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By Brent Woods
Seattle, WA (USA)
The concept of competition or buying on volume is not new. The box stores exist often with members and buy in volume collectively. E-Commerce is a very competitive market as well. What is interesting is comparing an existing market or global market for the sake of exporter or trade association and entire new markets.
A component of the project INCOCHAIN, is the Cooperative Buying Pool. Be it existing buyers or new markets altogether, it is possible to “pool” multiple buyers together via smart contracts and buyers can simply fill orders and they can coordinate in transparency or completely private, that is between buyer and seller.
Combined Purchasing Power Smart Contracts
Agreement for purchase of 50 each 20 foot containers of coconuts.
Terms: INCOCHAIN SMART DDP (Delivered Duty Paid)
*Seller agrees to ship to multiple locations anywhere in lower 48 United States of America (Alaska and Hawaii excluded) to the door of the customer or an agreed upon drop ship location. Seller agrees to combined bulk order of 50 each – (20 foot containers) and once smart contract is met and 50 are filled, the product will be loaded for transport within 48 hours and ready for shipment per bill of sale. Please see complete smart contract at Tx hash (link here).
Please find price, quality certificate, and complete terms of sale for details.
Minimum order quantity: 50 each 20 foot containers of coconuts
Maximum order quantity: 150 each 20 foot containers of coconuts
By sending to the following Ethereum address, buyer agrees to combined purchasing agreement with other buyers and per INCOCHAIN Smart DDP terms.
Status: 50 container load met. Coconuts to be ready for transport within 48 hours. Thank you for placing your order for coconuts! The Coconut Cooperative – Zihuatanejo, Mexico
Note: The above numbers represent container load orders by customers. In this example, the first customer to buy into the combined purchasing power smart contract. Nobody knows who or where those 12 containers are going but the buyer and seller. They are going to the lower 48 states per the smart contract (Alaska and Hawaii were excluded), but those 12 containers of coconuts could be drop shipped anywhere in the lower 48 states. Several orders were for 1 container load, which means they combined purchasing power with others. Total order complete at 50 order minimum, and is filled.
Hypothetically speaking of cooperative buying smart contacts that establish purchasing power, INCOCHAIN approached RSK to discuss possible use cases for smart contracts for world trade that entail incoterms or international commercial terms. Incoterms are standardized terms that clearly define the obligations and risks of both the buyer and the seller in air, ocean, rail, and trucking transportation. The standard is international.
In such a use case the marketplace can be established in live time and yet such a use case can be examined responsibly in terms of economies of scale.
Let us examine the actors in this international arena and look at their roles.
Importers – Buy products
Exporters – Sell products and they could be manufacturers, distributors, or sellers of any goods and services
Manufacturers – Be it one factory or a multinational corporation, manufacturers buy and sell depending on requirements, be it importation of raw materials or commodities to the exportation of finished goods or commodity class
E Commerce – Worth mentioning as there are many actors in buying and selling, but some prominent players in internet sales
Box Stores – This is worth mentioning in terms of trend analysis as the players are the big box stores be it Wal Mart, Costco, Lowe’s and many others around the world. The role they also play is related to buying and selling, often based on their purchasing power, but they bring product inbound and also involved in distribution and returned goods or damaged product (claims).
Trade Association and Economic Development – Trade associations or economic development councils can be agricultural or commodity associations to government consulates promoting economic development or trade with their region or country
Banking – Perform currency exchange, perform letters of credit and trade finance between buyers and sellers, ensure all documentation available per incoterms
Commodity Markets and Exchanges – Provide commodity trading and futures markets
Airlines – Provide freight services from origin to destination
Ocean Liners – Provide freight services from origin to destination
Rail – Provide freight services from origin to destination
Trucking – Provides freight services from origin to destination. Trucking does the pick up for air freight, the less than container loads of ocean freight, full containers and depending on the size of cargo and countries of origin and destination, may just be the means of international transportation. To this extent trucking plays an important and roll and are required to have a title document, the bill of lading. This document is important as it obligates risk and responsibility. The document also describes exact piece count and amounts which are important for commerce and regulations as to weight restrictions, and this carries over to airlines and ocean containers. All these documents are important yet they can be initiated via smart contract via bar scan, QR code, image (photo or surveillance), RFID, as a requirement. To this extent trucking companies are required to fulfil the smart contract or obligation of the terms rather than shipper and consignee being required to meet the paperwork requirements of the trucking company.
