Even if you haven’t explored, researched or experimented with using blockchain for supply chain management, you’ve likely heard of blockchain technology. One of the most hyped advancements of the last decade, the only thing harder to understand than blockchain itself is blockchain value. Or, more specifically, the return on investment (ROI) of blockchain for supply chain.
The research firm International Data Corporation (IDC) estimates that global blockchain spending will reach nearly $17.9 billion in 2024. Gartner predicts that “by 2023, blockchain platforms will be scalable, interoperable, and will support smart contract portability and cross chain functionality.”
This begs the question: are businesses seeing a return on their investment? How do supply chain professionals measure blockchain value? Without a clear benchmark for success, blockchain ROI can feel like a confusing foray into foreign territory.
But, just like any other technology, blockchain’s ROI is less about blockchain itself and more about evaluating and determining if it can enable and optimize your business strategy.
And for that, the Global Supply Chain Institute (GSCI) has published a white paper and guide for you to use with your supply chain and executive teams.
How to evaluate the ROI of blockchain technology
While the ultimate value of blockchain may not be unleashed until industry-level standards are set and accepted, the Global Supply Chain Institute’s research for the white paper, “When Is(n’t) Blockchain Right?” pulls back the curtain on blockchain’s highly anticipated ROI in specific supply chain applications over the next three to five years. The institute interviewed blockchain pioneers, recapped how they view blockchain value and applications, and outlined some of the benefits (and drawbacks) of blockchain technology, specifically for supply chain management situations. Consider this a preliminary read before downloading and diving into our the white paper.
When to use blockchain for supply chain management
During interviews with executives at industry-leading companies and throughout dozens of case studies conducted for our research, a theme emerged about when to use blockchain in your supply chain strategy:
Net net: your organization should only consider using blockchain when an existing technology does not address the following three needs:
- Rapidly deploying assets
- Leveraging an immense amount of data
- Eliminating non-value and/or repetitive tasks
There are plenty of technologies that can meet these three needs. But one of the crucial reasons to turn to blockchain is trust. If partners or competitors must share information within an end-to-end supply chain, or the need arises to execute commercial transactions where trust is limited, that’s where blockchain can add real value.
When NOT to use blockchain for supply chain management
Simply put: if a technology on the market can meet your needs today, use it. In our research, we found blockchain often implemented in technical pilots that were not tied to business value, or blockchain technology used as a database solution.
Blockchain is not a substitute for digitization or another technology that can deliver a quick solution at a lower cost with less risk.
More specifically, blockchain may not be the best choice if:
- You need easy implementation: Skepticism about blockchain is not unfounded. Blockchain can be complex and, understandably, many supply chain professionals fail to grasp some of its basic tenets. Implementing blockchain can be challenging, and scalability and interoperability are currently limited by a lack of standards. While blockchain technology may prove valuable for your company, it should not be approached as a quick and easy tactic.
- You need a quick ROI: The cost to develop and implement blockchain strategy solutions is the technology’s greatest drawback. Even with research and case studies, there is not a clear business case for blockchain in supply chain management. Without first arriving at a thorough understanding of what matters most to your company and evaluating how blockchain can solve those pain points or enable opportunity, it’s not possible to calculate a quick ROI germane to your organization.
Cost is Blockchain’s Top Barrier to ROI
The type of blockchain (public vs. private) is one of the primary drivers of cost. Private blockchain solutions absorb the cost of development, but a public blockchain has an opportunity to recoup development costs through onboarding, membership, and transaction fees (or some combination of all three).
Other common blockchain solution investments include:
- Cloud platforms
- Blockchain infrastructure
- Data storage (and retrieval)
- Data transfers
- Infrastructure administration
The extent of these costs (particularly data storage and retrievals, data transfer, infrastructure administration, resiliency and business continuity requirements) depend on network usage and number of peer nodes.
A private blockchain will also incur internal IT, developer and prototyping expenses. The cost of these services, paid to an outside entity, depends primarily on the duration and complexity of the project.
In addition to these expenses, you should consider the cost of internal employees (beyond developer and IT resources) that will support or be involved in the pilot project.
