Coffee beans to cappuccino: How BLOCKCHAIN could revolutionize the global supply chain industry
Dear reader, STOP.
Before you read this article, think for a minute.
DO YOU KNOW WHERE THE COFFEE YOU DRANK TODAY MORNING CAME FROM?
Well yeah, maybe Starbucks. But do you know where the entire process BEGINS?
Once upon a time… there was a coffee farmer named Miguel, who lived in Quillabamba, Peru.
Miguel wasn’t educated. Quillabamba had very poor internet connectivity. She spent her entire day working tediously on her farm. A local transporting company transported the raw coffee beans from Miguel’s farm to a port in Lima, Peru’s capital city. From there, they were shipped to Brazil where they were roasted and grinded in a factory unit. They were then packaged in another factory, and transported to local ports, from where it was shipped to all over the world. Wholesalers in your country bought that coffee and further sold it to your local cafe. It was then that the coffee was made into a cappuccino and you got the cup in your hands!-
This entire chain is known as a SUPPLY CHAIN.
What’s a Supply Chain?
A supply chain is a logistics system which includes all the parties involved from production or sourcing of a product to the end consumer.
In simple words…
Producer → Transporter → Manufacturer → Distributor → Retailer → Consumer.
Exactly. Supply chains have a lot of intermediaries. And that is precisely where the loopholes arise..
So, what’s the problem?!
Complex supply chains often face certain key common issues. Some of these are detailed below:
Producer:
Most of the transactions at this stage of the supply chain happen through cash. Thus, producers may or may not get a receipt of the payment. This makes the producer invisible in the entire supply chain, which leads to:
- Difficulty for producers (generally the poorest in the supply chain) to get loans from banks/lenders as there is no record of transactions or payment history. Thus, they are unable to arrange financial resources, making it impossible to move out of the vicious cycle of poverty that they are in.
- Chance that the producer might be deceived and not receive the price originally fixed.
Company:
Researchers at the MIT Sloan School of Management found that consumers may be willing to pay 2% to 10% more for products from companies that provide greater supply chain transparency.
What does this mean for the company?
This means that having access to all the data in the supply chain could allow companies to dramatically increase consumer trust, potentially increasing retention rate as well.
At the same time, it could also allow them to optimize inventory management, pinpoint sources of loopholes and make informed decisions about sourcing and distribution.
Unfortunately, this is not the reality today.
Most supply chains aren’t completely transparent or traceable and aren’t visible to every person involved in the chain.
Consumer:
Modern consumers are VERY interested in knowing the production processes of goods they use.
Check out this Forbes article for more on this!
GenZ is 15% more likely than older generations to rate brands based on ethical and environmental aspects. (73% are even ready to pay premiums to get access to such information).
But, the supply chain being untraceable, this information is not available to consumers.
Okay, got the problem. But what does BLOCKCHAIN do here?
To understand how blockchain could possibly solve these grinding problems, we first need to know its basics:
Blockchain 101!
Very simply put, blockchain is a DECENTRALIZED LEDGER. It is a linked chain made of units called blocks that store auditable data–data that EVERYONE in the chain can see.
Think of it as a Google spreadsheet. Multiple authors exist, right?
The same happens in blockchain. Everybody can contribute and add blocks.
EXCEPT
In Google spreadsheets, any of the authors can delete data from the document. This is not possible in a blockchain.
Blockchains are IMMUTABLE, which means that none of the participants can edit it unless ALL the participants agree to the alteration.
Hmm, this may all seem very abstract. Let us see the core components of blockchain to know better🧐
- Blocks: They’re the units which contain a collection of data. This data is information such as timestamps of recent transactions.
- Nodes: They’re the tons of computers in the network that maintain full copies of all the transactions.
- Hash: A unique cryptographic value of the block containing characters and numbers, basically a digital footprint. It is calculated based on the hash of the previous block.
- Mining: The process of verifying and adding blocks to a blockchain ledger in a proof-of-work consensus mechanism (I’ll tell what proof-of-work is in a bit)
- Block reward: The incentive mechanism earned by miners to encourage network participation.
I’ll give an example for you to understand better:
Let’s say that Person A wants to send $100 to Person B.
