John Wevill on using data analytics, blockchain and smart contracts to minimise supply problems in the construction industry
Investment in specific technologies could be the key to future-proofing an organisation’s supply chain. For example, data analytics is widely used by leading supply chain managers to predict future demand, as well as to predict potential future disruptions in the supply chain. If you can see a disruption event coming, your business can be prepared for it.
Too much of construction supply chain management is reactive and based on “what happened last time”. Predictive analytics can allow businesses to make informed decisions about their supply chain risk management on what is likely to happen next time. Depending upon the predictive modelling, a buyer can decide when is the right time to place an order, and from where – the analysis of whether the risk of sourcing a material from a particular jurisdiction is worth the potential cost saving, if the manufacturer might not be able to deliver on time.
Smart contracts to change supply and contracting dynamic
Part of the solution must be a reimagining of the role of the client, to become a properly integrated leader of its project team. Efficient communication and collaboration are essential, and again technology can be used to facilitate this. Blockchain-driven “smart” contracts – unbiased and (almost) infallible computer programs that form, perform and enforce agreements – could provide that enhanced efficiency.
Imagine the parties to a supply agreement wish to transact using a smart contract. They agree the terms they wish to be bound by, and then the contract terms are rendered into computer code and deployed onto a blockchain.
Smart contracts offer the potential for clients to contract direct, buying materials straight from the factory
As a simple example, the contract terms might be: “If you supply a consignment of steel elements of an agreed quality to a particular site, within an agreed time frame, you will be paid £[x] and we will obtain title in the materials.” The smart contract will self-execute once those pre-agreed conditions are satisfied.
The inherent nature of a blockchain – a distributed ledger, subject to a consensus protocol, on which blocks of data are cryptographically linked – builds trust into any transaction without the need for a third-party authority to validate it. Once data has been deployed onto a blockchain, it becomes extremely difficult to tamper with.
Smart contracts potentially bring a high degree of visibility to transactions, by providing the means to cut middlemen out of the process. With trust built in through the nature of the blockchain technology, and pre-agreed outcomes, there may be no need for an intermediary, such as a main contractor, to validate and orchestrate interactions.
Smart contract efficiency would facilitate more, but more discrete, supply and works packages on projects, with the potential for clients to contract direct, buying materials straight from the factory, and to move away from the main contractor procurement model. In the future, partly as a means to avoid the type of supply chain issues currently being experienced worldwide in the construction industry, we might increasingly see the procurement model defaulting to a form of construction management, driven by smart contracts, with an emphasis on off site manufacture.
Every movement of a product can be recorded on a blockchain to provide a transparent and incorruptible record for both supplier and customer
This brings a number of advantages. Clients are better protected if their supply chain is broader; but also if the supply chain is “closer”, in the sense that the client has a direct contractual relationship with the supplier. Communication is made easier; there is more of a sense of the client and supplier as part of the project team, with shared goals and transparent rewards – once the pre-agreed deliverable in the smart contract is achieved, the supplier automatically receives payment.
Blockchain advanced track and trace
Blockchain technology can provide other advantages, for example dealing with the problem of a lack of visibility over the transport of materials that have been ordered. The incorruptibility and transparency of the data on a distributed ledger lends itself to recording in real time the sourcing and movement of goods and materials from factory to site. Every event and movement of a product, from order to manufacture to delivery, can be recorded on a blockchain to provide a permanent, transparent and incorruptible record for both supplier and customer. Blockchain-enabled advanced track and trace can give customers early warning of any unforeseen supply chain problems at a granular level.
This is already a reality in the worlds of shipping and maritime insurance, where individual shipping containers can be tracked from departure to destination and the location information deployed onto a networked platform underpinned by blockchain technology. Visibility of the data recorded on the blockchain can be extended to the relevant stakeholders across a supply chain, to allow them to assess risks, most obviously the risk of late delivery, and to enable improved communication between those parties to agree alternative solutions when the real-time data available shows a problem emerging.
John Wevill is a partner and head of construction at law firm Seddons.