and consequently help fight counterfeits. Digitization of processes will significantly bring down trade costs, including verification, networking, processing, coordination, transportation and logistics, as well as financial intermediation and exchange rate costs. A global reduction in trade costs will benefit all countries currently impacted by COVID-19.
It is therefore, hardly surprising why more and more countries are experimenting with blockchain. One of the places that has been swept under the blockchain revolution is the Abu Dhabi Digital Authority (ADDA), UAE. ADDA has been toiling hard to create a government blockchain platform to support a secure “data marketplace,” between Abu Dhabi government entities and other external organizations. ADDA has deployed the WEF’s Blockchain Deployment Toolkit and tested it with the Centre for the Fourth Industrial Revolution UAE (C4IR UAE). The toolkit provided a lot of objectivity to the organization to develop autonomous and a secure data marketplace.
In India, too, this technology can be applied across various sectors from finance to healthcare to food industry to manufacturing. For instance, in the case of manufacturing and supply chain management, it ensures safe, secure, efficient and frictionless ways necessary for a business’ success and customers’ satisfaction. To put it more precisely, today’s consumers seek out brands that can guarantee product authenticity, whereas supply chain partners demand responsible sourcing and better visibility to minimize disputes. Blockchain ledger helps in tracking product journeys and allows real-time visibility for verified supply chain partners. Further, the common information visibility and sharing that is a concomitant of this process can eliminate inconsistencies.
It also enables automated payments for goods through Smart Contracts, so that when goods are delivered and verified, payments occur; thereby eliminating the chance of invoices getting lost or frauds. Another advantage of using this facility is that it can eradicate “middle man” fees and lead to ample savings inside trillion-dollar industries, which is the need of the hour.
In the context of retail and consumer goods, blockchain technology can offer customers everything that they want – real-time information, on-time delivery and record-time service. In a post-Coronavirus scenario, when consumers become distrustful and jittery about things like whose hands touched the final product, blockchain can assure things like quality, reliability, traceability, authenticity and product safety. It will be a win-win situation for all stakeholders: shopper confidence rises as blockchain verifies the authenticity and safety of goods; retail supply chain partakers can better ensure that they’re trading in ethically-sourced things to meet emerging consumer demands; and retailers can promote products, earn customer loyalty and gain insights into consumer preferences in entirely new ways.
To sum up, blockchain could be a powerful tool to facilitate the participation of Indian MSMEs in international trade and commerce. It can offer access to trade finance, facilitate trade procedures, and diminish trade costs for all the players and help to lower barriers to entry, making it easier for small companies and producers to participate in international trade. It can go a long way in paving India’s entry into the global value chain, at a time when the entire world has become skeptical about indulging in trade and consumers across the world have been forced to develop trust deficit towards the goods that they acquire from retailers and service providers.