Insurance – Provides insurance and risk management for cargo and freight and they are involved to the extent that incoterms clearly define risk and liability of both the buyers and sellers
Legal – Be it air, ocean (maritime law), rail or trucking, the actors can be law firms, banks, insurance, and that can entail any of the actors in the international arena, yet it can also encompass the courts or both import and export regulation. It can also cross over into insurance as it relates to liability
Customs Brokers – Provide customhouse broker services to clear freight through customs and this entails duties and taxes and commodity codes. They also provide customs preclearance often with EDI or Electronic Data Interchange. Enter in blockchain technology
Warehousing – Holding area for cargo and freight and also can act as predefined origin or destination per incoterms. Role also can be to provide bonded warehouse where required for international transportation
Let us examine benefits of blockchain technology for these particular actors. The efficiencies across several sectors are conceivable and quantifiable when using the blockchain ledger which can be paperless, but the purpose of this paper is to consider the benefits of smart contracts as they relate to combined purchasing power. The benefits are obvious when in terms of efficiencies and the unalterable nature of the blockchain, and there is the benefit of better tracking and tracing of goods and documents via the blockchain and via block explorers, but many buyers and sellers cannot penetrate new markets or maintain business due to price or currency fluctuations. So this comes down to competition and economics and both go hand in hand in an economic order, however this can also be a pain point. The volatility of international currencies or futures pricing of materials are all relevant, and both can be pain points. The benefits of blockchain in this capacity may bring bulk purchasing smart contracts and bring that competitive edge and comparative advantage. The other benefit of such bulk purchasing and the use of negotiation of cryptocurrencies for exchange means eliminating currency exchange of hard currencies while the very instrumentation of blockchain can offer an entire new barter or negotiating tool that requires further study and analysis.
To examine this component of cooperative purchasing power it is already established that this can be done “blindly” or in full transparency. The smart contracts can keep private information private where required and yet combining purchasing power can be established and this can be examined on the blockchain in hypothesis to conclusion as to the ability to establish free markets and establishing purchasing power which is afforded under contract by exporter or any seller to entire markets.
Say an exporter has no business in Canada, America, or Latin America, then it is possible to establish one lane of new business at a time. Let’s call this a 40 foot container of reclaimed lumber from South Africa. It could also be a pallet of Cuckoo Clocks from Germany. Via smart contracts a seller could offer a price either for reclaimed lumber or clocks for examples and say in this example, a seller will offer a discount to combined orders, be it 40 foot containers of reclaimed lumber or pallet quantity of clocks for combined orders or group discounting or pooled smarted contracts.
Of course quality, trust, consistency, and service are important factors, but in smart contracts it is possible to combine and pool orders. It is an important business decision as technology has to be considered in advance; possibilities of lowering standards may arise, price wars, or disruption of the supply chain must be given a careful study. Families, lives, and futures are at stake, so are wages. This is a good example for a testnet. But let’s be real, disruption and revolutionary ideas can also have many positive impacts on society as a whole, so improving standards of living, careers, wages, and supply chain logistics can also be studied in advance.
Such a hypothesis could also be studied up against existing trends and that includes the Wal Martization. And while there are many social impacts, there are also many impacts to business and industry that must be considered along with the social impact, as it is not just the bottom line.
If ocean freight and 40 foot containers and if the seller is willing to pay the freight to 10 different locations for 10 each 40 foot containers to new customers in Canada, America, and Latin America, then it is possible to fill these orders and once filled it begins the payment based on combined purchasing power of people that may know each other or do not know each other. The smart contract does not know that however it would combine the purchasing power as the seller accepts X price for 10 each 40 foot container loads to 10 locations.
For air freight and a pallet of Cuckoo Clocks, the same principle may apply for the condition of sale that they sell the pallet and freight delivered to the door of 10 new customers for X price for a combined discount, to sell pallet quantities, to move inventory, to profit on holiday seasons, etc. It is possible to study filling orders with blockchain to understand the dynamics of combined purchasing power or cooperative buying.
