For all of the trouble Brexit is causing for businesses both inside and outside the United Kingdom, not to mention poor Theresa May, it also provides a backdrop for industry to ask key questions and to learn lessons from this process that can help improve processes down the road.
One of those questions is how we can improve supply chains to make them less susceptible to disruption. One of the groups asking that question is R3, an enterprise blockchain software firm working with more than 300 members and partners. R3 believes solutions lie in blockchain technology.
Together, R3’s members are developing the open source blockchain Corda, along with a commercial enterprise version called Corda Enterprise. The Corda blockchain is being used in financial services, healthcare, shipping, insurance and other industries to record, manage and execute financial agreements.
In January R3 released Can Blockchain Future-Proof Supply Chains? A Brexit Case Study, a report developed by the R3 Global Trade Strategy Forum, a working group tasked with analyzing the impact of trade uncertainties. One of the authors is Alison Manzer, a partner in the Financial Services Group at law firm Cassels Brock. An expert in multi-jurisdictional transactions, she has been president of the Association of Commercial Finance Attorneys and is one of only a few Canadians elected to the American College of Commercial Finance Lawyers.
Brexit brings a heightened sense of urgency to R3’s work, and illustrates how vulnerable supply chains are to disruption. They cite three major sources of disruption when a country withdraws from a group such as the European Union: which border measures will apply; which regulatory regime prevails, and the variability of border processing capability.
“Regardless of the terms of (the eventual) Brexit, the idea was to look at challenges on supply systems now that they’re becoming a true border,” Ms. Manzer said.
Commerce involves three different types of supply chains: financial, physical, and information, and all of them will be impacted by Brexit, all of them are intertwined. The biggest financial issues revolve around the efficiency of goods delivery, Ms. Manzer explained. If goods are delayed at borders that will impact when payment occurs (fines can even be levied for late deliveries). The effects of delayed (and larger) payments will quickly be felt through a company’s supply chain.
“Trade finance depends on a financial institution’s ability to work with purchase orders, lines of credit and others,” Ms. Manzer said.
Industry-specific supply chains cited in R3’s report include aerospace, automotive and perishables. Airplanes are manufactured in multiple countries, with even parts of them such as wings moving back and forth across borders multiple times. Many participants in automotive supply chains operate on a just-in-time principle, where maybe a half day’s worth of materials are stored on site, Ms. Manzer said. For obvious reasons perishables cannot wait in long border crossing lines.
“Trucks and planes are coming across hourly,” she explained “It’s timed to go through without border delays. The industry literally times it to days and hours.”
This creates a list of issues, beginning with simple logistics. While there are a few large logistics companies in the United Kingdom, 90 percent of the market is controlled by 5,500 smaller firms, 70 percent of which have fewer than five employees. Each company has its own system, and each country has its own requirements. Many smaller firms will likely be poorly prepared for a worst-case scenario, or anything close to it.
They’re going to need to do better, because if Brexit proceeds in any form all participants are going to have to adapt to new border measures, compliance issues, and a lack of border processing capacity.
“This isn’t just a Brexit problem, but one for all cross-border commerce,” Ms. Manzer said.
Blockchain technology, while not originally developed for trade, addresses some of its deepest challenges, beginning with tracing provenance, Ms. Manzer explained. In order to levy the appropriate fees, a country needs to know where a product is coming from and to which countries it has traveled to on its journey. Blockchain-based ledgers provide an indisputable record of that product’s history. Combine that with pre-approvals and border wait times can be drastically reduced, she added. If done properly it addresses the regulatory requirements of multiple regimes from local bodies all the way to international agencies and meet the requirements of multiple agreements.
“By having verifiable chains of ownership, provenance and origin you can reduce the impact (of border wait times),” Ms. Manzer said. “But the impact can be much broader. It can apply to any movement of goods across international borders.”
Blockchain technology can also reduce the overall cost of trade, which is driven higher as the same documents are passed back and forth multiple times. By providing permissioned access to confirmed and verified documents, these fees can be eliminated as consensus needs to be obtained before a smart contract can be enacted. Project Voltron, built on Corda, addresses these issues. Voltron verifies transactions, assists with reconciliation and is used to represent letters of credit.
“The way in which it introduces a more efficient process for maintaining and transferring documents is particularly applicable for customs documentation which also requires back up documents that track goods through the supply chain,” the report states.
Blockchain technology can improve access to deep tier financing, which is financing for companies in the lower levels of the supply chain. One initiative is Project Marco Polo, which is built on Corda. It provides transparency into the production chain so it is easier to identify who contributes at each stage. Should there be local suppliers able to provide components for a project, this could also reduce cross-border shipping costs. In fact, any company willing to add its transaction history onto the blockchain can improve its access to financing by simplifying a bank’s due diligence process.
While early blockchains were public ones imbued with the technology’s founding libertarian spirit, any business and supply chain blockchains must be permissioned, Ms. Manzer said.
“None that I know of are proposed for open public networks.”
Some find fault with blockchains not in their design but in vulnerabilities at access points to the blockchain itself. That is an issue with any network, whether on the blockchain or elsewhere, Ms. Manzer explained.
“That’s no different than forged paperwork…One of the only bases for refusal to pay is by fraud. The law really has already dealt with it. How we respond to the law that surrounds this doesn’t need to change.”
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