Can Blockchain Unblock Supply Chain?

Blockchain unblock Supply Chain

When people hear about Blockchain technology they think of “Bitcoin” and because of this association – The underlying Blockchain technology has been always been viewed suspiciously due its rather radical approach to data sharing on an open platform using cryptography. Can Blockchain unblock Supply Chain?

However the application of the Blockchain technology itself is not just limited to digital currency as the technology can be used for open collaboration for any information across almost any industry.

This article introduces the concept of Blockchain technology and discusses its application in revolutionizing the traditional supply chain processes which are often based on “multiple bilateral links joined together to form a chain” as opposed to the Blockchain which is based on the “formation of an open ecosystem for collaboration”.

The principles, business case, merits, challenges and applications of the Blockchain technology are discussed with some words of wisdom for supply chain professionals who might be considering Blockchain technology.       

What Supply Chain Management problem does this solve?

The biggest problem in the transitional supply chain is lack of open and trustworthy information availability across the supply chain caused by multiple issues – trust, technology and legacy practices being the top ones. Can Blockchain unblock Supply Chain?

As mentioned in the summary – A typical supply chain is a series of bilateral contractual links that are put next to each other to form a supply chain and every link in the supply chain is a bottleneck for information flow, trust erosion and technology gaps. The gaps prolong the supply chain cycle, increase the extended supply chain cost due to assumed risk in every link and result in an overall disconnected supply chain from an end-user’s perspective.

The Blockchain technology has the potential to tackle these key gaps through the use of the open permissioned ledger system which creates an eco-system where information flows openly albeit in a permissioned manner, reduces the assumed risk in the supply chain and hence reduces the total cost of the supply chain while making the supply chain more agile and adaptive.  

What is Blockchain Technology?

While there are many definitions of the Blockchain technology principles, the one that is easy to understand is that it is an open-permissioned-distributed-ledger that all parties in the ecosystem have controlled access to.

Unlike traditional businesses where most of the relationships are bilateral in nature, the Blockchain information exchange is disintermediated and everyone in the ecosystem has access to the same information as the other players. It is this open trust environment that differentiates it from the traditional supply chain management where information, goods and commercial papers always flow “along a chain” in a supply chain as opposed to the Blockchain where they are shared with the entire network at the same time.

Ironically, there is no “chain” in Blockchain as all players are part of an ecosystem- so in that sense the ecosystem is more of a network than a chain.

How did Blockchain technology emerge?

The earliest mention of Blockchain technology was the Oct 2008 article published by the ever enigmatic, Satoshi Nakamoto which evangelized the use of distributed ledger philosophy to develop the digital currency called Bitcoin that continues to build value. I would like to call Bitcoin as Blockchain 1.0.

Since then, this technology has been broadened to advanced applications like smart contracts which I would like to term as Blockchain 2.0 – the application of the principles of distributed ledger are limitless so this area has tremendous potential for growth.

How is Blockchain technology different from Bitcoin?

Bitcoin, the digital currency, was the first application of the Blockchain technology and has developed a little bit of a love-hate reputation in the industry because of its openness and its radical challenge to traditional paper-based currency principles.

Blockchain technology has since evolved from the single use (as in the case of Bitcoin) to multiple uses as a distributed ledger principle that can be used to do anything amongst 2 or more parties (in fact the more the merrier) with significantly more controls and security than the Bitcoin version. Bitcoin is an open uncontrolled ledger while the new application can have control around who can have access to what type of transactions.

Why is Blockchain called the “Fifth Pillar” of IT revolution?

The disintermediation is the founding stone of the Blockchain technology. In the traditional commerce set-up we always use intermediaries to enable information exchange due to trust issues in dealing with other parties.

Blockchain technology takes care of the information exchange by making every participant of the network a custodian of all the information flowing through the network and in that sense. It removes the last bastion of “information custody” which was holding the internet from exploding.

Unlike Internet information exchange where information is passed from point to point – in Blockchain, the same information is passed across to the whole system so no person (not even the sender) has more information than any other player in the ecosystem.

The czars of the industry are calling it the Fifth Pillar in IT revolution after (1) Mainframes (2) Personal Computers (3) Internet (4) Social Media and now (5) Blockchain Technology 

What’s the difference between a traditional supply chain and the one structured on Blockchain technology? 

