Blockchain in Supply Chain: An Inevitability?
Blockchain technology is set to disrupt the supply chain by enabling the creation of an easily-accessible, tamper-proof and shareable single source of truth. This in turn will pave the way for process automation via smart contracts which will significantly reduce frictional costs and reduce risks, especially when paired with IoT acting as oracles. If its full potential is realized, blockchain will bring in the much needed element of trust in the supply chain, from both the consumer and supplier side. As such, this is more likely to be realized via implementation on a public network as it is only when accessibility is unrestricted that trust can grow organically as people are given the choice between different supply chain models. Critically, it should be public else from a consumer’s point of view, nothing has changed.
With that being said, there must also be incentives for the current incumbents to bear the initial set-up costs. This risk will likely have to be distributed across the supply-side players as a single supplier is unlikely to recover the full cost of implementing blockchain technology due to the surplus generated naturally going towards the consumer in reduced out-of -pocket costs. Additionally, in order for such a blockchain to be successful and effectively inter-operate with existing and future infrastructure, it would also require standards and frameworks to be set from both an operational and legislative standpoint. Hence, the benefits of blockchain will have to be weighed against the significant coordination and setup costs.
Pros and Cons
Chief among this consideration for companies is that blockchain will enhance transparency and traceability throughout the supply chain therefore allowing increased visibility for demand forecasting and risk management. This is made possible as a blockchain is essentially a shared ledger that is validated and updated in real time. Critically, such a system prevents redundant mirroring of the same document across the supply chain and therefore also avoids the problem of desynchronization. As such, this mitigates delays from paperwork required for trade finance record keeping while simultaneously optimizing production and transportation time throughout the supply chain by enabling real time synchronization of decisions with supply chain partners.
Consequently, this live tracking of transactions also ensures authenticity through improved traceability. This will likely be brought about by blockchain adoption pushing the industry to move towards an API-based technology. Hence, quality control is better assured via tracking the provenance and proper handling of goods. Better traceability and improved lines of accountability will also enhance consumer protection as it becomes easier to detect if and when a product was compromised. Moreover, verification of certifications on the blockchain makes document forging and signing much harder therefore minimizing instances of counterfeiting. Of course fraud is still possible if data uploaded to the blockchain is malicious or misleading
however, this could be minimized through cryptoeconomic incentives, reputational systems or managed access in the case of private blockchains.
Paperwork digitization also enables smart contracting functionality to be built on top of such invoices and contracts further optimizing end-to-end processes. Smart contracts can be programmed to automatically check when there is an out-of -balance condition based on pre-agreed contract terms therefore eliminating the invoice reconciliation process while also automating the tax process. Moreover, this prevents bad transactions to be written to the ledger in the first place. If smart contracts are properly coupled with tamper-proof IoT devices, such devices could then act as the trigger for smart contracts which opens up the possibility for much more fine-grained management of the supply chain.
Even without smart contracting functionalities, the increased data resolution on the blockchain will significantly improve demand forecasting and inventory management. More micro tracking of demand better allows the buyer to send the supplier the actual level of inventory consumption to be set against a pre-agreed service level rather than deal with purchase orders. Synchronous access to such data will also democratize forecasting and mitigate inflation of orders as they move upstream. At the same time, such live data will also improve financial liquidity for participants in the supply chain as payment lead times and payment review time is minimized as document transfer time is effectively eliminated. Goods might also be redirected based on multichannel demand changes given the information made available to intermediaries. Additionally, companies are expected to benefit from improved just-in time production as the product spends drastically less time incurring rent while being stuck at a port.
A likely inevitability
Given the reduced friction to trade from both a convenience and cost perspective, it is expected that the move to blockchain will encourage demand-side growth while reducing the economic rent being extracted by supply-side vendors. Critically, trust in the network will improve significantly with a public implementation of the blockchain as transparency ensures that the supply chain remains competitive via elimination of information asymmetry. Blockchain’s breakthrough potential is something companies will have to be wary of as it optimizes supply chain efficiencies, automates compliance, and enforces quality assurance processes; all of which aligns with consumer’s preferences for lower costs, shorter waiting times, and increased visibility.
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