Maersk: Cutting Shipping Costs and Increasing Supply Chain Visibility with Blockchain Technology
Maersk is piloting blockchain technology to improve supply chain visibility, transparency, accountability, and cost efficiencies for its global shipping business.
The ocean shipping industry accounts for close to 90% of worldwide trade 1, and since 1996, Maersk has been the largest container shipping and supply company in the world 2. Maersk must deal with delays and increased costs from the customs documentation, fraud, inventory and waste management, and the transit of millions of shipping containers worldwide. Digitization presents a significant opportunity to improve transparency of items being shipped, decrease costs of documentation, improve the quality of shipping data, and better identify waste and fraud. The costs of trade documentation processing and administration can be up to 20% of the actual physical transportation costs1. To illustrate the complexity of Maersk’s shipping operations, a shipment of refrigerated goods from Africa to Europe can include 30 people and organizations and 200 communications between them1. One lost form or piece of documentation can delay a shipment by days or leave a container stuck in a port1. As the industry current stands, there is an opportunity to improve transparency, documentation quality, and accountability for shipping mistakes, inventory loss, and fraud.
Maersk has entered into a partnership with IBM to implement a pilot blockchain technology by the end of 2017 to improve logistics visibility and data interoperability through increased collaboration of shipping partners and foreign governments. This application of blockchain provides all parties with a trusted, decentralized record of shipping data as well as a unified data source to see end-to-end visibility of the supply chain1. Each new link (shipping record or update) in the supply chain blockchain database is added only through consensus of all users. This solution creates a trusted, “open…supply network for all to see” and also aggregates data from different sources into a centralized location 4, which is incredibly valuable for the multiple decentralized parties found in international shipping and trade. In the short-term, a major challenge for Maersk and IBM piloting this program is to foster collaboration between many parties and a “supportive environment” with understanding from many sides to test the pilot3. Maersk has identified pilot partnerships with trading partners such as Schneider Electric and Kenyan flower company FloraHolland and government authorities such as the US Department of Homeland Security1.
In the short-term, Maersk must focus on creating a collaborative environment through forging good relationships with governments and trading partners for the pilot program in order to determine whether the program is feasible. In the mid-term, Maersk may find that adoption and reaching scale are more challenging than anticipated. Only a third of studied companies have begun to digitize their supply chain, with 72% expected to begin by 2022 4. It is an expensive and time-intensive process for Maersk’s current partners to adapt to a new digitized process and system, which presents a risk for Maersk spending so much money up front to develop a product. There are heavy fixed costs for Maersk to develop the technology for their digitized blockchain supply chain platform, and while over time the variable costs are relatively low for scaling blockchain, Maersk must be patient to not over-invest early in an otherwise promising project. Additionally, given that change management projects often face a 70% failure rate 5, partners and governments that work to digitize their supply chains may face setbacks, delays, and unsuccessful implementations. Maersk and IBM will need to patiently educate partners (potentially monetizing this education through a consulting arm) through the process of digitizing their supply chains, particularly for customs and government departments which are already prone to being risk-averse, slow, and bureaucratic.
A concern not currently addressed by Maersk and IBM relates to information security protocols in using emerging blockchain technology. Authenticating identity and implementing secure access protocols are critical for new technologies 6, which are especially susceptible to hackers as users become acclimated to new technology security protocols. The prominent Bitcoin broker Coinbase has experienced months where an average of one user per day had their accounts hacked through voice and email phishing tactics 8. With foreign cyber attacks increasing in severity and frequency, it is plausible to envision a situation where Maersk may be targeted with a cyber terrorist attack meant to disrupt its supply chain and world trade. To this end, Maersk must immediately work internally and with partners to establish controls such as using machine learning to flag suspicious activity, carefully assigning user access, and implementing dual-factor authentication 7. Maersk and IBM may also consider implementing more severe security constraints such as forcing users for all parties to engage with the blockchain through an intranet of secure terminals that are further removed from external hackers.
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Endnotes
1 “Maersk and IBM Unveil First Industry-Wide Cross-Border Supply Chain Solution on Blockchain,” IBM press release, May 5, 2017, on IBM website, [http://www-03.ibm.com/press/us/en/pressrelease/51712.wss], accessed November 2017.
2 Alphaliner Weekly Newsletter, “Volume 2011 Issue 8,” February 27, 2011.
3 Alicke, K., D. Rexhausen, and A. Seyfert, “Supply Chain 4.0 in consumer goods,” McKinsey & Company.
4 Schrauf, S. and P. Berttram, Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused, PWC Strategy& (2016).
5 Ashkenas, Ron, “Change Management Needs to Change,” Harvard Business Review, April 16, 2013.
6 Porter, M. and J. Heppelmann, “How smart, connected products are transforming competition,” Harvard Business Review (Nov. 2014)
7 Wieczner, Jen, “Hacking Coinbase: The Great Bitcoin Bank Robbery,” Fortune, August 22, 2017.
8 Price, Rob, “One of the world’s biggest bitcoin exchanges has been hacked,” Business Insider, http://www.businessinsider.com/south-korean-bitcoin-exchange-bithumb-hacked-ethereum-2017-7, July 5, 2017.
Great potential but challenging implementation, as you pointed out. Given the low margins and cyclicality of the shipping business, a roll-out of blockchain that is not met by timely customer adoption (e.g., due to the delays you mention) could cost Maersk much in the meantime, especially if it chooses not to passing the added cost as a premium to customers.
A second concern that comes to mind is the competitive response of other companies. As the first mover in its value chain to do blockchain, how does Maersk solidify its starting advantage from erosion by other players? If Maersk does the heavy lifting of educating its customers and its supply chain about blockchain, a competitor could enter later at a lower cost (given the more advanced stages of the technology) and build off the groundwork that Maersk has already laid. Will blockchain be an effective way to increase customer value proposition while also upping switching costs? Or is it destined to be a platform-wide technology, and Maersk is disproportionately investing to build a market that will benefit shipping companies beyond itself?