How blockchain can optimize the supply chain and help insurers calculate risk

How blockchain can optimize the supply chain and help insurers calculate risk

04-Apr-2018 by Daniel Keir

International businesses rely on the transportation of goods and services across national borders, and the documentation required to authenticate this movement is generally in the form of archaic paperwork that takes a long time to process. The current system often leads to cargo being delayed at ports, which is an even more grave issue if the cargo consists of material required by those in desperate need, such as medication or aid relief. There is a clear inefficiency in the current supply chain process. A digitized system to document and authenticate the movement of goods between borders would lead to a more seamless process.

A supply chain is a network of entities that are involved in the flow of goods from the point of origin to the point of consumption. It refers to the multiple stages that a product goes through as it transforms from a raw material into a consumable product — for example, production, manufacturing, storage, transportation, and distribution.

Prior to the industrial revolution, most goods were produced and consumed locally. Nowadays, with globalization, outsourced manufacturing, and changing consumer preferences, supply chains have become extremely complex networks of flows, that span multiple geographies and extend over several months.

The complexity of today’s supply chains means that they generally lack efficiency and transparency. There are simply too many stages with distinct standards and regulations – especially when moving across jurisdictions – that are extremely challenging to enforce. Details on the status of goods are far too often locked away in individual organizations. Most of the transactions in supply chains take place between different companies, whose primary interest is in the stage of the process that directly impacts them, and fraudulent activity is very difficult to source due to the tangled web of interactions.

The global food supply chain is arguably the supply chain that is under the most pressure to adapt, given that food traceability has become extremely important across the globe. Food safety problems and subsequent recalls occur more frequently then we would like, and due to their potentially calamitous health and economic impacts, they are treated with the highest level of concern. Modern day consumer preferences to know what we are eating and where it has come from, along with advancements in technology, has led to a widespread demand for food traceability.

Food traceability is the ability to track food through all stages of its life. Traceability systems should be able to isolate a contaminated product and block it from reaching consumers. In 2017, millions of eggs were removed from supermarket shelves in many European countries after it was discovered that the insecticide, Fipronil, had infected the food chain in The Netherlands. Only a minute proportion of the removed eggs could have been contaminated, but the supermarkets couldn’t take the risk because there was no effective food traceability system in place. Had an effective food traceability system been in place, personnel would have traced the contaminated eggs back to their origin, followed their journey to the supermarkets, and, as a result, identified the exact eggs that were at risk.

Modern technology offers opportunities for significant improvement across the supply chain, and blockchain is the technology that could have the biggest impact. It provides a shared digital ledger that is updated and validated at each stage of the supply chain. Each transaction is recorded on a ‘block’ which is visible across the supply chain, making the whole process highly transparent. Every stage of a product’s journey is recorded, shared centrally, and unable to be erased. Blockchain therefore has the ability to verify, record and coordinate transactions autonomously, reduce paperwork and administrative costs, and cut out the need for an intermediary in services such as insurance and transport management. Information can be gathered seamlessly on how goods are made, where they come from, and how they are managed. Many startups are seizing the opportunity to optimize the supply chain by developing blockchain solutions.

CyStellar, one of the 2018 Startupbootcamp InsurTech London startups, is developing a blockchain traceability system that can be used to accurately track food items across the supply chain. Consumers can scan a QR code on the packaging of the food item and see every stage of its journey to the supermarket shelf–from the farm where it was cultivated, to the warehouse where it was stored and the port from where it was shipped. It provides consumers with proof  that the food is authentic and is what the label claims it is.

Peter Bunus, CEO and Co-Founder of CyStellar, said:
We record every step in the supply chain, starting from the local farmers and finishing with the supermarkets. We can use the data to optimize every step of the food distribution chain. In the unfortunate event of a food recall situation, we can easily and quickly trace back the food to the origin and see where the food has been distributed elsewhere and stop the distribution channels”.

Peter uses matcha tea as an example of how Cystellar’s blockchain traceability system could be used. Matcha is a type of specially grown green tea leaves that forms the popular matcha tea. Cultivated predominantly in Japan, matcha lovers have been concerned about the safety of their tea since the Fukushima nuclear disaster in Japan in 2011. The main growing regions of matcha tea in Japan are far enough away from Fukushima as to not be affected by the radiation, but drinkers want peace-of-mind to ensure what they are drinking is safe. Cystellar’s traceability system can track the matcha tea back to the exact farm where the leaves were cultivated, and, as a result, provide assurance to drinkers that their tea is safe.

StaTwig, one of the 2018 Hartford InsurTech Hub startups, is building an intelligent supply chain system to track and trace products from manufacturers to customers. StaTwig focuses on optimizing cold chains, a temperature-controlled supply chain, to store and transport perishables such as food, vaccines, and other biological materials. 50% of all vaccines go to waste before they can reach the children in need of them, causing avoidable deaths and costing the pharmaceutical industry billions of dollars every year.

Sid Chakravarty, Founder of StaTwig, said:
We track the products from the manufacturer to the customer, recording vital information about the product on a blockchain ledger that connects all the stakeholders of the supply chain. As the data is tamper proof, distributed, and decentralised, it creates trust, transparency, and authenticity for the products in the supply chain.”

For the insurance industry, a more optimized supply chain will allow insurers to better forecast supply chain activity; more accurately calculate risk; and more effectively calculate the validity of claims through greater levels of transparency. The supply chain relies on each entity to function without an unwanted obstacle or interruption. However, the sheer volume of transactions in a supply chain means that issues can arise at any stage and at any level, affecting both cost and delivery times.

Product liability is an area that insurance companies need to pay particular attention to when it comes to assessing risk in the supply chain. If a product is defective, who is at fault? Any one of the stages in the supply chain could be culpable, but most likely, product liability results from poor quality control in the manufacturing factory, or a company inadvertently utilizing counterfeit parts. Insurers need to understand in which countries, for example, counterfeit parts are more frequently used, and take this into account when calculating risk.

Calculating the risk for insurers is extremely complicated and onerous, but technology can make the task much more feasible. As Hélène Stanway, Digital Leader at XL Catlin outlines: “Blockchain has exciting potential to help insurers improve efficiency, reduce complexity, and better underwrite supply chain risks. It can help us to make better forecasts and calculations about supply chain risk.”

Supply chains have an enormous amount of product wastage. Insurers end up paying a lot of money for the product waste, so by making the supply chains more efficient and providing that information to all the stakeholders, we reduce the risk of product wastage and in turn reduce the number of claims each year”, says Sidd.

Today’s supply chains are often inefficient and lack transparency. There are many emerging companies developing blockchain solutions to supply chain problems, and large companies need to jump on board with the technology if we are to see widespread supply chain optimization.