For simplicity's sake, let's think of a railroad and train. The train runs on the curved railroads going through meandrous paths and stops at multiple stations. Along the way, it carries passengers, goods etc. from one place to another. Supply chain from the perspective of business can similarly be portrayed as a train carrying things of value, both tangible and intrinsic, to specific locations, maintaining predesignated course and prescheduled time. Any disruption either in path of travel or timing has severe impact on the value of the output.
Supply chain allows a business to move products from the source to the final point of consumption. Leading firms around the world, from large retailers to high-tech electronics manufacturers, have learned to use their supply chain as a strategic weapon. Supply chain is defined by the suppliers, plants, warehouses, and flows of products from each product's origin to the final customer. The number and locations of these facilities is a critical factor in the success of any supply chain. In fact, some experts suggest that 80 percent of the costs of the supply chain are locked within the location of the facilities and the determination of optimal flows of product between them.
In its simplest form, a supply chain is composed of manufacturers, suppliers and customers of the company. This is the basic group of participants that creates a simple supply chain. Extended supply chains contain three additional types of participants. First, there is the supplier's supplier or the ultimate supplier at the beginning of an extended supply chain. Then there is the customer's customer or ultimate customer at the end of an extended supply chain. Finally, there is a whole category of companies/individuals who are service providers to other companies in the supply chain. In any given supply chain, there is some combination of companies/individuals who perform different functions. There are producers, distributors or wholesalers, retailers, and individuals who are the final consumers of a product.
Every stop within the supply chain railroad creates value, thus, it is called value chain; and all the related stations are called value chain network. In every step of the network the starting participant and tier-3, tier-2 participants are often Micro and Small Enterprises (MSEs). As per planning ministry of Bangladesh, the total number of SMEs in Bangladesh is estimated to be 7.9 million establishments. Of them, 93.6 percent are small, and 6.4 percent are medium. The 2003 Private Sector Survey estimated that there are about 6 million micro, small and medium enterprises, with fewer than 100 employees. These Micro, Medium and Small Enterprises (MSMEs) build the backbone of the supply chain network of Bangladesh.
MSMEs suffer from common constraints such as lack of capital, difficulties in procuring raw materials, lack of access to relevant business information, low technological capabilities, problems caused by cumbersome and costly bureaucratic procedures, and policies and regulations that generate market distortions. However, the most challenging factor considering Bangladesh context is access to finance.
MSMEs often complain that the lack of finance stops them from growing and fully exploiting profitable investment opportunities. This gap between the finance available to MSMEs and the finance that they could productively use is often known as the 'funding or financing gap'. The MSME sector tends to suffer because MSMEs are viewed as a less attractive investment opportunity than many others due to the high levels of uncertainty and risk they are perceived to have. This perception of risk is due to several reasons including:
- MSMEs often have limited transaction record
- Non-existent or very limited internal controls
- Few external controls, for instance, they are unlikely to be abiding by the rules of any stock exchange, and have one dominant owner-manager whose decisions may face little questioning
- Few or no tangible assets to offer as collateral
Digitization of the supply chain network can solve the issues at hand for both MSMEs and corporates/manufacturers. Technological transformation is key to competitive edges in 21st century, and for business organizations to achieve growth and sustainability, cost efficiency in supply chain is a must. It is assumed that a third of all manufacturing supply chains will be using analytics-driven cognitive capabilities by the end of 2020, thus increasing cost efficiency by 10 percent and service performance by 5.0 percent. According to a prediction by International Data Corporation (IDC), one-third of manufacturers and retailers will be tracking goods by using blockchain by 2021.
Blockchain is a key component of the industrial revolution 4.0 that records transactions across several computers linked in a peer-to-peer network without central control. It is a public ledger that can allow multiple parties to share data without changes. It removes the requirements for intermediaries who previously acted as trusted third parties to verify, record and coordinate transactions. Transactions in supply chains are likely to have more visibility thus driving transparency and leading to increased trust among parties. This will ultimately ensure efficient use of unutilized resources and sustainability.
According to IBM, approx. 10 percent of supply chain data is effectively used by companies. Therefore, businesses face delays and risks, leading to increased costs. The World Economic Forum said that by reducing supply chain barriers to trade, global gross domestic product (GDP) can increase by nearly 5.0 percent and global trade by 15 percent
The two areas where blockchain can contribute to supply chain and logistics are:
- Driving efficiency
- Enabling new business models
It can reduce multi-level approval processes and paperwork can be replaced by automated approval process. Blockchain can be used to monitor end-to-end product visibility and ownership transfer from origin to final receiver, even in between, when it changes hand among several manufacturers, logistics service providers, wholesalers, retailers, and consumers. Facilitating direct and automatic transaction will strengthen relationship between stakeholders. Payment, identification, certification, proofing etc. will be drastically improved, ensuring data transparency, security, efficient asset management and utilizing smart contracts-key features of blockchain.
Blockchain enables peer-to-peer interactions which can be trusted based on the digital signatures that endorse transparency where participants share the same documents as opposed to individual copies. Any change has to be made through mutual agreement. To change a single transaction record would require the alteration of all subsequent records and the collusion of the entire network. Thus, data on a blockchain is more accurate, consistent, and transparent than when it is pushed through paper-based processes. Every approved transaction is encrypted and linked with the previous transaction. That information is stored across a network of computers instead of a single server, making it difficult for hackers to access the system.
Also, historical transaction data can help to verify the validity of assets and prevent fraud. One desirable feature of the technology is the low transaction cost to deliver anywhere around the planet. Through blockchain, clearing and settlement can happen quickly. Requirement of third-party guarantors can be eliminated as everyone will have permission to access the single, immutable record. Also, the owner will have complete control of the assets since there is no third party that holds the value or can limit the access to it. Additionally, anonymity of transactions will help eliminate identity theft. All these features will eventually help financiers to analyze credit history, transaction history, business viability and historical performance of the businesses including MSMEs. These data may then be used to extend credit as a lot of risk factors are eliminated through blockchain.
A graphical representation of the same may be portrayed as follows:
Even though the technology is still immature, untested, and the best practices remain limited, it is clear that blockchain will have one of the most profound impacts on the logistics industry, especially on supply chain. Moreover, Blockchain may be best used through sharing economy, meaning the technology should promote the creation of a marketplace where different parties in the supply chain network can gain visibility in unused logistics assets, which can be utilized by other players. Standardized version of blockchain may be used in this regard for superior impact.
The essence of fourth industrial revolution has also struck Bangladesh and the leader in supply chain financing; IPDC Finance Limited (IPDC) has already implemented the first ever digital supply chain finance platform in South East Asia based on block chain technology. The platform entails manufacturers/corporate houses its suppliers and distributors in one single platform via blockchain network to promote financial inclusion. The platform named ORJON also envisions of a standardized marketplace by onboarding other market players thus taking Bangladesh to a greater height.
M Solaiman Sarwar, is the assistant general manager (AGM) and Head of Strategic Initiatives of IPDC Finance Ltd.