Blockchain Technology Application to Supply Chain

Popularly-claimed Advantages and Followed-up Suspicions Regarding the Real Applicability and Effectiveness

Keywords (#hashtags):

#blockchain #supply chain #blockchain-based supply chain #supply chain inefficiency #supply chain misconduct #applicability #effectiveness #blockchain-based supply chain performance measurement

Highlights

• Research: Conduct research on supply chain inefficiency and misconduct problems; identify unique characteristics of blockchain technology that have great potential to solve supply chain problems; raise suspicions about the applicability and effectiveness of the blockchain-based supply chain
• Innovation: Identify some new challenges of the blockchain-based system to support the suspicions
• Leadership: Provide future research directions for improving research methodologies and solving the challenges brought by blockchain technology; specifically provide guidance in creating a qualified blockchain-based supply chain performance measurement framework.

Figure 1: Mind Map for the Paper (Created by Whimscal)

Disclaimer: This article is part of the final deliverables of the SciEcon Blockchain + Lab, SciEcon Lab Incubator program, Spring 2022.

SciEcon Lab Incubator Program Inaugural Committee:

Chair: Prof. Luyao Zhang

Co-Chairs: Zichao Chen and Yufan Zhang

Chairs from partner programs: Tianyu Wu, Xinyu Tian, Zesen Zhuang, Lewis Tian, and Jiasheng Zhu

SciEcon Blockchain + Lab leaders Spring 2022:

Yutong Sun and Josh Manto

Acknowledgments: I am grateful for the insightful comments from the following scholars that help improve the article.

• Panelists and discussants at SciEcon Blockchain + Symposium: Prof. Xin Tong, Prof. Feng Tian, Prof. Gergely Horvath
• The SciEcon lab incubator program committee and the editorial board at SciEcon insight, research track.

SciEcon Insight Research Track Editorial Board

Design: Yixuan Li

Executive Editor: Lewis Tian

Associate Editor: Xinyu Tian

Founding Editor-in-Chief: Prof. Luyao Zhang

Introduction

The COVID-19 pandemic is continuously putting pressure on the operation of business firms and has led to a series of supply chain disruptions including the famous global chip shortage since 2020. The chip shortage not only led to the lack of supply and an increase in the price level in more than 169 industries, but also again drew the attention of consumers, business leaders, and scholars to the vulnerability of the global supply chain. Discussion on the supply chain problems and relevant solutions has been ongoing for decades among scholars. In recent years, blockchain technology has been viewed as a “promising” and “disruptive” technology for supply chain management (Jabbar et al., 2020; Saberi et al., 2019). However, it might still be too early to have faith in its large-scale applicability and post-adoption effectiveness. This paper will first summarize two key types of supply chain problems and the application potential of blockchain technology to solve them, and then propose four fundamental questions with argumentation as suspicions on its real applicability and effectiveness. A list of potential future research directions will be presented at the end of this paper.

Figure 2: Blockchain Technology for Supply Chain, by Hurst (2022)

Blockchain-Based Supply Chain

Modern Global Supply Chain and its Key Problems

The supply chain is a network of resources, people, information, organizations, and activities involved in the transformation of raw materials to final products for delivery from suppliers to consumers (Azzi et al., 2019; Jabbar et al., 2020). The modern global supply chain is becoming more and more complex, with “multi-echelon and geographically disjointed entities” competing to provide services under great expectation and regulatory pressure (Johnson, 2006; Lambert and Enz, 2017; Saberi et al., 2019). Substantial numbers of literature have claimed that currently the supply chain is heavily relying on the centralized information management system involving massive third parties and intermediaries, where two critical problems are highlighted: supply chain inefficiency and misconduct.