The key difference between the traditional SCM and a Blockchain enabled SCM is the positioning of the SCM links. Whereas in the traditional SCM the SCM links are generally enabled in the form of a connected network where every party is connected to the network as an equal player. 

What does Disintermediation mean? Will intermediaries like banks disappear in the new scheme of things? 

No, not at all. Intermediaries like the banks will play a very involved role in the supply chain of the future except that the role and the positioning may be different from the ones they have played over the past 1000 years where they have basically dealt with parties on a bilateral basis.

In this case, the banks (and other intermediaries like shippers, inspection agencies, customs brokers and distributors) will be part of the eco-system and they will all have the same level of information as the other players in the ecosystem. E.g. when a raw material supplier is ready to ship the goods, the notification is received by the inspection agency, shipping agency and the bank alike and the inspection agency has inspected and passed/failed the goods, then, the same information will be available to the entire supply chain; thus, enabling a “dis-intermediated flow of information”.

The shipper will know exactly when to pick-up the goods and If the smart contract allows the producer to be paid upon successful inspection and shipment of the goods, then the payment will be released at that stage and all these transactions will be visible to the entire eco-system, albeit, on a controlled basis.    

What are the founding and differentiating principles of Blockchain technology? 

The Blockchain technology is fundamentally different from the usual ecommerce transactions and the following are the founding and differentiating principles of the Blockchain technology:

Notarization: Every transaction happens on a distributed ledger and hence, there is a perfect notarization of every transaction across the system. The whole eco-system knows exactly what the source of the information was and the technology enables the authentication, thus, removing the need to verify the information again through the use of test certificates, bill of lading or letters of credit as an example. These commercial tools/documents, actually, all reside inside the Blockchain system.

Title transfer:  It allows easy title transfer for any property whose ownership is controlled by the Blockchain, but these may not just be limited to digital property like software/music, but could also include physical property like raw materials, goods, house, cars etc

Provenance (Chain of possession):Since every transaction is visible in the ecosystem, the system of records of where each product originated, from a compliance or QA perspective, can be traced backwards with authenticity. This is of particular importance in international trade as concerns around origin, labor practices, denied party is gaining importance.

Irrevocability of transactions: Every transaction that has ever taken place is shared with the whole ecosystem, thus, the histories of the transactions are always available; thus, eliminating the chances of information being hacked/manipulated/distorted to suit one party.  

Smart-contracting: The most powerful feature of the Blockchain 2.0 is smart contracts which basically means that the smart contracts are not just available but always have to be complied with. One cannot bypass the smart contracts thus eliminating the need to “check the checkers” and enabling more focus on partnership and less on compliance.

What’s the business case for Blockchain technology in a supply chain?

The business case for Blockchain technology is based on the following key business value:

  1. Reduced Total Cost of Ownership: Blockchain technology offers a viable alternative to traditional supply chain solutions at a fraction of the total cost of ownership.
  2. Speed and Reliability of transactions: Moving the transaction from a series of bilateral transactions to an ecosystem based clearing house allows the transaction to happen in a miniscule amount of time compared to traditional methods, and since the Blockchain technology operates in a secure environment, the transactions are a lot more reliable than the traditional ones.
  3. Synchronized and consistent sources of truth: Unlike traditional systems which can have multiple source of truth that may not always be in sync, the Blockchain technology enables a single source of truth available to all players in the system; thus, preventing any attempts to manipulate the data to suit one party.
  4. Self generating audit trail: Since every transaction in the Blockchain is recorded and is an integral part of the transaction process, there is an audit trail of each and every transaction in the ecosystem down to the point of discomfort. However, it is this level of detail that forms the foundation of the trust in the Blockchain ecosystem.

When does Blockchain technology generate most value?

