A new report from the University of Tennessee at Knoxville has thrown up a caution flag for supply chain management executives thinking about taking the plunge into blockchain.
The report, published on Wednesday by the Haslam School of Business’ Global Supply Chain Institute, concludes that blockchain initiatives are not for every company, and that implementation efforts can be a major waste of time, money and manpower unless the needs justify the commitment.
The tremendous hype around blockchain leaves it vulnerable to becoming the “next fad doomed to under-deliver” due to management’s lack of understanding and a “lackluster commitment” to effectively implement the process, the authors wrote. According to a November 2019 forecast by research firm IDC, business spending on blockchain was expected to grow to $14.4 billion by 2023 from $4.3 billion in 2020.
Blockchain is a shared ledger used to process, record, and track transactions involving tangible and intangible assets. A transaction is recorded in a digital ledger as a “block” of data, with an address called a “hash” created for each block. Each new block of information is validated by network participants and then connected to the block before it. As more blocks are added, the chain becomes stronger.
Because each block is connected to the one before and after it, it is impossible to remove a block without detection. Multiple participants in a supply chain will have the same information about transactions from start to finish, or as blockchain proponents call it, a “single source of truth.”
Blockchain is suited for supply chains composed of a large number of stakeholders that are relatively unfamiliar with each other, according to the report. By contrast, blockchain is unlikely to add value to companies with relatively tight-knit networks because those firms already benefit from the trusted partnerships and processes that blockchain is designed to foster, the report, titled, “When Is(n’t) Blockchain Right?”, said. Blockchain is massive overkill for the latter group, it said.
In addition, blockchain should be considered only when a company’s current technology does not support a rapid deployment of assets, the elimination of non-value added or repetitive tasks, and the ingestion of immense amounts of data, the researchers said.
No silver bullet
The litmus test for implementing blockchain–does a clear business case exist to warrant the investment–should sound familiar to most executives weighing important IT expenditures, according to the report.
“Without a thorough understanding of what matters most to a company and how blockchain can solve those pain points or enable areas of opportunity, it would not be possible to calculate an ROI (that’s) germane to the company,” the paper said. Blockchain is also not a substitute for digitization or other technologies that are able to deliver quick solutions at lower cost and with less risk, the report said.
Even if companies utilizing blockchain have big long-term goals such as transforming the existing infrastructure or identifying new opportunities, it behooves them to “start small,” the report said.
Alan Amling, a retired executive at UPS Inc. (NYSE: UPS), and the report’s lead author, said the 18-month effort, which included interviews with top U.S.-based companies, was aimed at educating non-IT business leaders on blockchain’s pros and cons. A key objective, Amling said in an interview prior to the report’s publication, was to frame the report’s findings in the form of business use cases that executives that don’t work in IT could relate to.
The team included the late Mary Holcomb, a 28-year professor at the school and a titan of supply chain academia who passed away Feb. 21.
The authors emphasized Blockchain’s enormous potential and benefits, especially for those companies whose needs fit the profile. A prototype of a successful implementation would be streamlining freight payments. An individual shipment handled by a third-party carrier includes nearly 200 variables ranging from location data and fuel surcharges to tolls, tariffs, and shipment details. An estimated 70 percent of freight contracts are subject to dispute, according to the report. The status quo effectively holds hostage about $140 billion in payments, and pushes administrative expenses to a “staggering” 20% of overall transportation costs.
Another discipline where blockchain can pay immense benefits is in traceability, a major pain point for the global food supply chain. The report cited comments from retail giant Walmart Inc. (NYSE:WMT) that research into the source of contaminated foods, which would typically take seven days, can be completed in 2.2 seconds using the blockchain process.
The report predicts that it will take about a decade for blockchain to achieve mainstream status. Blockchain is today where cloud computing and streaming audio and video were around 2010, the authors said.
The Walmart example underscores the importance of first understanding the problem and then leveraging blockchain as a solution, the authors wrote. “An evaluation of the activities that expose a company to loss and damage, along with the potential for reduction if a blockchain solution is implemented, can be used to calculate the preventable cost,” the report said.