The integration of IoT and blockchain in the supply chain industry holds great potential for companies looking to reduce their dependence on intermediaries, eliminate reimbursement delays, and streamline batching and routing processes. By utilizing the combination of these technologies in the supply chain network, a large-scale manufacturer could potentially save millions of dollars each year, as demonstrated by a limited analysis of supply chain logistics and storage.
Challenges in a Traditional Supply Chain
In this report, we will focus on the challenges faced in the logistics and storage stage of the traditional supply chain, recognizing that the integration of blockchain and IoT can bring incremental value to other elements of the supply chain as well. The traditional supply chain involves a complex network of planning, procurement, production, logistics and storage, sales, and after-sales service and returns.
As we concentrate on the logistics and storage phase, it is important to note that the integration of blockchain and IoT in the overall supply chain has the potential to drive substantial savings. This is due to the inherent challenges faced in a supply chain ecosystem, such as the plurality of interests and asymmetry of information. Despite interdependence among companies, each business within the supply chain operates with the objective of maximizing its own profitability, which often results in a lack of transparency and classic principal-agent challenges.
Six key challenges are typically encountered in the logistics and storage phase of supply chain management, including:
1. Inefficient Inventory Management: Visibility gaps in shipment locations and status result in inefficiencies in routing and inventory management, leading to higher costs, shortages, and dissatisfied customers.
2. Costly and Time-Consuming Letter-of-Credit Process: Letters of credit, which are necessary to establish trust between buyer and supplier, are subject to bank fees and consume time, resulting in additional costs.
3. Delayed Reimbursement for Damaged Goods: The inability to track damaged goods in real-time leads to the tying up of working capital for long periods.
4. Dependence on Brokers: Customs brokers are needed to prove the authenticity of documents and mitigate risk, but they also add friction and extra costs to the shipping process.
5. The Extra Costs of Fraud and Pilferage: Thefts raise supply chain costs, and an inability to assign accountability for pilferage can result in significant dispute resolution costs.
6. Inefficient Batching and Routing of Goods: Companies are unable to efficiently batch and route products, resulting in suboptimal container utilization and higher shipping costs.
Leveraging the Benefits of Blockchain and IoT
The lack of visibility in the supply chain, resulting in challenges such as inefficient inventory management, can be addressed through the integration of IoT. IoT provides real-time traceability, enabling companies to always know the exact location of a product.
However, central databases with device data that are inaccessible to other stakeholders and not trusted by them have limited ability to ease supply chain challenges and drive economic efficiencies. This is where blockchain comes in, adding a shared, distributed ledger to the equation. The arrival and departure of a product at a warehouse can be recorded in a verifiable event log, accessible to all supply chain participants.
Blockchain’s shared version of truth promotes trust and automates key processes. Vested parties can accurately and securely track critical information, such as the location and quality of goods. This pooling of immutable sensor data among relevant stakeholders will ultimately lead to the elimination of intermediaries and a reduction in costs as manual checks and outside validation become obsolete.
The integration of blockchain and IoT technologies holds significant promise for supply chain management. By enabling real-time visibility into the status of products and shipments and fostering efficient inventory management, the combination of these two technologies has the potential to drive significant cost savings and operational efficiencies across the supply chain.
In this article, we will explore the key benefits of blockchain and IoT in supply chain management and examine the economic impact of such a solution through a hypothetical case study.
I. Benefits of Blockchain and IoT in Supply Chain Management
1. Lower Inventory Holding Costs
By providing real-time traceability through IoT devices and verified by all stakeholders through blockchain, companies can reduce their inventory holdings, improve inventory management, and lower holding costs.
2. Reduced Letter-of-Credit Fees
Smart contracts and automated contract execution and payment can reduce, and potentially eliminate, the need for intermediaries such as banks, reducing letter-of-credit fees.
3. Less Working Capital Tied Up in Damaged Goods
Through the use of IoT sensors and time-stamped ownership data recorded in blockchain, disputes can be resolved faster and the amount of capital committed to damaged goods can be reduced.
4. Shrinking Brokers‘ Fees
Blockchain-enabled digital traceability and documentation can minimize dependence on brokers for customs clearance and potentially eliminate such fees.
5. Reduced Pilferage and Fraud
Through real-time reporting of fraud and prompt detection of route deviation and product tampering, pilferage and fraud can be minimized, and potentially eliminated.
6. Lower Container Costs
Improved container utilization through analysis of utilization patterns can reduce container costs.
II. Potential Economic Impact
To assess the potential impact of a solution combining blockchain and IoT in supply chain management, we created a hypothetical scenario of a $1 billion electronics company with operations in China and distribution centers in the US. Our analysis found that it was possible to achieve net savings equal to 0.6% of revenues ($6 million in annual savings for our hypothetical company) through improved logistics and storage efficiency. The greatest benefits were realized through reduced fees for letters of credit and improved inventory management.
III. Factors Affecting Total Cost Savings
The total cost savings from a solution combining blockchain and IoT will vary based on several factors, including product features, supply chain characteristics, and disintermediation possibilities. Companies with complex supply chains and numerous intermediaries are the most likely to see significant benefits.
In conclusion, the integration of blockchain and IoT technologies holds significant promise for supply chain management, offering the potential for reduced costs and improved operational efficiencies. However, it is important to note that the economic impact will vary based on several factors and that there are costs associated with implementing such a solution. As such, companies should carefully assess the potential benefits and costs before investing in this technology.