Person A will initiate the transaction, and information about the sender and receiver will be packaged and time stamped on a block.
This block will be sent to a queue called the mempool or memory pool where it will wait to be validated by a node.
Nodes validate the transaction, and the first one to do so receives a REWARD for doing so.
A lot of such verified transactions together make up a block, and that block is added to the blockchain.
And ta-da, the transaction is complete! Person B will successfully receive the $100!
This transaction can never be tampered with on the blockchain, since that would require a majority of the millions of nodes to agree to it.
Also, changing data on a block would change its hash value. And since all hash values are linked, changing one would lead to the changing of all hashes.
DOING ALL OF THIS IS IMPOSSIBLE (and wrong💀). Hence we say that blockchains are unchangeable.
Moving on, there’s 3 main types of blockchain.
Permissionless blockchains: Also known as trustless or public blockchains, they are open for any and all parties to join and work on a decentralized consensus mechanism. Eg: Bitcoin, Ethereum, Solana etc.
Permissioned blockchains: They can only be joined by invitation, thus typically have a smaller number of parties and are often more enterprise-oriented. Eg. Quorum, Ripple etc.
Consortium blockchains: They are a combination of multiple private blockchains belonging to organizations, where each organization represents one block. Eg. Hyperledger.
Next up, we have SMART CONTRACTS!
A Smart contract is basically a ‘self-executing code’. These codes execute themselves automatically when a certain task is done or criteria is met.
They are IRREVERSIBLE once deployed.
These smart contracts run on an ‘if-then’ basis.
Eg. IF person A transfers $100 to person B (let’s say you’re person B), THEN transfer $150 to person A.
Hmm, I know that’s a lot of information to take in, but here’s the last thing to know about blockchain.
Consensus Mechanisms: Proof of work (PoW) and Proof of stake (PoS)
PoW: Miners solve complex, computationally intensive algorithms to find the correct hash value and validate transactions. This takes time and effort. However, they receive rewards for doing so.
PoS: Coin owners must “stake” a specific amount of coins as collateral — for the chance to validate blocks. Validators are randomly selected and they receive transaction fees as rewards. However, this could lead to situations where only the riches are the validators.
And we’re done! Congrats if you made it through this!
So, now that we’ve gotten the two pieces of the puzzle (supply chain and blockchain), let’s join them!
How blockchain could ACTUALLY be used in SCM:
Blockchain based transactions are being piloted in many sectors including the financial, manufacturing, energy and government sectors.
Initially born out of a need for a more decentralized financial system, blockchain is finding innovative uses in a wide range of applications–including in the $50 trillion supply chain industry.
Following are the use cases of blockchain in the supply chain industry:
Recording transactions between different parties in the supply chain on a distributed and immutable ledger:
Payments made for each batch of products would be counted as one transaction.
Several of such transactions of different batches of products will be grouped as one block based on a common identifier (eg. a shipment tracking number) or a predefined time interval (eg. all transactions within a specific hour belong to the same block).
As the product moves through different intermediaries, more blocks would be created on the blockchain.
Each batch of goods will also have a unique identifier to it such as a QR code, barcode or RFID tag. They would contain all the necessary information about the product (seeds, farming method, temperature etc).
As the product would move through the supply chain, more information would be updated on those identifiers.
For example, it could start off with information regarding the raw materials, then include vehicle information, then processing and manufacturing information, and finally information about how much stock is still left.
Smart contracts allowing payments between different parties:
Every transaction between each party could be pre-decided and written in code as a smart contract.
The smart contract would execute itself as soon as the pre-decided task is completed, and the payment would be made.
This ensures that none of the parties face any issues concerning payment frauds, delays, wrong pricing etc.
Eg. A smart contract would automatically transfer $500 from the transporter to the farmer as soon as 50 kg of wheat is received by the transporter.
Let us now see how blockchain could be used in the coffee industry, all the way from the producer to the consumer:
- Producer — Each batch of coffee will have a unique identifier to it (QR code, barcode or RFID tag) which would detail the quality (seeds used, cultivation method etc.) and quantity of the products, and this data will be stored in the blockchain. [Advantage: Allows farmers to prove authenticity of their product, ensures they aren’t accused if product quality diminishes in transit.]
