Is blockchain the next killer app? - KPMG Thailand
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Is blockchain the next killer app?

Is blockchain the next killer app?

Don’t let the hype deter you, this technology has the potential to transform supply chains.

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Revolutions seldom run smoothly – as one US retailer recently discovered to its cost. After mooting a proposal to place sensors in its boots and clothing, the company was surprised by a consumer backlash. The idea was not to snoop on the customer, but to track the performance of the products. Even so, the media dubbed the scheme “creepy” and invasive and the retailer abandoned the plan.

Welcome to the exciting, strange and imperfectly understood world of blockchain. There has been more than a whiff of the dotcom bubble about blockchain lately with the technology being hyped as a panacea.

All this is enough to make businesses wary of all claims for the technology, yet blockchain and distributed ledger technology could truly have profound implications for retailers and brands, not least in its potential uses to transform supply chains.

New business models

How so? By offering the means to tackle the inefficiencies resulting from the information silos that trap data inside discrete parts of individual enterprises. Sharing disparate data on the blockchain enables them to be synthesized inside and beyond the enterprise in ways that create new value.

In this way, blockchain can offer broad new business capabilities, particularly, when combined with technologies such as the Internet of Things and artificial intelligence (AI), says Sam Ganga, Partner, Digital Strategy & Transformation, KPMG in the US. “One of the key elements it brings to the table is improving the visibility of information across enterprises. In this sense it can transcend what we would consider to be the traditional boundaries of the company and so could completely redefine how you conduct business. It potentially requires you to reconsider your workforce model, your operating model and how you are interacting with suppliers. It could open up space for new business models.”

Operating a blockchain that gives instant access to the information in it down to the tiniest details, creates opportunities to drive new efficiencies, create new relationships and compress some of the delays that bedevil existing supply chains.

“It is solving business problems that have been tough to crack before, such as showing the entire chain of custody and provenance to predict freshness and reduce spoilage,” says Ganga. “What would it mean to retailers if they could reduce spoilage by 100 basis points inbound or on the shelf?”

A grocer might be able to tell instantly where a consignment of produce came from, the date it was picked and whether it had the right refrigeration from farm to shelf. Such granular detail about factors such as likely spoilage rates can mean appropriate action is taken.

“The blockchain is not just a repository of data, it can be used to drive valuable analysis,” says Ganga. “It can tell you not to take delivery of this particular consignment of fresh produce or take it at a discount and sell it quickly because based on the chain of custody information in the blockchain, it shows it was sitting in the dock beyond its freshness window.”

The implications for reducing the frequency and cost of recalls is obvious. Being able to quickly identify a bad batch of eggs, for example, might in turn enable individual consumers to find out if their purchases were among a bad batch, assuming PoS systems become linked into the blockchain.

As supply chains are currently configured, it can take a week or more to track the food in a supply chain that has been affected by a disease outbreak. In April 2018, over 172 people in 32 US states became ill with E.coli from eating contaminated lettuce. It took several weeks to find where the lettuce was grown. With blockchain, it would theoretically take a couple of minutes. Some trials along these lines are already underway, including a major US food retailer partnering with Nestlé and some other manufacturers to track the origin of fresh produce.

“Because of the nature of blockchain’s distributed shared ledger you can improve the visibility of information in a way you can’t with any other technology. The fact that the data is immutable significantly improves trust in data, particularly among consumers. We are going to compress some of the intra-company and inter-company relationships that have been the slowest part of supply chain processes,” says Ganga.

It is the open, networked nature of blockchain, which enables the linking of many hundreds or thousands of parties in a given supply chain in highly secure ways, that makes its potential value so great. Using conventional shared databases to do this is not only much costlier, but also is more vulnerable to single point failures or cyber attacks, says Jan Reinmueller, Partner and Head of Digital Village at KPMG in Singapore.

“It means you can do away with reconciliation problems as there is one trusted repository of all the relevant information rather than different systems trying to align with one another. You can track where a problem happens to specific routes, logistics companies and times so you can quickly identify the root cause and so improve the overall quality of the supply chain.”

What is currently a static and sequential process of sourcing could even in future be responsive to demand signals and trends from the market, helping suppliers and retailers anticipate seasonal demand.

The operational savings could be vast, says Peter Fedchenkov, the co-founder and CEO of INS, which is building a decentralized grocery shopping ecosystem based on blockchain technology. “It will increase the velocity of the supply chain, decrease the number of errors, lower processing, database and reconciliation costs.”

At the moment every party in a transaction has to reconcile its own databases and devote considerable back office time and expense on this and, in particular, to dealing with errors. Blockchain promises instead a single immutable set of data shared across parties, showing clearly what happened in a transaction and whether a consignment was paid for or not.

Greater supply chain visibility might enable brands and retailers to build trust with consumers about the provenance of products, offering proof that extra virgin olive oil is really unadulterated or that salmon is not caught by slave-labor fishing boats. Multiple trials are showing how this can be done where suppliers are required to provide proofs via photographs and QR codes that are then uploaded via smartphone and embedded in the blockchain ledger.

