2 Chains: Block and Supply
A quick look at how Blockchain may shake up the Supply Chain industry.
Pictured above is the famous Ever Given that got stuck while traversing the Suez Canal. The losses incurred by such disruption are massive; for each of the six days the cargo transport was stuck, estimates say $9.6 billion of goods each day were held up! And this was just one such disturbance that affected supply chains globally.
The past few years have witnessed some major supply chain obstructions including the Ever Given incident and the ongoing COVID-19 pandemic as well as more recent disruptions from the so-called Freedom Convoy and the Russia-Ukraine situation. Whether these last days or years, affect single industries or every single industry, supply chains must be able to adapt quickly and resolve issues efficiently. Drum roll please… and here is where blockchain comes in! Blockchain can help improve the supply chain process from the top down, and in this post, we will take a deep look into its specific applications that will make an impact on such a crucial sector of the economy.
Who’s Using Blockchain Already?
But first, what big names might we recognize that are currently utilizing the emerging technology? We’ll take a quick look at a few companies that have implemented systems and why they chose to do so:
In the jewelry supply chain, traceability of diamonds or precious elements is important to ensure the raw materials are coming from ethical sources. De Beers is leveraging blockchain technology Tracr to track the diamonds from mine to retail counter. This ensures the authenticity of the diamonds and eliminates diamonds from conflict zones.
The largest retailer in the world, Walmart, is utilizing blockchain to add transparency to its food supply. By digitizing the entire process, they not only are able to track products from their origin but allow the employees to know exactly where it is stored presently. Tracking the origin of food takes seconds instead of days, accelerating and automating what used to be a complex process.
In the shipping industry, both FedEx and UPS have joined the Blockchain in Trucking Alliance (BiTA) to allow for increased transparency across organizations. UPS also has plans to implement a blockchain system that would store package destinations, movements, and methods of transportation, along with other information to ensure efficiency and transparency within their company. FedEx launched a pilot program similar to UPS to help determine which data should be stored to resolve any disputes with customers. And it doesn’t stop here! There are hundreds of companies trying to implement blockchain to improve the overall supply chain process. What has been such a robotic process has the possibility of being optimized and automated to save companies thousands of hours and dollars.
Supply Chain Basics
Before gaining an understanding of where and how blockchain can be utilized to resolve issues in supply chains, let us first delve into the fundamentals of supply chains. In the most basic sense, a supply chain, according to Investopedia.com, is simply a “network between a company and its suppliers to produce and distribute a specific product to the final buyer.” As one takes a deeper look into all the steps necessary to get from supplier to final buyer, one may realize that also includes sourcing or extracting raw materials, refining those materials into basic parts, assembling those parts, and selling and delivering the finished product to consumers. Take the ever famous Ticonderoga #2 Pencil:
The graphite and clay from Brazil and Mexico must be mined, refined, shipped, and manufactured into the led center of the pencil. Wood is cut down in Sweden or South Africa, milled, transported, and manufactured into the body of the pencil. The paint from Kazakhstan or Estonia must be transported and coat the body of the pencil. Can’t forget the aluminum ferrule attaching the wood to the eraser, which has to be mined in China or Mozambique, refined, shipped, and bent into shape. And, I know I make lots of mistakes, so the rubber for the eraser must be harvested in Thailand or Malaysia, refined, transported, and assembled into the pencil. Thus, such a “simple” item has a much more complex supply chain and steps to complete a finished product than one would ever imagine. Now extend this idea to much more complicated products such as cars, laptops, etc that have 10 times as many parts that need to be considered, and one can see how quickly supply chains can become a difficult process.
Not only do all of the steps in the manufacturing process need to occur, but documentation, contracts, physical movement of the goods, storage of the goods, inventory management, and authentication must be run to perfection for a product to hit the market and meet all of the customers’ demands. Thus, supply chains are quite complex and require management, tracking, and optimization to ensure the most efficient and cost-effective solutions are available for businesses.
Common Challenges
Supply chains are complex ecosystems that allow businesses to manufacture and distribute goods; along with that process, a variety of common challenges arise:
- Old software and poor reporting lead to insufficient information and a lack of transparency when tracking the movement of goods
- Delays and disruptions like those mentioned above create issues both upstream and downstream of the initial back-up
- Inaccurate and insufficient reports result in wasted time, effort, and resources trying to resolve other supply chain issues
- All the steps in the process require trusted relationships to meet consistent demand.
While blockchain is not capable of solving all of these issues, the technology is capable of aiding the process in all steps and reducing the impact of some of these issues.
Blockchain’s Role
At its most fundamental level, blockchain is a digital, public ledger that exists across a network. While most people think of cryptocurrencies such as Bitcoin when they hear the word blockchain, the actual blockchain lies in the ledger that records all of the transactions of Bitcoin. Thus, when applying this technology to supply chains, blockchain would serve as a record of assets exchanged between parties in the chain. Inventory, orders, loans, you name it; all would be given a unique identifier in the form of a digital token. Participants would be given their own digital signature that would be used to sign the blocks as they are added to the chain. Hence, every transaction is recorded on the blockchain as the transfer of the tokens occurs from one participant to another.
The 3 T’s
- Trust
The main benefits of adding blockchain technology to current supply chains can be summarized in three words: trust, transparency, and time. One of the key benefits of blockchain is the fact that the data on the chain is decentralized and immutable. Thus, participants on the chain can trust that the data is accurate and cannot be altered. Currently, companies maintain their own records, which can result in disputes if these records do not match. However, if all the data is decentralized, record disputes would be eliminated altogether, as the data is stored on a single chain, free from the manipulation of greedy businessmen. Further, companies can also leverage the immutability of blockchain to gain more trust from their consumers. Take for example a food company that claims to only sell organic, fair-trade goods. A blockchain-aided supply chain can easily prove the sources of all the goods and use it to back claims and gain trust from customers. Hence, blockchain adds trust to the supply chain process.
