“Blockchain in supply chain management is the next revolutionary milestone since the printing press in the 1400s, the combustion engine in the 1800s, and the internet in the 1950s”
– Ritchie Etwatu in a Tedx talk, Morristown, NJ.
Why Ritchie, a professor of blockchain management at Syracuse University, made this pronouncement is not just because of the pure brilliance of the blockchain technology, but because it can, indeed, revolutionize how we do business – just as the internet changed how we connect over long distances.
The buying and selling process has evolved from the two-man simplistic procedure that involves one buyer and one seller, to this complex network requiring contributions from several parties like the manufacturers, wholesalers, retailers, logistics companies, etc. A collaboration we know today as the supply chain.
With the ever-evolving supply chain complexities, the demand for optimal performance and accountability in operational processes is at an all-time high – a demand the blockchain technology can solve.
In this article we’ll cover:
- Quick overview of the blockchain technology
- What is blockchain in supply chain
- Benefits of blockchain supply chain
- Examples of blockchain supply chain
- Obstacles facing blockchain adoption
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Blockchain Technology: An Overview
“Institutional investors are wary of multilayered, opaque markets with no clear rules. Blockchain can bring order to these supply chains while preserving the valued anonymity of ‘in the dark’ transactions.”
Jacek Głodek
Even though blockchain technology was created in 2008 to serve as the public transaction ledger for bitcoin, financial experts have found an equally useful and genius application of the technology in commerce – blockchain in supply chain management. This application is a result of the foundational definition and characteristic of blockchain technology.
What is Blockchain Technology?
Blockchain is a decentralized, distributed digital ledger that records data in a way that makes it difficult and impossible to hack, change, or cheat the system.
The technology also referred to as a Distributed Ledger Technology (DLT), provides this rigid transparency by recording data in blocks, duplicating, and then distributing them across a network of computer systems on the blockchain.
As a programmable, distributed, secure, and immutable database, blockchain technology stands out as one contributing immensely to the redefinition of how and what a business transaction should look like.
How Blockchain Technology Works
To really grasp the concept of blockchain technology, you need to understand the concept of what a block is and how it is made.
A block can be thought of as a file where data is permanently recorded. It contains a series of entries that have been verified by the network of computer systems that witnessed the transaction activities.
As these transaction activities are completed, they will be recorded until the block is “completed”. When the block is completed, a unique nonce ( which is a 32-bit whole number) and cryptographic hash are generated.
The newly created block now contains past transactions and the next block must be generated from the data recorded in the previously created block. This cycle continues on and on in a chain, essentially creating a “blockchain”.
The technicalities of how blockchain works can be overwhelming but to illustrate with a simple practical example, consider the working principle of Google docs.
With Google docs, you can share document links to different individuals across a network of computer systems. Every single one of these individuals now has a copy of the document on their computer.
If you make any change to the document, it will be reflected, in real-time, on each one of those google documents. This is basically how blockchain works, only, it is more complex.
With google docs, and as it is with many other databases such as SQL and Oracle, there is some degree of centralization.
In google docs, for example, for a document to exist and be shareable in the first place, there has to be an author.
This author has more control over what happens to the document than the others linked to the document. This does not happen in blockchain technology.
With blockchain, nobody is in charge and everyone is in charge. Meaning no single person has ultimate authority over the data recorded in the system and at the same time everybody confirms the authenticity of the data on the ledger.
This airtight ledger system breeds trust, legitimacy, and accountability – upon which bitcoin’s value is hedged on.
What Is Blockchain In Supply Chain?
A blockchain supply chain is a versatile solution for a wide range of problems. Its implementation in financial transactions can make the involved processes in supply chain management run smoother.
In a typical supply chain, there are several processes i.e manufacturing, financing, procurement, etc., and between these processes can be one or more transactions taking place.
With a blockchain supply chain, these transactions are recorded on the blocks within the blockchain and in numerous copies on the entire ledger.