“If you want to minimize counterfeit products or eliminate other sources of fraud in the supply chain or ensure trust in the ingredients of your products, blockchain can be at the center as a key enabler,” says Ganga.

Creating transparency

There are multiple efforts to demonstrate the real-world utility of blockchain here. De Beers has started tracking diamonds from miner to retailer using blockchain to authenticate gems and ensure they don’t come from conflict zones. The Blockchain Food Safety Alliance, a consortium led by IBM, JD.com, and a large US food retailer, is using IBM’s blockchain platform to bring efficiency and transparency to global food supply chains.

But blockchain’s utility is not universal. Using it to create transparency across every aspect of the supply chain, even when it comes to food, may not be straightforward. Where assets change physical form – for example, to track wheat on its journey from crops in fields, to flour, to bread – it becomes harder to track them digitally.

The challenges are not stopping some from trying. Denver’s Coda Coffee Co. offers blockchain-traced coffee, enabling buyers to see the date and location of every stage of the process from harvest, washing and drying to export, roasting and retail.

Blockchain is very much in the experimentation phase. Barriers to its effective deployment are still numerous, not least of which is the ability to scale. Massive numbers of rapid transactions will have to be processed efficiently on these blockchains, an issue that still bedevils energy-hungry Bitcoin.

Quote: If you want to ensure trust in the ingredients of your products, blockchain can be at the center as a key enabler

Becoming more agile

For retailers and manufacturers, the path dependency of their existing ways of working is a further obstacle. “They will find it hard to move from their existing core systems to something that has not been proven. There have to be a few dozen use cases for these barriers to be broken,” says Fedchenkov. “Test and learn. No one can predict what will work and what won’t so the best strategy is to be open to it and try.”
Some organizations have appointed a blockchain ambassador responsible for directing experiments and ventures inside and beyond the organization, says Fedchenkov. “They become the center of knowledge and connections in the company on blockchain-related projects.

“They are the driving force in educating the organization on the benefits and potential concerns. We’ve seen this in a few FMCG companies such as P&G. It’s the best way to experiment rather than random people from different departments doing things in an uncoordinated manner.”

A further uncertainty every organization must grapple with is the lack of clarity as to what shape blockchain networks will take. Only the largest retailers or brands are likely to have the resources to build and maintain their own blockchains.

It may be that competitors collaborate in key areas to realize efficiencies. A consortium approach will help build the scale required and make signing up new suppliers easier. In some instances blockchains could be mandated and run by regulators; in Abu Dhabi, for example, the financial regulator is building its own ledger.

Organizations could end up participating in a mix of blockchains, says Reinmueller. “Look at what areas you want to collaborate in and which ones your competitive advantage and IP are in. There might be some areas where you will want to share your data for the wider good and others where you want to do it yourself. No one competes on risk. If you have blacklisted suppliers, would you share this with your competitors, say over issues of modern slavery? I think you should. It makes sense for competitors to become collaborators who share data in certain use cases.”

While the shape that blockchain technology will take is not clear, Reinmueller says its value is. “It is an absolute killer app. It will revolutionize everything we have seen so far and change the way we work and interact. By greatly facilitating and speeding up intra-company relationships, in time parts of the supply chain could even be largely automated and able to optimize themselves.”

The blockchain may thus in the near term become the means by which supply chains source, deliver and return goods making them far more responsive, thanks to blockchain and AI, says Ganga. “In five years, we might be looking at a supply network that is purpose built and self-selecting through the use of sophisticated algorithms finely tuned through the use of machine learning.”

That is certainly the expected direction of travel. In KPMG International’s 2018 Global Consumer Executive Top of Mind Survey, 60 percent of companies say that most supply chains will be demand-driven and customer centric by 20201. If blockchain does become central to such transformation, many may lag behind. The survey revealed many companies have yet to commit to blockchain initiatives. Just 3 percent of all companies are using it now, only 12 percent plan to use it within two years and 53 percent claim that they are never likely to use it.

This could prove a costly mistake, Reinmueller says. “It opens up new business models. The technology will go through the curve faster than other technologies have. Once we have nailed scalability, it will take off and every business which has an intermediary will be disrupted.”

Five Key learnings

  1. Reconsider operating models. Blockchain offers an opportunity to change the way you run your supply chain, to achieve efficiencies and savings. 
  2. Link up your supply chain. Blockchain can connect many third-parties in a secure, trusted way, making it easier to track items and interact with suppliers.
  3. Benefit from data analysis. Use the detailed data blockchain provides, such as spoilage rates and location of products, to help drive business decisions.
  4. Improve visibility. Blockchain can help build trust between retailers and customers, offering evidence of provenance, as well as stopping counterfeits.
  5. Collaborate with partners. Form consortiums to build blockchains that are big enough in scale to be effective.

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