2. Transparency
Furthermore, current supply chain records are split up into many different systems for each company, and the data is often unclear, unorganized, and hard to navigate. In contrast, the data on a blockchain system, which includes additional aspects not regularly included in records, would be stored automatically with a timestamp (follow this link for a quick read on timestamps). Additionally, the inherent chain structure of blockchain greatly increases the traceability of a good from end to end of the supply chain, which can be viewed by all participants, not just those directly involved in each specific transaction. Thus, blockchain adds transparency and can help resolve disputes more quickly than current supply chain ledgers.
3. Time
Finally, time can be saved and result in more efficient supply chains if blockchain technology is implemented. Smart contracts can be integrated into the system to automatically assess a transaction and take actions, whether that be sending payment, recording an entry, or flagging an issue for manual inspection. This feature would reduce the time it takes for all of these tasks to be done manually. Moreover, issues within the supply chain can be resolved more quickly. Due to the transparency mentioned above, it is much faster to identify where and when issues begin as a simple search on the blockchain can identify the root cause as opposed to rummaging through and comparing documents to identify the issue. In essence, blockchain can help improve supply chains by allowing interacting members to have complete trust in each other’s records, increase the transparency of the record-keeping system, and reduce the time spent performing supply chain-related tasks and resolving issues.
Some Hurdles to Overcome
While blockchain can aid the supply chain process greatly, we would be lying if there weren’t any drawbacks to its implementation, like any other emerging technology.
One of the key differences between cryptocurrencies and blockchains for supply chains is the fact that these would have to be permissioned blockchains. In essence, most blockchains are anonymous and open to anyone, while permissioned ones require specific access between known parties. One drawback to this setup is that there would be fewer nodes making up the blockchain, typically known to each other, which would make it easier to work together to change a block. Thus, determining who is allowed to join the system would be much more important. Due to the open and transparent nature of the system, data on the chain could be used to gather competitive intelligence or predict market movements based on transactions. Firms could curb this issue by limiting what specific information would be included on the chain while also thoroughly vetting who would be a participant.
Moreover, the issue with the speed of current consensus mechanisms used by blockchain platforms is pressing. Yes, right now blockchain increases security, traceability, etc, but the component of scalability cannot be ignored, especially when it is implemented into very advanced supply chains that are the backbone of billion-dollar companies. However, as the proposed technologies would be permission-based, a certain level of trust would already exist and could allow for a simpler and faster verification method. An example would be a round-robin protocol, which rotates the right to add blocks between participants in a fixed order. The members are all known and the order is defined, thus illegitimate data would still be easy to track and identify. In addition, the current scalability issues are a macro problem, meaning that as blockchain becomes more heavily adopted and the technology improves, this problem of scalability will be solved for everyone, including supply chains.
Lastly, no aspect of blockchain can eliminate the human error associated with blockchains. Intentional fraudulent data inputted into the system, or an incorrect count could result in inaccurate data being recorded on the chain (which cannot be altered due to the immutability of blockchain). Blockchain technology itself cannot prevent incorrect information from being added to the chain but can help identify and resolve where this inaccuracy arose. Further, some companies are reducing these issues by conducting strict physical audits when goods first enter a supply chain and integrating IoT (Internet of Things) devices and sensors to track products and add the records to the blockchain automatically. dApps could also be utilized to track goods and communicate with the blockchain to ensure the data is accurate. Thus, while blockchain would help resolve or reduce many issues associated with supply chains, it does not come without its own hurdles to implement a working system.
Overcomplicating the System
There are obvious hurdles for such a new and complex technology. What’s important is to see realize when blockchain actually helps a system, and when it simply complicates it. An important metric we found that helps assess this is called the “Blockchain Fitness Index” which was developed by the Digital Supply Chain Institute. After giving information about the supply chain of a certain company, one can get a better idea of how blockchain can actually help this system, and if it is worthwhile to invest the time in. Hopefully, with enough time, blockchain solutions will become more efficient and easier to use, but for now, we must do our due diligence with such a complicated and innovative technology
The Future of Supply Chains
Nonetheless, blockchain technology allows supply chains to become more efficient, more transparent, and more trustworthy through the inherent properties of blockchain. While the technology comes with drawbacks and cannot solve all issues associated with such a complex industry, it provides solutions that many companies, including some of the largest organizations in the world, see as a way to reduce costs and optimize their supply chains. And while it might not be able to prevent the next Ever Given from getting stuck in the Suez Canal, supply chain managers can find major time, trust, and transparency gains from the combination of two chains: block and supply.
Be sure to stay posted for the next post in the series — a look into governments around the world and their recent explorations with cryptocurrencies!
Blog Contributor:
Matt Brotnow |@mbrotnow20 | https://medium.com/@mbrotnow20
Resources Used:
1. Building a Transparent Supply Chain — In-depth review of the applications, advantages, and disadvantages of implementing blockchain technology into supply chains.
2. The Pros and Cons of Blockchain in Supply Chain — Brief look into the pros and cons of blockchain implementation in the industry.
3. Top Companies Using Blockchain — An overview of current applications of blockchain in a wide variety of industries.
4. How to Implement Blockchain in Supply Chain Management? — An evaluation of blockchain’s benefits to the supply chain industry.
5. Blockchain Fitness Index — Digital Supply Chain Institute — A new tool to assess blockchain’s implementation within given companies.
