How global supply chains will benefit from IoT and smart contracts

THE “fourth industrial revolution”, or the Internet in layman’s speak, has brought about significant changes in how businesses connect with their customers and interact with other businesses. For the most part, this has offered benefits to companies that exchange digital products and services. However, the trend today is going toward cross-channel or online-to-offline activities.

In particular, there is one sector that greatly benefits from recent innovations in digital transactions. Supply chain management, which has driven a big part of commerce in the past century, will gain significant improvements in efficiency and security, all thanks to technologies like the Internet-of-things (IoT) and the blockchain.

IoT: Connecting everything

The concept of connected devices started out as connected appliances, connected devices and even connected automobiles. The bigger dream was to have all electronic devices talk to each other, in order to enhance the user experience and build smart homes, offices and cities.

However, perhaps the more impactful effect of IoT would be on how the supply chain is optimized across all touchpoints. With devices and sensors talking to each other across different points of the supply chain, businesses can make better decisions, in terms of logistics, output and costing.

In fact, the smaller decisions can even be made by the devices themselves. According to Lalit Wadwha, vice president of global supply chain operations at Avnet, the main benefit would be real-time modeling and predictive capabilities, decision support and cost optimization.

“Information created, processed and interpreted by distributed smart objects and systems in this intelligent network eliminates visibility gaps, and injects enormous flexibility into the network,” he wrote.

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In practical terms, this can involve the ability to track products (both raw materials and finished goods), in terms of quantity and geo-location throughout the lifecycle – from supplier to customer. The intelligence introduced by IoT in such a system enables the system itself to make decisions that will mitigate risk when, for example, there is inadequate supply, or a supplier cannot provide the goods on time. In such a scenario, a connected supply chain can easily find alternatives, to ensure that one’s own business operations are not hampered by the slowdown.

“In a global supply chain, deployment of IoT technologies can improve customer service, revenue growth, profitability, working capital deployment, asset utilization, time to market, waste reduction, sustainability, equipment/product uptime, security, agility and risk mitigation,” Wadwha adds.

Writing for Business Insider, Andrew Meola cited Cisco estimates that IoT technologies such as asset tracking had an impact of more than US$1.9 trillion in the supply chain and logistics sector in 2015 alone. Seventy percent of retail and manufacturing firms have already implemented some form of IoT technology in their operations. Expenditure on connected logistics solutions is expected to grow by around 180 percent from 2016 to 2020, from US$7 billion to US$20 billion.

Smart contracts for smoother transactions

Perhaps a less obvious technology that can highly impact the supply chain and logistics sector is blockchain technology. This is the same technology that underpins cryptocurrencies like Bitcoin. But it is not only limited to financial transactions. The main essence of the blockchain is that it acts as a distributed ledger wherein entries are both secure and semi-anonymous (to the extent that transactions are transparent, but the identities are now).

IBM is one such established enterprise player that is currently focusing on providing blockchain tech to supply chain clients. According to Chris O’Connor, writing for the IBM Internet-of-Things blog, establishing contracts through the blockchain provides three benefits:

1. Builds and improves trust: This stems from the ability of parties (whether people or smart devices) to cooperate and work together. “While Person A may not know device B and may not trust it implicitly, the indelible record of transactions and data from devices stored on the blockchain provide proof and command the necessary trust for businesses and people to cooperate.”
   Reduces cost: The blockchain removes the middleman from transactions and agreements, thereby also reducing the cost and transactional friction.
   Accelerates transactions: The same with the earlier point, smart contracts make it faster to accomplish legal and contractual commitments.

“This technology has the potential to vastly reduce the cost and complexity of operating businesses. The distributed ledger makes it easier to create cost-efficient business networks where virtually anything of value can be tracked and traded, without requiring a central point of control.”

In the Asia Pacific region, blockchain tech is already being explored by banks and fintech-focused startups. The idea is to reduce transactional friction in payments and transactions like legal agreements (such as realty and rental contracts).

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Conventus, a law firm focusing on contract law and agreements, cites the main advantage of blockchain as a sort of “trustless trust”. It argues: “Many human relationships are based on peer-to-peer trust, such as trusting a family member to feed your pet while you’re gone.”

However, citing a study by internet scholar Kevin Werbach: “Blockchain introduces a third kind of trust architecture, ‘trustless trust,’ which is a system in which ‘it is possible to trust the outputs of a system without trusting any actor within it’.”

In the end, it’s all about enhancing efficiency and security. Writing for Security Intelligence, Preeti Sahu cites the main benefits for the logistics industry. “Next-generation blockchain-based trade platforms can help drive down the cost of logistics and improve efficiency by bringing together banks, insurers, logistics players, shipping lines, freight forwarders, customs authorities and warehouse providers. This could help increase SMB adoption. Furthermore, India could benefit from the savings, contributing to national growth.”

The takeaway

Transactional friction is particularly problematic in industries that involve moving goods from one place to another, and wherein businesses rely on the strength of financial and other agreements in order to push forward with their own goals and strategies. Through IoT and the blockchain, agents – whether humans, corporations or even devices – can make better decisions, as well as faster and more secure transactions. Time will tell if such innovations can, indeed, make moving things around faster, cheaper and more value-driven.

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