Blockchain and IoT — this is how radically improve supply chain
Supply chain is a strong use-case for blockchain. When IoT technology is added there is the potential to radically disrupt and improve the industry. Many large companies are already making the move.
The financial industry was the first to be impacted by blockchain technology with so-called fintech solutions emerging for payments, banking services and investment.
The next most obvious use-case for blockchain is supply chain management (SCM). The visibility, immutability and auditability provided by blockchain will revolutionize SCM.
According to a Deloitte report on supply chain management, the main SCM risk faced by organizations is lack of visibility along the extended supply chain (ie including their suppliers’ operations). They have no choice other than to simply trust their stakeholders — both internal and external.
Traceability breaches and fraud can lead to recalls or sales losses and potentially damaging scandals and fines.
So how can blockchain help? According to the same Deloitte report, the answer lies in providing a combination of blockchain and IoT technologies.
This article will look at how this would work. Later articles will look at examples of companies that are already applying this solution and at start-ups with ideas to make it better.
Blockchain, Supply Chain and IoT defined
Blockchain — public and private
In essence, a blockchain is a digital ledger. It is like a big spreadsheet that registers transactions and makes them visible to the public. A distributed, global network of computers (each one called a node) holds the records of transactions. Trust is managed across the nodes rather than by one central authority. Once data is written, it is immutable, which means it cannot be modified.
What makes it different from traditional databases is that it has a consensus mechanism that allows multiple parties who do not know or trust each other to have a shared database. Everyone has the same view of the database without the need for a third-party intermediary.
The well-known blockchains like Bitcoin and Ethereum are public and permissionless. They are decentralized, anonymous and available to anyone. Anyone can create an address and interact with the network to run a node, to start mining, to make transactions or to review/audit the blockchain through a blockchain explorer.
Purists will argue that this is the only model that can create trust. However, the cost and computational power required may not always be warranted.
Private (and permissioned) blockchains operate within closed ecosystems — for example, a supply chain or a consortium of banks. They are also called distributed ledger technologies (DLTs). Each one is purpose-built to create efficiencies, cut costs or perhaps to create new data-driven business models. This is the model being adopted in many businesses and industries.
There is a single centralized point of control, to decide who can read the ledger of verified transactions, who can submit transactions, and who can verify them. They benefit from some of the characteristics of public blockchains: immutability, automation of data synchronization, strict privacy and security capabilities. They rely in part on the trust already inherent in the off-line relationships of the parties involved.
There are pros and cons for both systems. Organizations wanting to use blockchain for their supply chain management will select which is best for them — in much the same way as they decide where and whether to use a private intranet or the more public internet.
A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Wikipedia
Supply Chain Management (SCM) is “moving the right items to the right customer at the right time by the most efficient means”.
This is more difficult than it sounds.
A supply chain generally progresses from delivering the raw materials from a supplier to a manufacturer, moving the final product to distribution centers, warehouses and retailers and finally delivering it to the consumer. Record-keeping and tracking become more difficult to manage as businesses grow in size and especially when suppliers may be dispersed across the world.
The Internet of Things is a giant network of everyday devices connecting with other devices, servers or platforms on the Internet. This includes everything from mobile phones to washing machines, coffee makers to wearable devices for health and fitness. It also includes sensors to track products being moved from one place to another.
The analyst firm Gartner predicts that there will be over 26 billion connected devices by 2020.
Why blockchain and IoT for supply chain?
According to Debra Bordgnon, CTO of Dimension Data, Australia, there are two areas where blockchain will be a gamechanger for supply chain and IoT.
The first is technical. Blockchain will be an enabler of the Internet of Things (IoT)
Blockchain will supply “intelligent processing” between IoT devices, improve efficiencies and reduce the need for resources. This is because blockchain provides an architecture and a security framework to manage a mesh of connected devices. In her opinion, “In a world of 21 billion connected things, 5 billion connected people and 44 Zetabytes of data, that is really important.”
Blockchain technology offers capabilities for tracking a vast number of connected devices. It can enable the coordination and processing of transactions between devices. It is decentralized — ie spread across many computers — which eliminates single points of failure and thus creates a more resilient device ecosystem.