The possibilities of new business development are endless and the disruption that could come with combined purchasing power could be enormous.
It would be responsible to consider possible ramifications on the blockchain as cheaper isn’t necessarily always better. Certain factors must be considered including environmental, or human elements, or other considerations but in terms of creating competitive bidding situations between buyer and seller, this is a good use case for studying the combined purchasing power.
What are the blockchain limitations/challenges in this international arena of bulk purchasing? The technology is in it’s infancy and it is not traditional in terms of legacy systems. Risk is a factor with blockchain, so is hacking. Yes these are obstacles. Business is often done with trust and through relations and this is why reputation is very important to any buyer or seller, however the limitations can be mitigated with a trustless system and one that is immutable. Limitations may entail worldly knowledge of smart contracts, multisig wallets, and arbitration in this regard, however this too can be mitigated via blockchain technology. Another challenge that arises is volatility itself as it relates to cryptocurrency assets. It would not be fair to discuss volatility of hard currencies unless that was also discussed as it relates to Ethereum, Bitcoin, or any other asset, in fact, these crypto assets can be way more volatile. The mitigation may come with stability or smart contracts, or pegging, with such discussion of “stable coins”, yet this is a completely different subject matter, but worth addressing as volatility is a major challenge. The other challenge worth noting is the complexity of smart contracts interacting with each other on a global scale between all the actors, say with an airline or ocean liner, but to refine this process it is important to keep the focal point of the bulk purchasing smart contracts and not to complicate all the world’s trade. Another great challenge to blockchain technology as it relates to bulk purchasing power and negotiation comes down to taxation and compliance, and this is a limitation that will be analyzed by management and governance. But in this regard, the overall efficiencies and benefits must be weighed versus the limitations.
What is the market opportunity and size? The answer is everything under the sun.
According to Wikipedia:
Largest countries by total international trade
Main articles: List of countries by exports and List of countries by imports
Top traded commodities (exports)
Volume of world merchandise exports
Value in US$(‘000)
Mineral fuels, oils, distillation products, etc.
Electrical, electronic equipment
Machinery, nuclear reactors, boilers, etc.
Vehicles other than railway
Plastics and articles thereof
Optical, photo, technical, medical, etc. apparatus
Iron and steel
Pearls, precious stones, metals, coins, etc.
Source: International Trade Centre
And as you can see that is hardly everything under the sun. Now imagine the potential market for decentralized world trade.
Use Case Process and Description: The concept is easy so let’s keep this as simple. The more you buy, the better discount you get for volume. This is but one use case, as some fair trade organizations may be willing to PAY MORE via smart contracts and bulk orders may swing local cooperatives into action to meet the criteria if they want the business (example is elimination of child labor or no GMO), but again let’s keep this very simple. To illustrate my point, a seller or let’s use the example of an economic development alliance (a local government that represents olive oil producers in Italy) offers via smart contract offers bulk purchasing to tap into a global market. Imagine an “exchange” like any cryptocurrency exchange and orders are “filled”. This can be done via smart contracts for the purpose of bulk purchasing. All things are negotiable. Let’s keep that in mind, and this entails both price and terms of sale. But let us use the example of INCOCHAIN Smart EXW (as the terms of sale). Right now an economic alliance of olive oil producers (a local government) can offer pricing on behalf of their cooperative and they can quote based on the volumes that come in, in the traditional sense. Be it 1 container load or more, they price it accordingly. But with combined purchasing power via smart contracts an offer can be made with INCOCHAIN Smart EXW (which means the buyers are responsible for all freight and obligations from the bay door at origin) yet the economic development alliance can offer bulk purchasing smart contract for say 100 container loads of olive oil. The buyers could know each other, compete fiercely against each other, or remain anonymous (blind). But in this scenario the economic development alliance may be able to fill 100 container loads by offering X price based on the volume and that offer may stand for 48 hours or it may stand for 48 months, as it depends on the smart contract. But what this enters into is bulk purchasing or combined purchasing power based on new markets and new revenues and profits, something a business may consider (consider olive oil producers), but to further illustrate this, let’s use a smart contract offer that is for 48 hours. Let’s say 100 containers are filled in 47 hours by 37 buyers, the order is filled, the terms are met, and it’s binding. In this scenario it exemplifies how an economic