1. Supply Chain Inefficiency

One leading cause of the supply chain inefficiency is the complicated process of transactions, including tedious paperwork, time-consuming payment settlement procedures with low automatization, and numerous intermediaries. This kind of complicated process is particularly serious in cross-border transactions. Jabbar et al. (2020) have argued that the clearance procedure is often processed manually, which will increase the total shipping costs by 15 to 50%. They have also provided an example:

“For example, to ship refrigerated products from East Africa to Europe, one would have to obtain written approvals from nearly 30 organizations.” (Jabbar et al., 2020)

Dealing with manual procedures and so many relevant organizations will seriously delay the delivery of goods, adding extra risks for goods like food, and a large amount of extra cost is paid compared to a smart and decentralized transaction system.

Besides, supply chain misconduct, which will be introduced later, also aggravates the inefficiency problem. Low efficiency can weaken the resilience of the supply chain and generate unimaginable great costs in time, money, and other resources, adding to the burden of this already-complex supply chain network. It is particularly fatal for the business firms under the current global pandemic situation with great uncertainty, as the supply chain lacks flexibility and quick reaction to the rapidly changing local policies and other unexpected issues.

2. Supply Chain Misconduct

Supply chain misconduct is even more common and serious in the current supply chain. The complexity of the system makes it “almost impossible” to thoroughly track, verify the information and manage risks (Sarpong, 2014; Ivanov et al., 2018). Centralized and intermediary-density architecture with technological limitations and imperfect management frameworks lead to the lack of transparency and traceability, which open a gate to misconduct including data tampering, information disclosure, fraud transaction, and corruption (Cole et al., 2019; Francisco and Swanson, 2018). Firms will have a hard time tracking, regulating those misconduct, and dealing with public opinions and government penalties. It might cause serious brand value loss and trust shortage (Saberi et al., 2019). Dealing with these problems will also seriously lower the efficiency of supply chain operations, creating a vicious spiral that adds to the vulnerability of the global supply chain. The case below can show the great cost of lacking traceability and transparency:

“…the 2015 E. coli outbreak within Chipotle Mexican Grill outlets, leaving dozens of customers ill. This outbreak caused significant image concerns for Chipotle, causing its stock prices to fall by up to 42%. Lack of transparency and accountability across Chipotle supply chains and capability to monitor multiple suppliers in real time were some obstacles for Chipotle. These obstacles could have caused further contamination prevention even after its discovery” (Saberi et al., 2019).

Figure 3: Chipotle Stock Saddled by E. coli Fears, by Garcia (2015)

Even with the traditional solutions including the radio frequency identification (RFID), GS1 standard, EPCIS-based systems, and the Internet of Things (IoT), the inefficiency and misconduct problems remain (Jabbar et al., 2020; Moin et al., 2019; Lin et al., 2019). Therefore, with the common goal of cost-saving and efficiency-increasing, especially under the great uncertainty during the post-pandemic era, business firms are given tremendous pressures to build a supply chain management system that is transparent, robust, and trustworthy enough to provide efficient transactions and support “information required for the timely provenance of goods and services” (Saberi et al., 2019). With its unique characteristics, blockchain technology then becomes one of the most popular potential solutions to supply chain problems.

Blockchain Technology

Figure 4: Transaction in Blockchain, by EUROMONEY

Blockchain technology is essentially a distributed database that records cryptographic data and other information in a synchronized environment where the information can be transacted, tracked, and verified by users (Dutta et al., 2020; Saberi et al., 2019). Before introducing its adoption potential in the supply chain, four critical characteristics of blockchain that are vital for its adoption need to be highlighted (Saberi et al., 2019):

• Non-localization (Decentralization) In the blockchain, if a new block is to be added, it will be broadcasted synchronically across the network for validation under a consensus mechanism. If it is approved to be added, the data will again be distributed across the network and can be accessed by various users without intervention from third parties.
• Auditability Each new block needs to be validated and approved by the majority of nodes before being added to the network, and it can be easily traced by authorized users. In comparison, auditability is said to be “expensive, impractical, or impossible” to achieve in the traditional system since it is very challenging to ensure that all the relevant information is perfectly recorded and the audit agency is with “strong knowledge and assurance of operator identity” (Steiner and Baker, 2015).
• Security New blocks are created with great transparency and consensus from the majority of nodes so that fraud transaction data will be hard to sneak into the network. Besides, every transaction information recorded by an approved new block will be irreversible and unmodifiable, with timestamps, unique hash codes, and the pre-hash code of its previous block. It will also be synchronically distributed across the network. Therefore, it is extremely hard to tamper with the data that has already been recorded. Finally, it is easy to trace any blocks in this transparent and chronological network.
• Smart Execution With smart contract technology, the transaction-related rules, terms, and actions will be coded into a software program. If it verifies that certain contractual terms are met, it will automatically execute the contract and update the ledgers accordingly.

