Supply Chain Tokens for Collaboration

Collaboration is a key business enabler and parties decide to collaborate if:

• There is a business objective that cannot be achieved individually.
• There is value for all parties in reaching the objective.
• Parties acknowledge that the resulting value must be shared.

Each party is driven by economical behavior and spends the least to achieve the maximum return. In a world where all parties trust each other they would know that each one gets a fair return for the committed effort.

In the real (i.e., trustless) world, motivation to collaborate is driven by self-interest. Lack of trust between parties generates conflicts of personal interest, and since no business partner can expect a fair return without conflicts, everyone will try to maximize its own “what’s in it for me?” at the expense of the counterpart.

To make an example, food traceability gives the end consumer full information of the product. Today’s aware consumer expects to receive full information of the purchased goods, and traceability gives full information of what the product contains (e.g., raw materials, additives), how the product was processed, and how the product was stored and moved to reach the final store shelf.

While, collectively, all partners of the supply chain agree that the traceability service is an important asset for their relationship with the client, yet—when taken individually—nobody wants to be the first to make the necessary changes and investments (e.g., install tracking devices on trucks and temperature control sensors in containers) that adapt their own processes to the required setup to ensure full traceability of the goods. Questions like: “why should I do it?”; “Will this help me sell more?”; “Will customers pay more for the service?” are not unusual. To summarize, the key question is about the return on investment for tracking goods. The (still) missing answer turns collaboration into a series of compromises and a bare minimum just to “make things work”.

The goods tracking example—just one of the numerous— tells us that it is, apparently, impossible to fulfill everyone’s personal interest.

Apparently. A set of innovative software tools may, instead, change things.

Before diving into the details, let’s imagine this business scenario: Supply chain partners provide traceability information of a product, and every time that product is sold they get compensated. A logistics provider, hence, would get paid not only for the service of moving and storing goods, but also for the information given on how, when, and where the goods were moved and stored.

This could turn down the barriers that block collaboration, because now everyone gets proper compensation for some activity they would otherwise not have performed because there was no commercial value in it, at least from their own personal perspective. But if the client attributes value to that information, and if the provision of that information can be monetized, then both the client and the provider of the information get value. Once the information provider gets compensated for that information, then he will do his best to provide it. Any kind of information, of course, from the origin of the product to the processes and flows that make it available for use to the client (either the end-consumer or a supply chain partner).

Let’s see now how technology enables such promising and compelling business proposition.

Blockchain, information, and tokens

The product being traced is an asset, so are the associated documents (e.g., certificate of origin; certificate of quality; packing bill; shipping note; customs clearance). These documents contain data related to the processes that impact and add value to the product. They could be considered parts of the product’s bill of materials (i.e., the list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture a product[1]). For instance, the information contained in a product certificate attests the value of the good in terms of its quality. Without that document the item cannot be sold. The data in a bill of lading (and, similarly, a shipping note) becomes an integral component of the product: if missing, in fact, the logistics process cannot progress, and the goods remain stuck in the supply chain. Furthermore, a bill of lading is a necessary prerequisite to access financial instruments (e.g., letters of credit) that facilitate the trade of the good. The information contained in a purchase order—another document attached to a product—triggers the entire production and delivery processes, alongside attributing a monetary value to the goods being traded. Finally—but only not to exceed with the number of examples— the data and information in customs clearance papers represent another important “product component” that permits the goods to flow from origin to destination.

Just as the products are assets traded between supply chain business partners, so is the data contained in the accompanying documents. Each asset (either product or information) has its own intrinsic value, indispensable to make the entire system work and flow. From the data contained in the documents the client extracts information that becomes another valuable asset. The information is therefore monetizable, and the supply of that information—just like that of the components of a product—deserves fair compensation.

With the appearance of digital tokens, innovative software technology transforms the data and information of activities and tasks performed to buy, make, store, ship, and deliver a product into assets that can be digitally shared in a collaborative environment. When exchanged on blockchain, digital tokens become a monetizable asset.

From a practical perspective, every time a product is sold, the information that goes with the product is sold as well. That information (i.e., asset) is tracked as a digital token, and through that token all parties in the supply chain that added valuable information to the product can claim ownership of a portion of that asset. Since the token can now be monetized, every information provider gets a share of the value. Each share can be “cashed” in various forms: paybacks; discounts; loyalty points; bonuses to purchase other goods. To the extreme of “credit worthiness” points that improve the company credit risk profile by virtue of which access to financial resources becomes cheaper and more affordable.

To summarize, the item carries the information and the token carries the share of value to all those who sourced that information. So, all participant nodes of the supply network are now motivated to provide information on the product and related processes because they will get compensated when the product is sold. The, presumably sterile, activity to give information on the product turns now to be a potential revenue generator.

Blockchain-based smart contracts represent the technical solution to contractually motivate and fairly compensate supply chain participants, provided that the shared information is real and trustworthy. Feedbacks (e.g., “likes”, comments) must be treated with control mechanisms normally used in anti-spam control algorithms. They must avoid proliferation of “likes” for the sole purpose of getting cash-backs. For this, software applications and protocols are already in place (e.g., steem.it), so technology is not a barrier to adoption.

Tokens and the attention economy

The use of digital tokens as “carriers” of information that adds value to the product may potentially lead to a further step of adoption that takes full advantage of the viral effect made possible by social networks and well measured by Metcalfe's law: the effect (hence, the value) of a network is proportional to the square of the number of connected users of the system. A single node is useless, but the value of every node increases with the total number of nodes in the network, because the total number of people with whom each user may exchange data and transactions increases. We can call this the “ripple-effect” of digital tokens in the blockchain.