The second is human. Blockchain will be a catalyst for business ecosystems.
For IoT to work requires collaboration across companies, sectors and even countries. And that requires trust.
In the supply chain scenario, that means trust that other parties will do as they have promised. Trust that the items on the way are exactly the items that were promised. Trust that everybody will be paid fairly and on time. Trust that proprietary systems and information are not stolen.
Combining blockchain and IoT into supply chain seems truly a marriage made in heaven:
· Blockchain will provide a trustless system
· IoT devices will provide data and information in real time
· Smart contracts will verify data, clarify terms of agreement and self-execute on them
The combination provides tamper-proof data storage and the “single source of truth”. It clearly identifies all players, whether they are suppliers, distributors or the sensors attached to trucks. It cuts across traditional silos in business processes, assists with regulatory compliance and significantly reduces paperwork, time and costs.
Once Artificial intelligence and machine-learning are added to make sense of the data this will allow for long-term management decisions.
A consortium of 14 Japanese companies, made up of shipping, trading and insurance giants are putting this to the test. They are putting together the Ocean Network Express (ONE) to jointly develop a private blockchain-based platform to streamline the exchange of trade information and procedures. This is likely to result in a transformation of the container shipping industry.
(By the way, Debra Bordgnon identified a third area where blockchain will be a gamechanger: Blockchain as a protector and liberator of our personal data. Look out for our article on this topic.)
How do blockchain, IoT and supply chain work together?
The traditional supply chain is dependent on updates from multiple parties along the “journey” of the item from raw material to a factory to store shelf. This requires multiple databases and there is great difficulty synchronizing them. Even when there are sensors, radio-frequency ID’s (RFIDs) and GPS tracking, there is seldom a single end-to-end system.
Using a blockchain to record all of the movements and the data from all of the devices and parties involved provides a single global database with information that can be verified and audited. And it is visible to everyone concerned.
The movement of an item, whether it be a lettuce or a shipping container, is tracked as a virtual transfer of ownership from one point to the next. Along the way, such information as the temperature in a container, the condition of the trucking fleet or any indication of tampering can also be monitored. Every step a food product takes from field to supermarket, or a drug takes from manufacturer to hospital, can be tracked and users can be sure products are safe.
Smart contracts can automate many of the processes. So, for example, as devices recognize each other or note positions or proximity, they can automatically send a notice of this as a transaction to the blockchain, without any human input. Conditions may be set for automated invoicing or payments as items meet certain conditions along the supply chain. A sensor may be triggered to adjust the temperature in a refrigeration container. Or owners can be alerted to delays in shipping, obligatory rest periods for drivers, maintenance checks, tire replacement, license renewals.
Moving blockchain from theory to reality
A supply chain is an area where blockchain is moving from theory to reality.
Here are some examples involving industry leaders:
· Alibaba, the eCommerce giant, has piloted a food supply chain and is investing $14 billion into developing the technology.
· Nestle, the Swiss food-giant with annual sales nearing $100 billion is partnering with IBM to remove unnecessary middlemen from their supply chain.
· Pfizer, the pharmaceutical giant, is partnering with Chronicled, a blockchain start-up for supply chains.
· ABI-InBev, the largest beer brewer in the world, is working on a platform to simplify freight logistics.
· Walmart , the retail giant with $500 billion turnover, started by using the Hyperledger Fabric to track its pork supply chain. It has now moved on to collaborate with IBM and 100 other companies, including Nestle, to develop new supply chain protocols.
· Samsung Electronics, with a turnover of about a quarter of a billion dollars, has announced a Nexledger platform to track global supply chains.
· Berkshire Hathaway is looking to blockchain to streamline the supply chains for its railroad and fine jewelry subsidiary, Richline Group.
Our next article looks at some of these companies and projects in more detail and will also highlight some of the blockchain start-ups that are working in this space.
The future of blockchain, IoT and supply chain
Blockchain, IoT and supply chain certainly seem to have a future together. Clearly, there is a willingness from existing, dominant supply chain networks to disrupt themselves in order to sustain their business value into the future.
This is an exciting area for developers and entrepreneurs.