These recordings are then distributed over the network of computer systems on the blockchain which makes the information highly available and therefore transparent.
Every single transaction that happens in the supply chain is archived on the blockchain and reflected in real-time. Essentially making everyone a real-time participant in all transactions.
To perfectly drive home the point of blockchain in supply chain management, let’s illustrate with an example in the food industry.
Businesses in the food industry, like restaurants, work with fresh produce and it is crucial for these businesses to follow the product from their source to the end consumer. As they are highly perishable.
If the restaurant adopts the more transparent blockchain supply chain management model, it will be easier for them to track pork – through a hypothetical supply chain – that is sourced from China to its processing by a charcutier in France, to when it is delivered to the restaurant, and finally to how it is sold to the consumer.
Thus the entire process is made more effective so that each participant enjoys significant levels of standard – the end consumer a greater level of quality, the restaurant a more cost-effective operation, and the raw pork handlers less chances of getting into a conflict.
Financial Transaction Models: Conventional vs Blockchain
Traditional transaction systems we have now are riddled with inconsistencies, inefficiencies, and disparities. Because we never really changed how we did business.
We have basically stuck to the 10,000-year-old conventional method of performing business transactions. One that primarily involves two basic entities. We have only managed to scale the system to involve more parties in the process.
The problem with the model is that it does not accommodate the discrepancies and inequalities brought about by the proliferation of this financial transaction system.
With just two parties involved, the transaction is transparent to some extent as they are both primary sources of products of exchange.
But as the number of entities involved in the transaction increases, transparency decreases because, at any given time, one or more individuals are denied explicit details on the transaction of two parties in the transaction network.
When this happens, the whole network is open to errors and the legitimacy of the entire transaction will be brought to question.
An example of such errors would be in the logging of inventory data. Whether it be by mistake or a deliberate act to skew the specifics of the transaction, the conventional model makes it easier for data to be tampered with.
This manipulation of data can cause a whole ripple effect of conflict that oscillates along the supply chain.
There are so many other execution errors such as missing shipments, duplicate systems, etc., that all have consequences on the efficiency of the supply chain.
The worst part of this situation is that these execution errors cannot be detected in real-time. And sometimes, it might not even be detected at all.
Even when the problem is detected, it often doesn’t make sense to backtrack and trace the point of error because it is usually expensive and the process is rather difficult.
This traditional financial system went on and on till the mid-2010s when financial experts started exploring the possibilities of blockchain technology in finance.
Argument For The Conventional Model
Over the years, several solutions have been introduced to mitigate the effects of the inefficiencies found in the conventional transaction model.
Some might argue for the efficacy of Auditing, Enterprise Resource Planning (ERP), and GS1 RFID tags to eliminate execution errors and strengthen the supply chain in this model. But every single one of them is limited in operation and effect.
Auditing does well to verify the transactions in the supply chain but is of no help to address the operational deficiencies in the model.
Enterprise Resource Planning systems could improve operations and reduce cost, but it is difficult to match entries with transactions.
For RFID tagging, there needs to be integration with an ERP system which is usually extremely expensive and time-consuming.
No matter the argument put forward for the conventional transaction model, there will always be a disparity because the basis for which a transaction can be near perfect – trust – is missing.
Argument For Blockchain Technology
So why blockchain? What does it have that the convention model does not?
Well, according to a paper by MIT Technology Review,
“The whole point of blockchain is to let people – in particular, people who don’t trust one another – share data in a tamper-proof way.”
Note two keywords – Trust and Tamper-proof.
Trust is greatly amplified in blockchain technology because every party is essentially a participant in every transaction made in the supply chain. It is also impossible to tamper with the data recorded on the digital ledger.
With blockchain record-keeping, every asset (i.r order, bill, inventory, etc.) and participant in the blockchain are given a unique identifier that functions as a digital token.
Recall that when a transaction is being made in blockchain, it is recorded in a block. And with the digital token that every participant has, they can “sign” the blocks as valid before it can be added to the blockchain.