alliance or trade association can penetrate new markets and this is why they made the offer. In this scenario, the combined purchasing power of 37 buyers (that bought 100 containers of olive oil) is what brought the deal together via smart contract and in the terms of sale, INCOCHAIN Smart EXW, the buyers were responsible for all logistics and risk beyond the point of origin. Now let’s consider the offer didn’t fill under smart contract because the 100 container minimum was not met. Perhaps another offer would be considered. Perhaps the economic development alliance considers offering INCOCHAIN Smart DDP (Delivered Duty Paid) to the destination, meaning they will offer bulk pricing, yet will deliver to 37 drop ship locations (of 100 containers) and assume all risks and obligations (including costs) all the way to the door of the 37 drop ship locations. This was a business decision. This bulk purchasing scenario opens up the market for increased competition. And it is this hypothesis that the overall economies of scale can be reversed. Again, this must be examined for test purposes as well as ethics in advance, as cheaper isn’t always better. There are social ramifications that must be considered. But then again, combined purchasing power doesn’t always mean that it drives the prices down. It is argued that the economies of scale can be reversed to counter this affect of lowering price, wages, and overall social standards, as purchasing power can also be used to swing the economics to improve standards, be it social or environmental. There could be some benefits that could come from leveraging and negotiating in order to get the markets to meet the demands and to that extent people have options, and smart contracts can offer these social contracts to demand improvements or the fact remains, bulk purchasers have options and those orders can be filled via smart contracts. In this regard, bulk purchasing smart contracts can be revolutionary in terms of trade finance and social responsibility; not all scenarios lead to the Wal Martization of the world economy. These are all good reasons to consider these test cases in advance of development where the social ramifications can be weighed and studied independently via blockchain research and to this extent current solutions such as economic development via new business development (revenues, profits, and jobs) are present while demands can be placed on major actors and countries to meet ethical standards. All things are negotiable. Let us remember this. Buyers can demand anything via smart contract, so can sellers. Perhaps pressures can be put on producers that grow GMO crops. Perhaps pressure can be put on countries that have bad environmental record or be used to demand countries eliminate the poaching of endangered species or exploitation of slave labor. Long term, via auditing, again with blockchain, demands can be placed in negotiation (smart contract), in this case bulk purchasing contracts (among known or unknown actors) can strike their demands. Likewise, everything is negotiable, and buyers can place demands in smart contract too. But short term, this is complicated the more elaborate the terms of sale (be it letters of credit or any bill of sale) and the coding and development is not there for complex negotiations. But in concept, there are short term and long term benefits as detailed.
With blockchain it is possible to create competitive situations if not examine it first hand for those willing to accept new business via cryptocurrency, be it Bitcoin or Ethereum, etc, that is inherent in the terms of sale. But it is possible that once an offer is accepted funds are held and once the entire amount accept the offer, it’s accepted.
It comes down to competition, quality, service, and so often the bottom line in business. With blockchain and studying the net effect, one must ask will they take the profits from 10 new customers (whether they knew each other or not) and sell on slimmer margins for volumes they never sold before, or markets they never sold before? That’s a business decision, but it can be offered via smart contract.
Likewise, a buyer can determine if they want to come to marketplace to buy at a better price or offer via blockchain and combined purchasing power as it may be a competitive buying opportunity be it reclaimed lumber or clocks. There may be advantages to combining purchasing power (coordinated like a buyers group or blind for privacy and competitive reasons). There may be volume discounts that ultimately changes the economies of scale based on purchasing power and cost plus from manufacturers for volume discounts. Add in smart contracts for rebate incentives (to cooperative buyers) or smart contracts for returned goods privileges (consider manufacturing and inventory control), everything is negotiable.
The concept of bulk purchasing is not new; it works well for Wal Mart. What is new are smart contracts and bulk purchasing that can be effectively utilized and create positive international relations and this can be hypothesized and argued to conclusion that bulk purchasing can create a positive environment that benefits many in terms of commerce and that terms of sales (incoterms) or international commercial terms can be created to open new markets globally. Once an offer is made, they cannot be renegotiated. The order gets filled at that point and the offer can be held to a specified time and date.