Blockchain Technology Cost Phases
Blockchain technology solutions provide ROI in three phases within a business: a pilot project, commercial market application and finally a network of networks.
Pilot project:
The organization uses blockchain technology to address a specific problem as a proof of concept. The pilot project stands as a contrast to current practice, demonstrating the ease or difficulty of using the technology and any relative advantages.
Blockchain value during Pilot Project Phase: Limited or no ROI
Commercial market:
Bringing blockchain technology to market entails increasing scale and complexity; additional developers and IT efforts will be required. Costs for this phase include the resources needed to create a governance model and advising board that will determine how the blockchain will be monetized.
Blockchain value during Commercial Market Phase: ROI in the longer-term
Network of networks:
As the number of companies in the blockchain increases, the lead company will need to upgrade the platform. It will often use an external company to manage development of the ongoing ecosystem. The fees for this service and continued service costs can vary depending on several factors, including project duration and complexity.
Blockchain value during Network of Networks Phase: Large potential for ROI
Blockchain Cost Benefits to Supply Chain Management
Cost savings:
The pain points that often motivate a company to seek a blockchain solution typically involve streamlining and speeding up administrative tasks. An oil and gas use case documented by the World Economic Forum reported that the blockchain solution resulted in a reduction in freight spend of five percent or an equivalent of $100M.
Other cost reductions can be realized by using blockchain to replace legacy systems and tools. Blockchain can more simply coordinate common systems records and data that would previously take supply chain members considerable resources to reconcile.
In addition to reducing administrative costs, a blockchain solution enhances trust by providing a single source of truth.
Cost prevention:
To calculate preventable cost that can be saved by blockchain, companies first need to evaluate the activities that expose them to loss and damage, and then align those activities with blockchain’s potential to reduce the risk. For example, in the food industry, blockchain has assisted in reducing waste by shortening the time it takes food to reach the final consumer, and to cut down time and effort for tracing recalls.
For many organizations, potential risk reduction can be credited to blockchain’s ability to reduce the likelihood of fraud and data breaches through its tamper-evident nature. Because the magnitude of this potential loss is immense, evaluating risk exposure from fraud and determining the degree of risk reduction by using blockchain can demonstrate a significant benefit.
Blockchain as a New Business Opportunity
If your blockchain solution has value, your company may bring it to market and monetize the blockchain through membership or transaction. With a membership model, a new member in the blockchain would pay a one-time onboarding fee along with an annual membership (or subscription) fee. For the transaction fee model, the blockchain owner determines the price per transaction based on the number of transactions per customer.
Capitalizing on this business opportunity depends on the actual blockchain solution offered to potential new members and the value they perceive from joining the consortium (e.g. if a company wants to supply leafy greens to Walmart, joining Walmart’s blockchain is the price of admission.).
Evaluating Blockchain Value for your Company
Does blockchain offer ROI for supply chain management? Yes, in a limited number of applications. These include reducing administrative burdens, costs of invoice reconciliation and tracking the provenance of goods. Most companies remain in various stages of pilot programs that, by their very nature, do not produce profit. Still, most of these pioneering organizations are also banking on building their expertise in this technology now to be ahead of the curve when it eventually (and likely inevitably) goes mainstream.
Is now the time to make that type of investment in blockchain? Expert views vary. Companies that focus on making investments that show a proven ROI were content to wait on the sidelines and plan to be fast followers later. Others are working on business-model improvements of peer-to-peer networks that could be unlocked with blockchain. While others are deep into pilots and evaluations.
Wondering where to start on your blockchain journey?
Inside the full Global Supply Chain Institute white paper, you’ll find more in-depth information, along with a Blockchain Screener and 15-question Blockchain ROI Decision-Support Framework to map out blockchain opportunities for your specific organization and business challenges. When used together, these white paper tools provide a structured and efficient approach to assessing the timing and extent of an investment in blockchain with your colleagues.
Find a full explanation of blockchain’s ROI for supply chain management and tools for screening use cases in the GSCI white paper, available for free download below.