Establishing trust in a global supply chain

Global supply chains are omnipresent among most products we consume, but do we really know where our products came from and what happened to it along the way?

The global supply chain emerged throughout the 20th century and has enhanced productivity all over the globe. The variety and quantity of products that are now available to consumers all over the world are unprecedented. Adam Smith’s idea of Absolute Cost Advantage laid the groundwork for trade, where division of labor allows two parties to take advantage of the capabilities of the other, in addition to their own. Hence, an exchange of goods only takes place if one party can produce a commodity at a lower production cost than the other, thereby creating economies of scale. The increasing means of transportation, communication and tracing have all contributed to global sourcing becoming the standard over the exception.

Nonetheless, despite all innovation over the years, supply chain managers still face difficulties on a daily basis.

1. Administrative hassle — The paper trail required to comply with all regulations and to clear products through customs

2. Quality control — The exact date and place where manufactured components were added to the product

3. Lead time — The exact amount of time a specific product spent in every part of the supply chain

4. Fair trade — The price paid to the producers in developing countries

Technological innovation has always been a source of productivity enhancement (e.g. Internet). Blockchain technology can be used to transparently and securely register and transmit valuable data and assets peer-to-peer without a third party. Every (trans)action within the blockchain network is verified and validated by nodes in the network, making it impossible to alter the information without consent of all nodes.

This key characteristic of blockchain technology makes it highly suitable for a global supply chain, as the need for trust is replaced with an immutable ledger and smart contracts.

Many of the core characteristics of a traditional supply chain can be enhanced by blockchain technology:

1. Standardizing transactions — Through smart contracts, transactions can be automated and standardized. The smart contracts execute pre-agreed terms and give shipment authorization.

2. Reducing risks — Transactions of goods and payments between parties can be settled nearly instant, reducing validation time and settlement risk.

3. Transparency — A tag attached to each product or batch results in radical transparency. Place of origin, storage, authenticity, property certificates and records are all easily accessible.

4. Security — All records are stored on the blockchain. These cannot be deleted or altered without consensus and provide tamper-proof evidence that guarantees the integrity of the information

5. Quality — Blockchain can support identification of bad actors supplying insufficient quality produce and help to detect fraudulent behavior. (inconsistencies with validation, suspicious identity, etc) If suspicious activity takes place, stakeholders in the network will be immediately informed.

Despite the significant potential of blockchain technology to ease the journey of products to the customer, we also need to recognize its limitations. When it comes to registering physical products, a blockchain is reliant on accurate input of data at the source. This requires suppliers to implement robust processes that verify and guarantee correct input of data, which in some instances will need to be financed by richer parts of the supply chain.

Hence, it is recommended that companies first conduct research on the difficulty of implementing blockchain technology in their supply chain, whilst taking the potential value gain into account. Below we have indexed several natural resources based on their feasibility of implementation and the value to be gained, facilitating a rational decision on whether to pursue a blockchain fueled supply chain.

Figure 1: High-risk resources for fraud such as diamonds and teak wood are most likely to gain value from the introduction of blockchain technology.

We have conducted a granular assessment at the use case level to determine opportunities for the supply chain of each natural resource. The model determines feasibility based on the following 4 criteria; type, technological maturity, standards & regulations, ecosystem. The value impact is determined by assessing; revenue increase, cost reduction, increased traceability and social impact. Particularly natural resources with (a history of) questionable sourcing stand much to gain in value through blockchain technology (e.g. teak wood & diamonds). Teak wood sourced from Myanmar is declared illegal by the government. Teak wood’s rarity makes it highly valuable and therefore subject to fraud. Legal teak wood sourced from eco farms in Indonesia stands much to gain by proving that the wood was produced eco friendly, both in charging higher prices as by cutting documentation costs. The likelihood of successfully implementing blockchain is higher for products without complex ecosystems and production processes. Supply chains with many different sources at the origin, with relatively little technological capabilities (farms in developing countries) make it more difficult to implement a rigorous process to guarantee adequate and correct input of data. Feasibility is high for products where a (advanced) single company owns the entire supply chain from the origin to the store (E.G. De Beers), as less complex collaboration is required and technological capabilities are abundant.

The usage of blockchain to streamline supply chains is starting to become widely adopted by multinationals.

Shipping giant Maersk has joined forces with IBM to launch blockchain for the seas. Food producers & providers such as Cargill, Coca-Cola and Ben & Jerry’s have incorporated blockchain into their systems. The latest trend has been to leverage blockchain for Fairtrade, enabling consumers to see the actual price paid to the farmer for the product that they are consuming. Examples of this can be found (among others) in the sugar industry[1] and the coffee & tea industry[2].

Enough talk about what other companies are doing. The question is, what are you doing and what should you be doing in the future? Blockchain will have a lasting impact on supply chains because it enhances transparency, security & traceability. Those natural resources that stand to gain the most are frequently subject to fraud. Despite the potential of blockchain, it only works when the data input at the origin is trustworthy, which requires a thorough understanding of technology but also of human behavior. As outlined in the framework, supply chains with complex ecosystems and little technological maturity tend to experience more difficulties. We recommend to first investigate the feasibility of implementing blockchain and the value gain, before researching implementation strategies. Keep in mind, what starts as research today, will be the technology standard of tomorrow.

[1] https://www.reuters.com/article/us-blockchain-coca-cola-labor/coca-cola-u-s-state-dept-to-use-blockchain-to-combat-forced-labor-idUSKCN1GS2PY

[2] https://www.supplychaindive.com/news/unilever-blockchain-tea/513365/

[3] Caltrix research on natural resources