Figure 5: Four Key Characteristics of Blockchain, by Saberi et al., 2019

With these four key characteristics, blockchain provides a secure, traceable, transparent, and efficient information management system with no intervention from third parties. It can create great accountability and trust among participants.

Blockchain’s Adoption in Supply Chain

Figure 6: Supply Chain Transformation, by Saberi et al., 2019

The benefits of blockchain technology have great potential to enhance the ability to solve supply chain inefficiency and misconduct.

1. Raising Efficiency

Blockchain can compile and optimize the “control flow” and “business logic of inter-organizational business processes” to achieve efficient, transparent, and reliable business process management (Dutta et al., 2020). Decentralization greatly reduces the complexity of negotiation and paperwork with the intermediaries. The peer-to-peer network and smart contract can help quickly create, record, validate, and track transaction data. And with the combination of traditional technologies such as the Radio Frequency Identification (RFID) and the Internet of Things (IoT), firms can easily mark their products uniquely and share relevant data across the internet to blockchain networks (Mondal et al., 2019; IBM, 2020). Dutta et al. (2020) also stress that it can reduce the distrust and corresponding transaction issues caused by information gaps among relevant stakeholders. Therefore, blockchain can optimize the management of assets, products, customer orders, and contract execution, which significantly raises the resilience of the supply chain, lowering the operation cost and preventing the disturbance of fraud and malpractice which might be very time-consuming. For a more detailed analysis of this topic, you can refer to Martinez et al. (2019) and Notheisen et al. (2017).

2. Reducing Misconduct

Blockchain can effectively suppress supply chain misconduct to increase security and reliability. Public distributed ledgers and data immutability greatly raise the difficulty of tampering with the data. Chronologically ordered blocks with clear hash and time stamps bring great traceability, which reduces illegal counterfeiting and enhances product safety and supply chain security. Transparency brought by consensus mechanisms and public accessibility also greatly contributes to quality management, as the relevant information can be easily accessed, tracked, evaluated, and is hard to be altered. Finally, the smart contract can make sure the transaction is carried out exactly following the contract, which remarkably reduces fraud and enhances the relationship of trust among all parties. Together these benefits of blockchain can largely enhance the capability of risk management and create a trustworthy reputation for the brand (Cole et al., 2019).

The two tables below retrieved from Dutta et al. (2020) demonstrate the advantages of the blockchain-based supply chain in a more detailed and clear way.

Table 1: Benefits of Using Blockchain in Supply Chains

Table 2: Blockchain for Major Supply Chain Functions

A Real-world Application Case of Blockchain-based Supply Chain

Everledger is a blockchain company aiming at using blockchain technology to track and protect high-value luxury goods. By involving major certification houses around the globe where diamonds are graded and certified, Everledger creates a digital thumbprint for individual diamonds which will be written on the blockchain. It also digitalizes the certificates of the Kimberley Process, which certified the rough diamond production process (Gutierrez, 2017). Over two million diamonds have been uploaded to the blockchain and achieved “complete provenance from origin to the end owner” (Jabbar et al., 2020).

