The intersection of Blockchain and Internet Of Things (IOT) Sensors sounds like a random buzzword generator designed to get investors to hit the invest now button. However in the world of Supply Chain, we need Embedded devices that track the product all the way through the Supply Chain (aka Internet Of Things). However it is the combination of Blockchain and Internet Of Things (IOT) that is so powerful. To date, Internet Of Things applications within Supply Chain have mostly stayed at the Enterprise level; consumers still have to trust an enterprise brand. By adding an immutable, censorship resistant distributed ledger, consumers have the option to “trust but verify”. We are no longer reliant only on brands. As consumers, we can dig into the production and supply chain process if we are motivated to do so.
This is Part Two (Chapter 7) of the Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index/table of contents please click here.
Change happens when 3 things come together at the same time:
- 1. An unmet consumer need.
- 2. An enterprise need from producer companies that motivate them to get in early on a new technology.
- 3. Technology that enables those needs to be met.
TL:DR. All three conditions are true for the Blockchain use cases in Supply Chain.
This chapter/post focusses on:
- The intersection of Blockchain and Internet Of Things for Supply Chain.
- Unmet user/customer needs that can be met by Blockchain based technology in the Supply Chain.
- Enterprise use cases for producer companies that motivate them to adopt the new technology and how this will create an ecosystem for innovation by others.
- What product sectors are most likely to be impacted in the near term. Reasoning from first principles.
The intersection of Blockchain and Internet Of Things (IOT) for Supply Chain
The biggest enterprise vendor on the planet, IBM, saw this intersection early on and acted on it. Daily Fintech reported on the IBM Adept project to bring together Ethereum and Internet Of Things when it first appeared in September 2014. Since their near death experience in the early 1990s, when hit by the PC wave of destruction, IBM has been very good at getting in early on new technologies and figuring out how to apply them to board level priorities in Global 2000 companies; the Adept project is one example of this ability.
Unmet consumer needs that can be met by Blockchain based technology in the Supply Chain.
Consumers want answers to three questions:
- Is this product a fake or is what it says on the label true? Most of us don’t have the time or motivation to dig into the production and supply chain process. We rely on brands for quick decisions. For that quick decision, all we want to know is if the product really is from the company owning the brand.
- Is this a quality product? Brand is a quick way to make this decision. However for unbranded products, at much lower price points, there need to be other ways of doing a quick assessment.
- Is this an ethically good product? This may only matter to a small % of people, but many of those people are wealthy and influential, so keeping them happy matters. One independent brand that covers this space is Fair Trade.
I will illustrate this using Tea as the example (because I happen to love tea):
- Is this really Brand X? I have my trusted tea brands. One that I will use as an example is Twining. I trust them to sell me a good tea that is what it says. I also trust most grocery chains to not slap a false label on a product. So, to carry on with an example, I am confident that if Coop (a grocery chain I use a lot) says it is Twining, then it is Twining.
- Is this really Darjeeling tea? That is another example; I happen to love Darjeeling tea. This answers the quality product question as much, if not more, than the brand. Darjeeling, like Champagne, is a location specific brand. You cannot sell Darjeeling tea that is grown in Assam (although you may actually prefer Assam tea). Again I will trust most major brands to not slap a Darjeeling label on tea grown elsewhere. For example, if Twining says it is Darjeeling I accept that. If Coop sells a store brand Darjeeling I trust that.
- Were chemicals used by the plantation owner? The Bio label tells me this and it justifies a premium price.
- Were the pickers well paid and decently treated? The Fair Trade label tells me this and it justifies a premium price.
What is happening is that in each case, a brand label helps make a quick decision as we go about our busy lives. Brand = Trust. The promise of Blockchain + IOT for users/consumers is trust but verify. This will change consumer relationship with brands and how brands are built.
The biggest objection to this consumer use case is “most people don’t care enough to dig into the data to verify that something is correct”. That is totally true. However, thanks to social media all it takes is one user who takes the time and trouble to find the facts that can destroy a brand’s reputation in a heartbeat. That means that all brands that want to be trusted will have to expose all the data in their whole supply chain – from picking the tea leaf to loading onto a grocery shelf.
Where this gets more complex is when we shop online – where as the old saying goes “nobody knows that you are dog”. You can replace Coop with Amazon and maybe have the same level of trust, but a world where we buy everything from Amazon is sad (unless your name is Jeff Bezos). For independent e-commerce to thrive we need transparent supply chains.
This is what will transform the supply chain all the way to the consumer. One way to be totally confident of the product is to either see where it comes from or buy it directly from somebody who owns that production. If I walk the Darjeeling plantation I get the confidence that the tea being sold in their farm shop is good; but that is an awfully long trip to buy some tea! One more level of indirection is to buy from somebody who I trust who vouches that it is what it says it is; I buy olive oil this way.
Enterprise use cases for producer companies
Enterprises control supply chains and branding. That is why we trust brands. The last thing they want is a truly open, transparent supply chain; that would destroy their margins through brand commoditization.
Enterprise fear of brand commoditization means that they will never deploy this technology? Case closed, Eeyore wins the argument and Tigger slinks off looking sheepish? Maybe not and here is why. Enterprises have many reasons to deploy Blockchain + IOT in their supply chains (and many tech vendors happy to help them do that) that have nothing to do with the consumer.
For example, enterprises want to use Blockchain + IOT to reduce costs in three areas:
- Insurance: If you can prove where your product is at all times when it is under your ownership, you can reduce the cost of Insurance.
- Hedging: Blockchain + IOT makes it easier to buy/sell commodities when they are in the supply chain.
- Supply Chain Finance: Blockchain + IOT makes it easier for lenders to bid on financing in the supply chain.
There are real world projects in each of the areas.
Once enterprises deploy Blockchain + IOT for these use cases, it is a short step to open up the platform to partners that will use the platform to reach consumers.
That is why the enterprise applications for Blockchain + IOT will come first and then enable the much bigger consumer applications.
What product sectors are most likely to be impacted in the near term
The Elon Musk approach of reasoning from first principles is best when looking at market innovation. This leads to 3 product sectors that are most likely to be impacted in the near term”
- High priced commodities designed for consumers. A classic example is jewellery. You can price the underlying commodities (gold, diamonds etc) quite easily by weight. The final product to adorn our bodies has a creative design element that is harder to price and which creates the consumer desire. One of the first startups applying Blockchain to one of those commodities (diamonds) is Everledger, which got a lot of attention when they emerged in 2016 and they recently (March 2018) closed a $10.4m Series A which indicates some traction. Now the big diamond producers have joined in with TrustChain. The issues are similar to a premium food use case (including ethical issues related to how diamonds are mined). A much more complex and less artisanal version of this would be in electronics and cars (ie many components in a branded end user product).
- Commodities in the B2B supply chain. This is where IBM and other enterprise vendors are active for applications referenced above. These will happen before the consumer applications, because persuading one B2B enterprise is easier than persuading millions of consumers.
- Food and beverages. I chose this as the use case example, because I believe it will have the biggest impact because quality at the right price is the key driver of a healthy productive life. Wealthy people can afford high quality food. Poor people who live on farm land can also eat well. When we get something that brings nutritious. tasty food to urban workers it may look like the amazing supply chain innovation known as the Dabbawalla food delivery network in India.
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).