Authored by: Zach Cohen

www.linkedin.com/in/zacharyacohen/

Maersk is the first multinational supply chain company to announce its foray into utilizing blockchain technology to streamline its operations. Maersk has partnered with IBM to launch a version of Hyperledge Fabric, an IBM blockchain solution that has been developed as part of the Linux Foundation’s Hyperledger Project. Maersk and IBM are by no means the first companies to utilize blockchain technology the supply chain space. This credit duly goes to pioneers like OpenTradeDocs, Provenance, SkuChain and Wave that have been diligently working on the application of blockchain technology to supply chain finance, bills of lading and transparency to supply chains.

Potential Impact of Maersk & IBM's Solution

Maersk and IBM’s solution is the first large scale solution for cross-border shipping and logistics. Specifically, their solution makes the process frictionless for customs officials and logistics providers involved. What struck me about Maersk’s and IBM’s solution was that it could integrate and operate with multiple customs systems at several ports and with various types of products. With the current paper-based system, there are numerous problems with supply chain visibility, supply chain finance, potential for corruption, human error and fraud. Besides these problems, there are numerous direct and indirect costs attributed with an international shipment that each impact the shipments lead time. Each direct and indirect costs impacts a shipment's lead time differently, this is shown in the diagram blow.

Source: Maersk 

Pilot Project

Kenyan Flowers Sent to Holland

Maersk looked at a single shipment of flowers being sent from Mombasa to Europe in 2014. This single shipment generated 200 separate communications between about 30 different organizations including the grower, logistics companies, government agencies, banks and Maersk [1]. These 200 communications created a stack of documents that measured about 25 centimeters in height [2]. Maersk and IBM tested their solution by adding all the actors to a blockchain solution that utilizes smart contracts.

Once the growers submit a packing list via a computer or mobile device a smart contract is initiated. This starts an export approval workflow with the relevant Kenyan government agencies. As soon as an export agency signs the relevant document, its status is automatically updated within the blockchain. All relevant parties can view the status of each export document. At the same time, simultaneous status updates about inspection of the flowers, sealing of the refrigerated container, pickup by the logistics company and approval by the customs company are sent to the Port of Mombasa. This enables the Port to prepare for the arrival of the container. Further, all documents and actions related to the physical goods are shared. Permitting tracking of where the flowers are and who has possession of them as well as the next steps on their journey. This is particularly important due to the perishable nature of flowers.Source: IBM

Challenges

Still challenges remain as Maersk and IBM rollout for this solution. Getting buy-in from governments, major 3PLs and land-based logistics providers is crucial. Customers will want to know that the major logistics companies are also using this solution enabling ease of use and assurance. Further, expansion will be limited by the number of governments, customs agencies and port authorities willing to adopt this new system. Other challenges:

·     Buy-in from other government agencies need in the export/import process

· Varying import and export

·     Ease of use for customers

·     Teaching all relevant government agencies involved in the export/import process how to use the system

·     SCM Finance platform linkages will they be a part of the platform?

·     Linkages with 3PLs and land-based logistics providers

Does Blockchain = Cost Savings?

The big question is will blockchain truly generate significant cost savings for Maersk, other ocean carriers, logistics services providers, ports and customs officials? For a short answer yes. IBM conducted a use case with a shipment of avocados on the same shipping route Mombasa to Rotterdam, and calculated that the cost of the shipment was $2,000. However, the cost of the paperwork for the shipment cost $300, or 15-20% of the shipment's cost, which can be attributed to inefficiencies in visibility and timing in the export process [3]. When you consider that the cost of processing the documentation for a single shipment cost approximately twice as much the shipment itself, reducing the cost of processing trade related documents related by 15-20% would greatly reduce overall costs. This is just in terms of processing the documentation, not even with regards to the impact that the blockchain solution has on supply chain barriers. Additionally, reduction in document processing times impact overall shipment lead times.

Blockchain's Future at Maersk and Beyond

Blockchain has other advantages besides reducing the costs of processing trade related documents. Fully unlocking the true potential of smart contracts via blockchain has the latent potential for a frictionless trade platform where supply chain finance, customs processes and import/export licensing can be optimized for all parties throughout the supply chain. Further, it enables a chain of custody to be created for shipments so that all actions, documents, location and custody of the shipment are known to both the supplier and buyer creating complete transparency. Other added benefits are verification of certifications from third parties, which are particularly important in the case of food safety, conflict free minerals and pharmaceuticals. It will be interesting to see how Maersk utilizes the blockchain solution with these items that require more scrutiny from export and import officials with regards to certification.

If the Linux Foundation is developing other blockchain solutions for supply chain aimed at overcoming supply chain barriers and this is the first of many products to come, the future is very bright indeed. However, Maersk and IBM's product still has to scale their product. It has proven with successful with a challenging and time sensitive perishable good. Maersk's expansion of the blockchain solution to products that face the most numerous obstacles during the export and import processes are the ideal place to start. If they can conquer the most challenging products to ship, then routine shipments will give them little difficulty as they continue to onboard clients to the blockchain solution.

Potential Global Impact?

Let's think about this in a more global context for a second. The International Maritime Organization and the UNCTAD estimate that approximately 90% of the world's trade was transported by sea in 2016 [4]. With so much of the world's trade stuck in processes that are so inefficient, inconsistent and ambiguous they impact not only businesses but also consumers through higher costs. A 2013 study by the World Economic Forum, World Bank and Bain Capital found that reducing supply chain barriers to international trade could increase world trade by 15% and world GDP by 5% . The report goes on to further state that "reducing supply chain barriers to trade could increase GDP up to six times more than removing tariffs [5]." The estimates in the report are based on if every country in world improved only two supply chain barriers - border administration and transportation and communication infrastructure - to even half of the world's best practices. Maersk and IBM's solution directly affects both of these areas. Further, their solution maybe the first of many to start reducing the supply chain barriers to international through blockchain.

Sources

[1] IBM. “Maersk and IBM Unveil First Industry-Wide Cross-Border Supply Chain Solution on Blockchain.” IBM News Release. (March 5, 2017) https://goo.gl/9sZr0D

[2] Ian Allison. “Shipping giant Maersk tests blockchain-powered bill of lading,” International Business Times. (October 14, 2016) https://goo.gl/OI5e6b

[3] Ian Allison. "Maersk and IBM want 10 million shipping containers on the global supply blockchain by year-end." International Business Times. (March 8, 2017). https://goo.gl/Uayxaj

[4] International Maritime Organization. “IMO Profile.” United Nations. https://goo.gl/yzn7lM

United Nations Conference on Trade and Development. Review of Maritime Transport 2016. UNCTAD Secretariat, 2016: New York.

[5] World Economic Forum, Bain Capital and the World Bank. “Enabling Trade: Valuing Growth Opportunities.” 2013. World Economic Forum: Geneva.