Figure 7: Diagram of Everledger’s use of blockchain, by Thoughtworks

With the involvement of blockchain technology, jewelers and consumers can easily track the whole production, transportation, and delivery process. With this powerful traceability, unqualified, false, and inferior luxuries can be detected, tracked, and handled more easily, efficiently, and less costly. More importantly, the unique digital thumbprint can help police track stolen products more conveniently. Before, luxuries like diamonds in bulk can hardly be recovered once stolen. In the famous Hatton Garden heist, a group of thieves has robbed some pieces of jewelry with an estimated value of £14 million. Due to the lack of identification, certifications, and traceability, only around £3.6 million worth of jewelry has been recovered, with the rest sold or damaged (Massey, 2018; Gutierrez and Khizhniak, 2017). Now with blockchain technology, even if the products are successfully stolen, once they are traded again, their unique digital thumbprints and certifications will be very likely to be detected by traders or the online transaction systems, and the police will be much easier to verify those products with these identifications.

Suspicions

In general, various empirical evidence and theoretical analysis have suggested that those advantages of blockchain technology have great potential in solving supply chain problems. However, researchers have also stressed the challenges, barriers, and risks regarding its adoption. Hence, the rest of this paper will raise four fundamental suspicions regarding the applicability and effectiveness of blockchain adoption in the supply chain. To clarify, here “applicability” mainly concerns blockchain potentials in a pre- and peri-adoption scope, while “effectiveness” mainly concerns its performance in the post-adoption scope. These suspicions reveal the technological and non-technological obstacles that can hinder the implementation, and display the characteristics of blockchain that can harm the business performance of firms and the security of data. Limitations and future research suggestions will then be presented accordingly.

Suspicion of Applicability

Suspicion One: Is the technologically advanced blockchain-based system really free from technological challenges that might hinder its adoption?

So far, we have summarized a full list of benefits that blockchain can bring to the supply chain due to its superb and unique technological appropriateness and advantages regarding the problems of the supply chain. However, some technical shortcomings and challenges can also seriously impact the adoption process and discourage firms from adopting the blockchain.

Firstly, the integration of novel technology is a great challenge to many supply chain participants. Many traditional information operation systems including typical enterprise resource planning (ERP) systems adopted by many firms do not support blockchain (Jabbar et al., 2020). New IT tools, networks, and systems need to be settled down to construct the blockchain-based system, and these might be very costly, complex, and challenging (Abeyratne and Monfared, 2016). In addition, the technological transition process might change “all aspects of an existing business” and therefore brings the “potential for organization-wide hit if the system fails” (Dutta et al., 2020).

Secondly, not only the fundamental differences between the old system and blockchain-based system are problematic for its adoption, but the differences among diverse blockchain-based systems are a great challenge as well. The implementation requires business firms to “hire services of the third party” for technological support (Jabbar et al., 2020), but there are plenty of blockchain companies nowadays and many of which have their own segments to focus on. Besides, due to the commonly acknowledged insufficiency in blockchain industry standards, laws, and government regulations, great barriers will be built among different blockchain systems from different technology supporters. It will reduce the interoperability of the blockchain technology and hinder its wide implementation in different supply chains (Casino et al., 2019; O’Leary, 2019; Jabbar et al., 2020). Imagine a manufacturer who might have to operate multiple blockchain-based systems or even plus maintaining the traditional system at the same time. It will be unrealistic for scalable implementation without proper interoperability.

“…the isolation of blockchains in their respective ‘silos’ due to the lack of interoperability standards is an impediment to wider adoption…blockchain systems need to speak the same language, and to incorporate and share common capabilities and feature sets related to consensus models, transaction, and contract functionalities.” (Jabbar et al., 2020)

Thirdly, technology elements like distributed ledgers and consensus mechanisms will promote transparency and information sharing, which might discourage those stakeholders who view information as a competitive advantage (Saberi et al., 2019). Without proper rules for information sharing, effective communication and collaboration among parties will be hard to achieve, and they might not be willing to participate in the new supply chain which significantly hinders its adoption (Gorane and Kant, 2015).

Suspicion Two: As it is a technological mechanism itself instead of a management theory, can the blockchain-based supply chain escape from non-technological issues when being implemented?

The blockchain-based system is no more than a technological system itself. Therefore, it still needs a proper mode and pattern of management to get rid of social and managerial issues. Adapted from Saberi et al. (2019)’s categorization, three types of non-technological challenges can hinder the adoption of the blockchain-based supply chain: intra-organizational, inter-organizational and external challenges.