- Transporter: Information regarding the pick up time, vehicle, product quantity etc is further added to the blockchain. Smart contracts, agreed upon prior by the farmer and the transporter, would self-execute as soon as the criteria (eg. products successfully shipped from the farm) are met, and the payment would be made. The transporter would then receive his/her payment through smart contracts upon delivering to the factory/manufacturing unit [Advantage: Farmers and transporters receive their payments immediately upon pick-up and delivery respectively through smart contracts. They don’t have to deal with extensive paperwork as smart contracts facilitate automated document generation and verification.]
- Manufacturers: More information is added to the identifier, containing information about coffee processing, quality etc. Blockchain provides real-time data updates regarding inventory levels. [Advantage: Ensures optimal stock level, no excess inventory, thus cuts costs.]
- Consumer: Gets access to the whole production process of the final product they use. Builds trust with the company, enables them to make informed decisions such as buying products that are ethically and sustainably sourced. [Advantage: Having transparency and product information like never before!]
Huhh, huge process, right!
THIS IS WHAT BLOCKCHAIN OFFERS.
Complete transparency.
No lengthy paperwork.
No payment frauds.
No trust issues.
No counterfeiting.
Full access to information.
So, who’s at the forefront of this blockchain revolution in SCM?
📣Spotlight No.1) IBM Blockchain
IBM primarily offers 2 main solutions to clients:
IBM Blockchain Transparent Supply -
Allows companies to build their own blockchain-enabled collaboration and data-sharing ecosystem with their supply chain partners. It enables them to track the physical flow of goods across companies for new speed to insight, while choosing who to share what data with and what each permissioned party can see.
IBM Food Trust -
Basically the same thing as the first one, but built and modified for food supply chains.
Walmart and IBM collaborated together, where Walmart used IBM Food Trust to track its food supply chain and had barcodes on their products, allowing consumers to know how their products came to be.
Pietro Coricelli, Antonello Produce, Farmer Connect and Atea are some other companies who’ve used IBM’s blockchain services.
📣Spotlight No. 2) BanQu
BanQu is an SaaS (Software-as-a-service) that helps companies to trace the entire lifecycle of their products using blockchain.
It allows clients to power their traceability & circularity, ESG reporting, and regulatory compliances using the unaggregated source data, geolocated transactions, certifications, real-time reporting and tamper-proof records that its software can allow them to access.
At the same time, their aim is to give what they call the ‘economic passport’ to producers, who are often the poorest yet an indispensable part of the supply chain.
While blockchain offers immense potential in this domain, integrating it into existing logistics systems isn’t as smooth as it seems.
📣Spotlight No.3) Incube
Incube’s eco-system’s like WAVE and Honeywell identify, track and trace unit level items or batches as they move through their supply chain from raw material/ production to finished products on the shelf.
Challenges & Implementation Risks:
1) One of the first things a company has to decide is the type of blockchain it would need to build.
In permissionless blockchains, parties are not known or trusted. Conversely, in most supply chains, the parties are known and trusted.
The supply-chain world is very unlikely to accept open access simply because they don’t want to reveal proprietary details like demand, capacities, orders, prices, margins to all the members in the chain, mainly consumers.
However, having permissioned blockchains and a small number of parties would mean that the need to independently validate consensus protocols used in the public domain is limited.
Thus, the purpose of decentralization could be lost.
2) A supply chain blockchain is only as good as the data input into it. Smart contracts simply can’t execute themselves if parties don’t add data to the blockchain.
Thus, external verification systems would be necessary to put in place.
However, that is a complex process and still requires a lot of research put into it before we implement it at scale.
3) Consumers only see as much as companies want to disclose. Even if consumers can see the story behind their products, it is actually up to companies how much information from the entire supply chain they want to disclose. Thus, consumer trust still can’t be guaranteed.
So…
As we can see, there are still significant barriers we face before we fully tap blockchain into large supply chains, at scale.
However, blockchain still offers a world of opportunities for us in the SCM industry–if we manage to find solutions to these loopholes, blockchain can prove to be the holy grail of all supply chain issues.
I believe that the day we’ll drink our cappuccino knowing all about its making isn’t far.
With the current pace of advancements, it’s not long before we’ll appreciate every Miguel’s hard work behind our coffees.