So if there is any incongruence with the entry logged at any point of transaction, it will be swiftly detected.
Benefits Of Using Blockchain In Supply Chain
It’s no news that blockchain technology has tremendous benefits to our supply system but the question remains…what are these benefits?
Here are the top 4 benefits blockchain provides supply chain management:
Traceability and Transparency
This is perhaps the most commonly known benefit of blockchain in supply chain management.
It is literally the major talking point of this technology because its transparency and traceability cannot be over-emphasized.
Blockchain supply chain transactions are aided by what is known as smart contracts. Smart contracts are coded, self-executing contracts that run on terms and agreements between the buyer and the seller.
This allows transactions to take place among anonymous parties without a central authority, legal system, or external enforcement system.
These smart contracts exist across the decentralized blockchain supply chain network and they control the implementation of the transactions in the supply chain.
When a transaction is successful, the parties involved sign off on the transaction and confirm it as valid. After which the details and necessary data of the transaction are recorded permanently into the blockchain.
The distributed availability and permanent storage of these smart contracts in the blockchain make every transaction transparent and traceable.
Hence, it will be much easier for parties to be held accountable for inconsistencies. It will also improve efficiency because participants know that if they do not keep to their end of the bargain, they will be easily identified.
Optimal Security
The beauty of the blockchain is that it is a read-only digital ledger – making it extremely difficult to falsify, hack, change, or cheat.
This rigid security decreases any chance of forgery or fraudulent activities.
The security that blockchain gives companies in their supply chain management boosts their credibility and reputation. It also reduces operational costs which, in turn, saves businesses from running down.
According to reports, fraud costs companies $400 billion and is responsible for 50% of business failures. Since the data on the blockchain is less likely to be falsified, the likelihood of fraud will be significantly reduced.
Improved Cohesion
The major problem with the present supply chain management model is a lack of trust.
When there’s a lack of trust, it will be difficult for all the participants – with competing interests in the supply chain – to create a cohesive chain of operation that moves the product from the point of manufacture to the end-user.
The cohesion that blockchain technology provides also strengthens the solidity of the supply chain.
Due to the laxity in security, the current supply chain allows for any party in the system to skew data as they like.
And every other participant knows of this possibility. As a consequence, the supply chain becomes fragile and can easily fracture because the skepticism of the contributors in the supply chain is volatile.
Increased Automation And Forecasting
The blockchain supply chain model demands an increase in automation.
Because most of the data in a typical supply chain are analog and with the help of an ADC (analog-digital converter), this analog data can be converted to digital signals. Which are then recorded in the blockchain.
The automation of production activities throughout the supply chain significantly decreases the potential for human error.
As a result, inaccuracies that lead to miscommunications and conflicts, are erased. Making the supply chain more efficient.
The real-time data collected on products in a blockchain supply chain helps businesses make better forecasts and predictions. Thereby improving their operations and creating a better experience for their customers.
Examples Of Blockchain Application In Supply Chain: 5 Real Use Cases
The adoption of blockchain in supply chain management keeps increasing. Companies in different sectors are partnering with supply chain blockchain companies to integrate blockchain technology in their processes for smart, data-driven, and optimized operations.
Here are 5 real industry examples of blockchain in supply chain management.
Blockchain In The Oil Supply Industry: Abu Dhabi National Oil Company
In 2018, Abu Dhabi National Oil Company (ADNOC) shook hands with IBM to launch a blockchain supply chain pilot program.
This program saw all of ADNOC’s entire current infrastructure – from the oil wells to the customers – moved to blockchain. The primary aim of the program was to aid ADNOC in oil and gas production management.
ADNOC also wanted a greater level of transparency in their operations and business transactions. This solution enables ADNOC to track every drop of oil and data provenance as well.
Blockchain In The Diamond Supply Industry: De Beers
De Beers, the largest diamond producer in the world, has to deal with what every diamond producer and retailer faces in this industry – the intolerable working conditions under which the diamonds are extracted.