Intra-organizational challenges display a series of managerial barriers inside each supply chain partner. For example, support from top management is a key to successful adoption. Leaders of the firms without sufficient awareness and commitment can disturb resource allocations (Fawcett et al., 2006) and financial decisions (Saberi et al., 2019). Moreover, the giant transition might change the organizational culture, which might lead to hesitation and resistance among employees (Mendling et al., 2017; Jharkharia and Shankar, 2005).

Inter-organizational challenges mainly concern the cooperation relationship between supply chain partners. For example, different participants might be different in operational objectives or priorities, especially those who are geographically scattered with diverse cultures (Mangla, Govindan, and Luthra, 2017; Sajjad, Eweje, and Tappin, 2015). It might seriously impact their communication and cooperation, which might hinder the adoption of the blockchain-based supply chain.

External challenges stress the lack of relevant government policies, regulations, and guidance again. It might create serious uncertainty in the system, aggravate the hesitation of leaders, and hinder the broader adoption of blockchain technology (Saberi et al., 2019).

Suspicion of Effectiveness

Suspicion one: Can blockchain technology really reduce the total cost and raise the efficiency effectively during post-adoption operation?

In previous sections, massive analyses have proved the potential of blockchain technology to reduce transaction cost and raise transaction efficiency through decentralization and the smart contract. However, blockchain itself can also bring some inefficiency and high cost to business firms, which makes the overall effectiveness ambiguous without empirical data.

Firstly, Jabbar et al. (2020) have argued that the principles of blockchain determine that it needs to carry out more processes than the traditional database, and the challenge of scalability is more critical as well. Large network size leads to crowded computing resources and great redundancy in nodes’ processing, which significantly slows its retrieving and omitting of records. Besides, they also stressed that the proof of work for adding a new block is very expensive and requires large and complicated computation which limits “the rate of new blocks.” These technological characteristics remarkably increase the consumption of energy and time, which greatly raise the operational cost and lower the efficiency.

Secondly, due to the complexity of the technology and the management difficulties of such a large network, firms might be forced to conduct large rounds of training and hire experts or employees with solid knowledge to support and operate the whole system. The time and money spent on human resources might also be enormous (Saberi et al., 2019).

Suspicion two: Can blockchain technology really solve the problem of supply chain misconduct effectively?

One of the biggest advantages of blockchain technology is that it contains the rules which can systematically inhibit supply chain misconduct. However, cases of hackers’ attacks on the bitcoin network have proved the impossibility of full security (Boireau, 2018).

Figure 8: Cryptographic failure by Pander (2022)

In fact, blockchain technology not only fails to guarantee the security and quality of data but also makes it even harder to be revised. As Saberi et al. (2019) stressed, humans are still participating in the information recording process and the creation of blocks. Human misconduct can still affect the quality of data entering into the blocks. To make it worse, the immutability of data makes it very hard to correct the error. Even if someone gets the authorization to re-enter the data, the scar of the misconduct will still be left in the blockchain forever (Palombini, 2017). From this perspective, blockchain technology has buried a giant hidden problem in the supply chain operation.

In addition, although there are consensus mechanisms and public distributed ledgers to provide transparency and solid data verification, fraud and tampering behaviors can also be completed “by obtaining consensus of participants” (Swan, 2015). Data privacy is also not under-protected (Dutta et al., 2020). One can find it nearly impossible to accurately distinguish a true consumer from a business competitor who wants your transaction information. Even with a private or hybrid private-public blockchain, the requirement of transparency will still force firms to reveal a fair amount of information to the consumers, which brings the danger of privacy disclosure.

Limitation and Future Research Direction

The biggest limitation of this paper is that it fails to provide solid empirical data to directly evaluate and compare the business performance before and after the blockchain implementation. Blockchain technology is still “an emerging technology.” Therefore, far from the success in long-term operation, most real-world cases only display the successful implementation behaviors, and it is hard to find enough performance data for references (Dutta et al., 2020). Common research approaches of literature were “conceptual, framework proposals and case studies,” which lack quantitative analysis (Queiroz et al., 2018). Besides, the lack of standard and framework for performance measurements is also a critical barrier to further evaluating post-adoption effectiveness (Saberi et al. 2019).