The product could be bananas to mango juice to rebar, it doesn’t really matter, but the terms of sale can be changed or they can be combined via smart contract, depending on the terms, like 10 container loads, and the combined order (of cooperative purchasing pool) is filled, but this scenario could be followed to conclusion, and also provide analysis as to the affect of free markets, positive relations, and combined purchasing power in cooperative fashion.
Such combined strength in purchasing could create an aggressive environment on blockchain all of which are unique to market conditions. Blockchain can facilitate such an environment and develop brand new markets with combined purchasing power, and it is argued that this combined purchasing power, the competitive edge,cheaper transactions, and ease of exchange between buyer and seller will offer both competitive and comparative advantage to foster long term business opportunities.
A marketplace could be created where both buyers and sellers place their offers and they are either accepted or rejected within certain limits and that is the beauty of setting up or establishing new markets. But the smart contracts dictate the terms of sale as per incoterms, giving cooperative bulk purchasing power to buyers and facilitating a trading place for sellers to offer under smart contract bulk offers (Delivered Duty Unpaid or DDU or Smart EXW etc) to buyers ultimately bringing combined purchasing patterns to new and existing markets.
Each market could be established, from oil, bananas, 3D Printers to 3D Printed Products…any product, finished product or raw material or commodity item, and they can be matched up with communications and a trading floor 24/7
What could also be qualified and quantified on a testnet is possible impact to a more decentralized opportunity between buyer and seller or cooperative purchasing via smart contracts or the emergence of new markets depending on the terms of sale offered and that varies. Just because the terms of sale are X today doesn’t mean they can’t change to Y tomorrow, again, everything is negotiable and bulk purchasing smart contracts can and will have an impact on leverage, so the tables can be turned. This too can be examined in testnet. It’s a matter of examining upstream and downstream elements and studying, comparing, and contrasting the total impact that negotiated terms of sale (per incoterms) can have. Blockchain can aggregate this data.
1 container load may not warrant discounting, but 10 might. 10 buyers might not know each other but with smart contracts they can pool their true purchasing power and drop ship can be introduced to their door with the proper terms of sale if aggressive terms are arrived at (or minimum quantity met) or blockchain proves in “live” time via oracle that that cryptocurrency be it Bitcoin, Ethereum, or any other. A manufacturer or exporter may not want to pay the freight carte blanche all the way to 10 destinations of 10 different buyers for example, but if the terms were say to the port, that combined purchasing power could be the competitive advantage for securing the order which represents 10 new customers or 10 new container loads. That smart contract that pooled the true purchasing power together may be the competitive advantage for the importer to compete in their marketplace or specific arena.
Say If minimum quantities are met, it could be offered via contract and once filled or once minimum is met or once timeline is up, it’s sealed in smart contract and it is a binding transaction. This much can be tested in this use case.
The emergence of new markets can also be studied as just because there is not a market today does not mean that it cannot be made tomorrow. Terms of sale can be introduced with blockchain that disrupt existing lanes of trade – at least it could be studied, depending on the terms of sale, be it INCOCHAIN Smart EXW or Smart DDU vs existing currency exchange and existing supply chain logistics absent cooperative purchasing offering or bulk purchasing smart contracts.
Be it upstream or downstream, import or export, buying 1 container at a time versus comparing in live time and “filling” orders with others with smart contacts, it is not being seen yet alone studied. It also likely does not make sense for that person importing 1 container load a year to be overly concerned about total cost savings, but a volume importer or exporter may be and blockchain may prove to be efficient or inefficient. Terms of sale based on volume or switching terms of sale may prove to be the competitive advantage in the studying of emerging or actual markets for any commodity code or product.
Written by Brent Woods, INCOCHAIN
If anybody has any questions about Cooperative Buying Pools, smart contracts, or INCOCHAIN, please visit http://www.incochain.com/ or reach out to us at email@example.com
INCOCHAIN is an early stage startup with members in London (England), Zug (Switzerland), and Seattle (United States)