Supply Chains and Decentralisation
Unlocking the potential for the global trade
If you take a quick look around yourself right now, there is a very high probability that most of the objects surrounding you came through some form of regional, national or global supply chain. In the most general terms, what constitutes a supply chain is a string of entities that are respectively adding inputs into a product or service that is offered on the market. Supply chains today are increasingly gaining on complexity which creates challenges with managing this multitude of often fluid relations effectively.
Information asymmetry as impediment to trust
At the very core of any such business relation lies trust which is hard to earn and very easy to lose. Fragility of trust-building is further enhanced by the fact that we are faced with information asymmetry leading to limited accountability. Information asymmetry (a term introduced by Dr. Akerlof) is a situation where actors in the market have vastly different access to information regarding the subject of the trade. This in turn means that they will make suboptimal decisions and, as shown by dr. Akerlof, it will eventually run good actors out of the market.
A symptom of such asymmetry in supply chains is very limited visibility throughout the entire chain. Every entity has merely an outlook to one step back (suppliers) and one step forwards (buyers). When this is coupled with distorted accountability where certain actors are taking on responsibility beyond the scope of their inputs and vice-versa, we have a difficult situation on our hands. One in which responses to crisis situations are slow (e.g. product recalls, scandals), provenance information is unavailable, multi-organisational optimisations are difficult, compliance and quality processes are overly work intensive and many more.
In order to sufficiently address these issues, it will take a collaborative effort on different levels. At a fundamental one, though, decentralisation can be a very powerful tool, especially for the three reasons elaborated below.
1) Decentralisation as a flattening mechanism
Decentralised consensus, firstly used in finance, proved to be a great flattening mechanism for any network structure. The fact that Bitcoin network has delivered on the promises of serving as a digital currency transferring value among peers without central authority managing the process is only the first showcase of the power of decentralised consensus.
Similar to what it has done in the case of finance, we can implement this principle when thinking about supply chains. Decentralising the consensus on what has happened in a particular instance of a supply chain is creating a very precise accountability system that is the first necessary step of building transparency. With the absence of a central authority, each entity takes full responsibility exactly for the data they are responsible for and that they provide in a decentralised network. This allows good actors to prove their worth every single time as well as puts a light on bad actors in a case something goes south.
2) Immutability for data integrity
Another important innovation that Bitcoin network introduced to the decentralised consensus was keeping it in an open ledger in form of a blockchain. Distributing the ledger throughout the network provided its immutability and accessibility of entire history of transactions at all times.
Translating that to supply chains creates additional value to the decentralised approach to managing supply chains. If we have created laser-sharp accountability in the first step, with the immutability of provided data we get data integrity. The fact that data stored in blockchain cannot be altered or tampered with in any way means that entities must put significant effort into making sure that their data is accurate every time. In addition to that, it also allows for audits and checks for however far back in the past someone would want to look.
3) Preventing collusion
Third and final characteristic of decentralised systems which is important for supply chains is preventing the possibility of collusion. Every open system is facing a possibility of certain actors behaving maliciously. In supply chains, such behaviour would be wanting to alter the data input from a single actor perspective or a collusion of a group of actors within a certain supply chain. Combining decentralised consensus and immutable ledgers with tailored data replication (read more in the OriginTrail whitepaper), a system eliminating the possibility of collusion is achieved.
Benefits of decentralised management of supply chains
By following all of the above, we are left with supply chains that are transparent and are the needed layer for creating trust. All entities acting in a supply chain that have genuine intentions can benefit from such decentralised systems as they are motivated to take on responsibility for what their input is (and only for what their input is). At the same time, they are motivated to uphold other entities to the same level of accountability. Wanting to remain in a supply chain system with central authority when it is proven that it is not a systemic necessity can only hint to alternative motivations beyond what an entity is responsible for.
At OriginTrail, we are strong believers that we will see great improvements in trust across the supply chains with decentralised systems entering the field. We are already unlocking this potential with our current partners as well as being very excited about the new projects we are taking on. Follow our next steps by subscribing to our newsletter or joining our Telegram group.
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