Therefore, future research can focus on building the proper performance measurement framework to evaluate blockchain adoption and conduct quantitative research to investigate its performance.

Take the direction of building proper blockchain-based supply chain performance (SCP) measurement as an example. Currently, there are many existing supply chain performance measurement frameworks developed either by scholars or different firms. That said, it might be better to adjust and develop a comparison model classified according to industries, which should eliminate the external effect like the pandemic, involve key indicators such as the Lead Time, and assign reasonable weights to the variables that directly link to those already-claimed pros and cons of the blockchain technology. One should be able to quantify the change in performance brought by those advantages and by the disadvantages both separately and collectively. To provide some potential sources, literature reviews of SCP measurement like Akyuz and Erkan (2010) might be very useful to understand popular traditional measurement frameworks; papers identifying key measurement variables of blockchain-based SCP like Hong and Hales (2021) can help develop the base of the needed comparison model; finally, a very few attempts of building blockchain-based SCP measurement model such as Bamakan et al. (2021) will also be a very good pioneering source to refer to.

Additionally, based on the challenges and potential obstacles the blockchain-based system might face before and after implementation, future research can focus on domains including:

• Government policies and legislation for better regulation
• Unified industry standards for better interoperability
• Managerial guidelines for better intra-organizational transition and inter-organizational cooperation
• Reasonable privacy protocol for different groups to access the supply chain data
• Mechanism improvement to lower the operational cost and strengthen the data security

Conclusion

The global supply chain is facing serious problems of inefficiency and misconduct, which have brought great costs, trust shortage, and brand value loss to the business firms. The characteristics of decentralization, auditability, security, and smart execution provide blockchain technology with promising potential to solve supply chain problems. Various companies have also successfully implemented blockchain technology in their supply chain and are continuously expanding the scale of adoption.

However, little empirical evidence is available to evaluate the real performance of the blockchain-based supply chain. As stated, many researchers have argued that the implementation and long-term operation of the blockchain-based system might encounter a series of problems. Two types of suspicions significantly raise doubt about the real applicability and long-term effectiveness of the blockchain-based supply chain.

Suspicions for applicability in pre- and peri-adoption scope: Firstly, great complexity in the technology, low interoperability, and strict requirements for information transparency can already discourage business partners from participating in the network. In addition, business firms might encounter non-technological problems, including managerial barriers, partners’ unwillingness to share information, and external uncertainty due to the insufficiency in government regulations, which will discourage firms from implementing blockchain technology. Therefore, whether one is able or willing to adopt the blockchain-based system remains suspicious.

Suspicions for effectiveness in post-adoption scope: Firstly, the advantages of blockchain in reducing cost and increasing efficiency can only apply to part of the segments. The positive long-term effect on reducing cost and raising efficiency is suspicious due to the poor situation of some other segments. Secondly, certain mechanisms can generate an opposite effect on the security problem and make it even harder to quickly restore the system from malfunction. Therefore, whether the blockchain-based supply chain can effectively manage the operational risks and data quality is suspicious.

At last, this paper reflects the common limitation of the lack of empirical observation and quantitative analysis. Future research should focus more on current research limitations and work on solutions to those potential challenges. With these challenges and without solid empirical and statistical evidence, one cannot simply conclude that blockchain technology has so many advantages, thus guaranteeing good performance in its application to the supply chain. We shall even be skeptical about its applicability, not to mention its long-term effectiveness in the post-adoption era.

About the Author

Tingyu Cai is a rising junior majoring in Economics at Duke Kunshan University (dual degree with Duke University). His research interests lie in areas including macroeconomics, international political economics, industrial research, and business strategic and operational management. He is currently a research affiliate under Prof. Luyao Zhang’s Blockchain + Lab, SciEcon Lab Incubator Program. Contact him on LinkedIn.