Blockchain in Supply Chains
In our last article about the use of blockchain in the commercial sector BANKEX Managing Director Constantine Kurbatoff mentioned how blockchain could be utilized in supply chain and logistics applications. In this article, he takes a more detailed look specifically at how blockchain technology can be useful in the supply chain industry.
The Problems of Supply Chain Industry
The supply chain industry consists of various systems to deliver products from one or more manufacturers to end users. The industry consists of producers, retailers and end consumers connected through delivery systems.
According to Allied Market Research, a global market research and business consulting company, the worldwide logistic market size will exceed USD 12 trillion by 2022.
The industry is not usually transparent for end consumers of manufactured goods — products just magically appear in stores and most of us have no idea where things come from.
This complicates the process of product identification from the point of view of the consumer — the quality and characteristics of a given product are important to the customer, but they are often on their own when it comes to determining quality, the original source of a product and if such products are what the label or a retailer says they are.
Often, a retailer doesn’t even know where products are actually from.
A standard way of addressing this problem is for producers or manufacturers to use some kind of label or marking that indicates the country of origin and other information about a product. In the majority of cases, these markings are true and accurate, but it is also a common that a reseller distorts information about a product.
Whether it’s a different country of origin or a different brand or some other ‘enhancement’ of various properties of a product to increase its value in the eyes of a consumer, a seller often knows the buyer will never be found out and he may have much to gain by tweaking a label.
For example, some brand products sold even in expensive retail outlet have false labels. Owners of these shops order replica goods from China or Bangladesh and mix them with authentic products and sell them as genuine.
In other cases, the mislabeled products confuse both retailers and consumers. In a similar way, labels on products applied by a retailer can also be distorted. Labels that have expiration dates or other information about freshness or use by dates are often the only indicator of the quality of perishable goods. In this case, there are risks that the product bearing a mark with a production date or expiration date is inaccurate.
It is difficult to validate the integrity of a producer or other intermediaries that add information to a product along a supply chain.
A consumer often has only the brand and his experience of a brand to rely on.
Of course, all this confusion is due to the competitive nature of both brands and retail outlets. The play’s the thing and when a buyer does not have the knowledge or resources to quickly assess the origin or quality of a good, he is at the mercy of a retailer. His trust for a retailer is low and he seeks alternatives. In this case the consumer can only rely on some features of the product that provide information needed to assess quality or origin or he has to trust to the retailer where a purchase was made. Consumers consider the reputation of retailers, their location and word of mouth references to find the best quality to price ratio available in their environment. When a new brand of product appears in a retail shop, consumers want to believe that the brand and authenticity of a product has been verified by the retailer and that the quality matches the description of the product. Consumers routinely pay for their confidence in this verification and may understand that this is reflected in the price of the goods.
In the case of products sold through an online retailer, consumers have even less information about the products and the retailer and their confidence is more abstract. Consumers are less likely to purchases a product through an online store because of quality or brand but rather for economy or convenience.
Until recently, the only solution that participants had on a supply chain was to simply trust those further up the chain.
The emergence of blockchain, however, opens new possibilities for all participants at every point in the supply chain. The transparency that blockchain brings to supply chains not only prevents abuse, but reinfices quality and trust.
Advantages of Blockchain over Standard Databases
How can blockchain be used in supply chains and what are its advantages?
Large distributors have their own warehouse databases that store information about the volume of goods available, price, country of origin, date of production, and other information. Consumers do not have access to these databases. If you are persistent, you might succeed in calling a distribution representative to get information about the availability and qualities of a certain product. In the case of online retailers, this information may seem easier to come by — but sellers only display product information on their websites that they want to display. Other information will be unavailable.
In addition, different participants of a supply chain have different databases and they are most often incompatible and uncoordinated, making it nearly impossible to prove the authenticity of goods supplied even when they are open to view.
For example, when you buy a Louis Vuitton bag at a retail outlet, you can never be 100% sure that the bag is not a counterfeit produced in China. Because of disparate databases, even a retailer may not know if the bag is the real deal or not. With a unified database accessible anytime and anywhere and by all, such a situation would be far less likely. It would enable everyone to trace the path of products from beginning to end. Furthermore, such a system would enable supply chain participants to avoid products that had no accessible history.