Most diamonds are extracted in Africa and oftentimes than not, they are mined under harsh circumstances. De Beers sought to change this situation by implementing a blockchain program they call Tracr.
Since its launch in 2019, Tracr has successfully traced 100 high-value diamonds along the supply chain – from the mine troughs to cutters, to polishers, and finally to the jeweler.
Blockchain In The Fashion Industry: Martine Jarlgaard
Blockchain technology is also changing the future of fashion by helping designers and fashion houses make smarter decisions and connect better with their end consumers.
In an interview with London College of Fashion’s innovation agency, Martine Jarlgaard expresses the value designers create by connecting with the consumer.
She states how the present fashion supply chain does not tell the full story behind a product. Essentially neglecting the actors and contributors on the supply chain.
And that is why in 2017, she, in collaboration with Provenance, exhibited the first-ever garment tracked with blockchain in a Danish fashion show.
Tracking every aspect of a garment’s life helps the consumers better appreciate each contributor in the supply chain. It also ensures the garments are not produced under harsh working conditions.
Blockchain In The Food Supply Industry: Walmart
The food industry is a delicate one and its supply chain must be firmly supervised at all times. A problem at any point in the supply chain can cause disastrous effects for both consumers and food companies.
For example, if there’s an epidemic from certain food supplies, the consumers are at risk of food poisoning and the retailers resort to throwing out all their inventories because they cannot exactly pinpoint the origin of the disease.
Walmart decided to put an end to this predicament by collaborating with IBM in 2019 to implement blockchain as part of its food safety requirements for its suppliers.
Walmart aims to improve shipping efficiency, traceability, and transparency in the global food industry via IBM’s blockchain technology.
Seeing the progress Walmart has made concerning food safety, other companies like Nestle and Unilever are also looking to integrate blockchain technology into their supply chains.
Blockchain In The Wine Supply Industry: Origintrail & TagItSmart
It is estimated that 30,000 bottles of fake wine are sold per hour in China. These wines are produced using dangerous additives and chemicals to fast-track the vinification. In contrast to the delicate, thorough process it takes for original wines.
Oridintrail and TagItSmart solved this problem by creating a blockchain solution for the wine industry. Their solution utilizes smart sensors to prevent wine fraud and the pilot program was able to track over 15,000 unique bottles to their sources.
Constraints And Challenges Facing Blockchain Adoption In Supply Chains
So far, blockchain technology has proven to be the messiah of the supply chain. Though intrinsically immutable, blockchain technology faces some constraints that are limiting its adoption in global supply chain networks.
Challenges Concerning Data Access
One aspect that the conventional transaction model edges the blockchain model is inaccessibility – the latter has more control over data access than the former.
It might not make any difference because blockchain technology is a read-only digital ledger.
But it does not take away the fact that the records on the blockchain supply chain can be exposed to other parties other than the contributing actors.
Legislation Constraints
Another issue with adopting blockchain technology is political. Blockchain may not be completely compliant with the legislation of some countries and as a result, it would be difficult to log the data, coming from these areas, on the supply chain.
Scalability Constraints
For blockchain supply chain to work effectively, every participant in the supply chain must adopt blockchain technology in their operations.
But this places huge financial burdens on the small businesses in the supply chain as blockchain integration is quite expensive. And if businesses cannot integrate blockchain technology, the overall effectiveness dwindles.
Conclusion
Cryptocurrency, the forerunner of blockchain technology, has shown how stable, secure, and transparent transactions can be between several parties on the digital distributed ledger.
These proven features of blockchain technology establish it as an objective solution to the disputes that occur in a lot of the transactions in the supply chain.
The blockchain supply chain can take us to a place where disputes around contracts and invoices will disappear.
It would also facilitate smoother global transactions that take place every minute and provide a single distributed ledger that every participant can refer to as the only source of truth.