Blockchain to Reduce Supply Chain Risks

Globalization has proven to be an ongoing challenge for supply chain managers. The supply chain is becoming ever more complex; raw materials are sourced from various of locations around the globe, shipped to processing plants hundreds of miles away, then transported to the assembly line in yet another country.

Take a simple product such as Nutella for example. This delicious hazelnut spread shows up on the shelf at your local market. Before it sat on the shelf, the raw materials came from 10 different suppliers located in every corner of the globe. The materials are then shipped to 9 different factories to process the materials before being shipped to another factory to make the spread. Nutella’s supply chain is relatively simple but still undoubtedly complex — imagine the complexity involved in sourcing materials for an automobile.

While a globalized supply chain offers the benefit of comparative advantage, where every country specializes in what they do most efficiently, it also leads to a lack of visibility and control procedures — making it more difficult to manage.

The Supply Chain Vulnerability Report published by Cranfield University School of Management cites the lack of visibility and control procedures as a significant vulnerability in the supply chain. Increased visibility, defined as “the ability of all members of a chain to see from one end of the pipeline to another,” would effectively mitigate risk resulting from inaccurate inventory reporting, unexpected shortages and supply chain fraud.

But how can we effectively monitor each step of a complex, globalized supply chain? The solution is blockchain technology. Typically associated with cryptocurrency, Blockchain will play a vital role in supply chain management in the near future.

Blockchain is a digital ledger in which access is given to every company in the supply chain. When a transaction is recorded, it is visible to every company and must be verified. Transactions cannot be altered or deleted without unanimous approval.

Blockchain will allow managers at all points in the supply chain to monitor the transfer of inventory and the exchange of cash from the moment the raw material is acquired to sale of the final product to the consumer. In addition, every link in the chain will be able to see each other’s raw materials inventory, work in process inventory and finished goods inventory, allowing for increased visibility and greater accountability.

The suppliers of raw materials will be able to track and predict the demand for the product based on the flow of inventory from later tiers in the supply chain. First tier suppliers will be able to verify that the flow of raw materials will be sufficient to meet the demand of the consumer. Additionally, any disruptions in the supply chain, such as a temporary increase in scarcity, will be able to be detected well in advance, allowing companies to react proactively.

As blockchain technology continues to evolve, supply chain management will become more efficient by increasing visibility, reducing monitoring costs, preventing accounting discrepancies, and providing predictive analytics.

Cover photo credits: Wikimedia Commons