One of the advantages of blockchain based supply chain systems over standard databases is that data in blockchain cannot be changed. The delivery of a product with a certain expiration date may be delayed, for example. A retailer with access to only a standard database might choose to ignore this with a certain amount of impunity because it will be very hard for others to know if he decides to make a new label with a different date to make this product look more recent. Other information characteristics of a product could be changed in a similar way to make it look like deadlines were met, shipments were received from England or Germany instead of China or Bangladesh, and so on. The retailer has relative impunity and obvious motivation to do this. With a blockchain based supply chain, however, a retailer could not do this without everyone else on the supply chain noticing a discrepancy. Others would know that information changed a certain point, a certain time and that certain people were responsible. Everyone would know if a product comes from China or not and such information cannot be changed — it would have multiple backups, even.
Another advantage of blockchain is that a retailer can control suppliers by monitoring products from the moment they are moved from a warehouse. Retailers offering prepayment for goods in production can be sure that they are produced at a particular plant in a particular place and not by a substitute manufacturer from another country, thus adding previously unimaginable levels of quality control. Without blockchain, such control would be almost impossible. So with a unified database, retailers would have the opportunity to verify many aspects of the products that they put on their shelves and they could offer guarantees of authenticity to their clients as well. This would not only enhance retailer relations with higher levels of trust — it would redefine the nature of brands themselves. Also, it provides additional for marketing efforts, as producer knows nothing about its product distribution around the world.
Are there other advantages to the application of blockchain in supply chains?
Unified product databases could be transformed in terms of reliability and quality if they were not only accessible by all parties on the supply chain, but especially if they were managed by a coalition of supply chain participants, each looking out for their own interests. Participants in this coalition would have natural incentives to monitor data provided by counterparties and to validate the reliability of such data. In an ordinary database, an individual owner can manage data by deleting or changing the information. A company that owns a particular server with the database on it might have economic problems and be forced to shut down operations, especially small operators, and this removes data from the overall picture. The data on blockchain based supply chains is not dependant on private servers, however, and the failure of any particular server does not affect the integrity of the system as a whole. A blockchain based system has built in function of recording every payment, every shipment, every sale and this record is available to all as market data as well so everyone has equal footing in regards to knowing the state of a particular market, the historical success or failure of participants and opportunities to meet unmet needs. No one entity has control, but rather all have shared responsibility according to their interest.
A unique feature of blockchain based supply chain systems is the possibility of some network for logistics, quality control and payment. If a retailer of a particular product wants to make a contract for supply, he can pay for it using internal blockchain currency. This simplifies the system even further as there is no need for additional systems for managing payment or third parties to input financial information in a database. Consumers could inputs information to the network directly at the cash register when they make a purchases just as when a retailer orders a shipment or a supplier acknowledges a payment from a retailer. Also it provides the information to grant warranty service by a producer. All transaction information is on the blockchain, stored forever. This is an advantage of blockchain over the standard database that is still difficult to even comprehend in its potential to transform commerce as we know it — everything from production to shipping to retail sales and consumption would be affected.
Blockchain databases managed by mutually independent users such as producers of goods, wholesalers, retailers and transport providers would have completely new significance. Participants could provide an audits of each other, feedback on processes and reach new agreements for mutual benefit. Consumers would have more direct power to affect the reputation of brands. The need to pay to record an entry on the blockchain will help reduce the number of false or irrelevant feedback.
Of course, a blockchain based supply chain system would not eliminate human error. It would be possible for a manufacturer to make mistakes by inputting incorrect data on the blockchain. However, it would also be possible to make other records showing that the previous information was wrong. In this way, human error can be managed as an organic element in the system and such mistakes need not permanently affect the reputation of a manufacturer, retailer or other participant of the system. Errors would not necessarily disrupt the functioning of the entire system.
With the help of blockchain, consumers can easily monitor all information about the retailers. Large consumers might require not only high-quality goods, but also high-quality service whose main features are secure and stable supply lines. With blockchain based networking, small suppliers with high-quality service would be able to compete with large suppliers. Opportunities will be more readily apparent and competition in a highly quality controlled environment will help businesses and markets to grow and flourish.
With the use of blockchain in supply chain systems, global markets will become increasingly more transparent and even more complex. This will boost efficiency that will drive the improvement of all aspects of markets — consumers will buy more for less, producers will make better, more targeted goods and retailers will have better selection and service for consumers. Ultimately, this will stimulate the global economy and increase product diversity, as every new contract brings benefits to the industry no matter where it comes from or were its going to.