Transposing this concept to the supply chain, the more nodes add (pertinent) information to the product, the more value is created. The problem may reside in the difficulty to onboard all nodes. This is where the token, again, plays a vital role: the product itself represents the “onboarding mechanism”. A simple QR code stamped on the product is the trigger to get the downstream node (i.e. the “client” in the client-supplier duo) to join the network by simply scanning the QR code and provide the expected product (or process) data through this newly opened virtual “channel”. The smart contract “knows” that that precise node has scanned the QR code, so all information subsequently added to the blockchain about the product and related processes is monetized via the token and the incumbent participant node immediately enjoys the benefit of the ripple-effect.

Aite Group anticipates that the business of digital assets will be totally revolutionized as soon as the information and sentiment-related data on these assets held by companies, supply chain partners, financial institutions, private and public investors will be attached to the related tokens. The principles of the “Attention Economy” will enrich traded tokens with valuable information that will help better price the underlying assets. According to the Attention Economy theory, individuals hold a scarce—and therefore valuable—resource: time. Companies that are able to direct that time (i.e., attention) to their activities will win. Consumers will then “sell” their time/ attention.

The theory principles hold also if the role of the “consumer” is replaced by a node in the supply chain: every “attention” paid to the flow of goods and information (e.g., by providing pertinent data) is monetized and returned as compensation.

Smart sensors, sustainability, and supply chain finance

An example counts more than a thousand words. Let’s depict a business scenario in which a company follows a strategy for sustainability (i.e., environmental social, financial). The company is responsible—to the eyes of the client—for the compliance to sustainability of the entire upstream supply chain and puts its brand at risk every time one of the nodes (either a direct supplier, or worst, the supplier’s suppliers) breaks the chain of confidence and trust.

The objective of the company hence is to ensure that its supplier network provides products and processes compliant with sustainability protocols that allow the company to transfer (i.e., “sell”) this trust to its clients. There is abundance of technology tools to monitor, record, control, and—eventually correct—any disconnections in the chain: Digital sensors that automatically detect environmental conditions (e.g., temperature; humidity), process events (e.g., shocks; machine and tools used for production), movement of goods (e.g., geo-location), product quality (e.g., chemical composition analyzers). Product identification devices (e.g., bi-dimensional barcodes; QR codes; RFIDs; NFCs). Tracking devices (e.g., scanners; RFID and NFC readers; drones).

The problem that this company faces is not lack of technology, but the lack of collaboration between supply chain nodes. All the technical devices must be maintained, operated, and utilized by the nodes in the chan. If a temperature sensor in a container breaks, the logistic partner (i.e., “node”) must be responsible to fix it. If a geo-location device is used to map the location in which a particular plantation is grown, the local farmer must input the day and time when it started to harvest. The device becomes useless if it is not fully functional and operated at the needed time. But what is in it for the logistics service provider or for the farmer to be responsible for such activities?

Of course, the company could make the activities mandatory and penalize who breaks the rules. Besides not being a smart way to demonstrate the company’s willingness to live up to principles of sustainability, this is an expensive policing exercise that brings very little advantage since it’s applicable only after the damage is done with the company’s brand already compromised.

If—instead—the suppliers along the chain are empowered with the promise that for every “good” product that will be sold they will be compensated (via tokens) for the product and process data they have provided via the devices installed, then it is in the best interest of every supplier to keep the systems fully operational and feed them with data when required. Furthermore, the company at the end of the chain may use the data collected to extract nonfinancial data and build alternative supplier credit risk evaluation criteria. This risk profile will be shared with far-sighted banks that Aite Group anticipates[2] will start assessing corporate credit risk using statistical data related to a company’s end-to-end supply chain performance—which could encompass on-time deliveries, quality, compliance, correct shipping documentation, lack of disputes, and on-time payments. This will allow banks to decide what degree of risk they want to take, price it accordingly, and lend money to “risky” companies that would- otherwise- be left out of the supply chain finance circuit.

Real use case examples show how some companies are using sustainability protocol criteria to drive better social and environmental standards amongst their suppliers[3]. Levi Strauss has developed a scheme which rewards suppliers in developing markets boasting good environmental, labor and safety standards. The more suppliers improve on the variables set out in the company’s terms of engagement, they receive progressively lower interest rates – and fees – on working capital loans via a supply chain finance platform. In a similar program, sports company PUMA offers sliding rate for invoice discounts based not only on PUMA’s credit standing, but also on the supplier’s adherence to the company’s social and environment standards. Suppliers who score higher in the auditing process are rewarded with better rates.

The devil of course is in the process rather than the incentive. Both companies have dedicated compliance teams to visit and monitor suppliers around the world through regular audits. How effective initiatives like this are in practice may in the end come down to companies’ ability to monitor their increasingly complex global supply chains.

Smart sensors, tokens, and blockchain represent the possible answer and close the loop.

The bottom-line

The monetization of product and process information gives suppliers the confidence they will get paid in exchange of the information provided.

Applications that convert digital assets into digital tokens to then trade them on the blockchain represent a very tangible result of how blockchain is shifting gears in both the physical and financial supply chains.

[1] Wikipedia, accessed 3 September 2018.

[2] Aite Group Impact Brief “The Supply Chain Bank”, August 2018.

[3] Supplier finance meets CSR, Treasury Today.