Blockchain technology is not a one size fits-all solution considering the uniqueness and the complexity of the ecosystem that it has to breed within. In my view, Blockchain technology makes most sense under the following key conditions:

  1. Complexity and Volume of the transactions is high: The commodity being transacted should have complexity in terms of speed of information handover, number of title changes, custodian issues, high number of transactions that are difficult to capture.
  2. No well-established market authority exists: Unlike well established and mature markets like stock markets, the commodities that are more likely to become candidates for Blockchain are the ones where there is no established authority over the market allowing the creation of the Blockchain ecosystem.
  3. Transactions are easily quantifiable: Materials and services alike are performed against industry standards which are easy to trade and transact against.
  4. Industry wide issue: The whole industry has to recognize and acknowledge the problem to be resolved. Initiatives taken by a single player or service provider will not go a long way unless it is recognized as a key industry issue (like conflict minerals or trade settlement).

What are some of the simple applications of Blockchain technology? 

Some of these applications are already being used by Blockchain ecosystems around the world in its nascent form, although the possibilities are only limited by the imagination and collaboration in eco-systems. Some of the simple applications are:

Procure Materials 

In a Blockchain enabled supply chain – the buyer places a PO for the bill of materials in the smart contract ecosystem, the raw material supplier receives the information and sends the raw material to the producer who manufactures for the contract, the system then sends a notification to the inspection agency which records the details of the goods to be inspected.

These records will be available (till eternity) to enable any audit on QA issues faced anywhere in the downstream supply chain. Once the inspection agency has issued the certificates in the smart contracts, the shippers can arrange to ship the goods and issue the Bill of lading in the system which, depending on the contract, might trigger the payment against the letter of credit (also captured in the ecosystem).

And this information is also available to the downstream supply planners to enable the manufacturing. Since the smart contract information input is authenticated using the technology, the reliability of the information is significantly higher than the traditional. It also breaks down the siloed organizational behavior that can erode overall extended supply chain value.  

Manufacturing sector

Time and Quality sensitive manufacturing supply chains lose a lot of value due to discrete information gaps in the supply chain. These information gaps can generally be traced to parochial behaviors from the discrete supply chain links in the ecosystem.

For example, the manufacturing process of an airplane like A380 involves the physical and information coordination on approximately 4 million parts with 2.5 million part numbers produced by 1,500 companies from 30 countries around the world. Extended supply chain traceability is a challenge as regulations require companies to have complete traceability on the parts used in the manufacturing process including details of the manufacturing process.

All of this information availability is managed through brute force resulting in increased cost of production. A block chain technology will enable the ecosystem players to record the information only once and the same information will be made available to the all the players in the eco-system.      

The use of Blockchain technology allows the manufacturing stakeholders to focus on manufacturing and not be held back due to information gaps, trust issues in the supply chain which are common in today’s manufacturing environment where suppliers often work in silos.

Tackling conflict minerals supply chain 

Provenance is the biggest issue in the $75 Billion diamond industry and needless to emphasize, quite opaque in terms of transparency and conflict/synthetic minerals might be contributing to a growing portion of the problem facing the industry.

Conflict minerals (or Blood diamonds) are not just the biggest parallel source of black money flow but also a social problem in some of the developing countries. Kimberley Process (KP) is a multi-government initiative which is working together to enable the certification and authentication of the diamonds as they pass through the various aspects of the supply chain.

Everledger and IBM have been piloting a new Blockchain-based technology that allows every diamond in the rough and polished stages to be fingerprinted in the Blockchain ecosystem, thus, enabling a very open information on the source of the diamonds that will be passing through the various aspects of the supply chain. Thus, cutting down on counterfeiting which was nurtured in the physical supply chain through counterfeiting of physical documentation. 

The principles of how the diamond industry has been able to tackle a growing social and commercial problem can be extended to other forms of supply chain like Crude Oil and Luxury goods too as these industries also suffer from source of origin issues and as a result lose a lot of value.

So what are the challenges in implementing Blockchain technology in Supply Chain Management? 

Implementation of a Blockchain Technology based solution is not easy as it poses a lot of challenges – the key ones being:

  1. Lack of awareness and understanding: Blockchain is still an enigmatic black-box to most non-technology people and its association with Bitcoin does not help the situation either. Blockchain technology’s radical approach with a permissioned-distributed ledger challenges the core of the business practices for the last many centuries where every business entity has maintained their own ledger. This is by far the biggest challenge for non-IT professionals.
  2. Industry Maturity and trust level in the ecosystem: Industry maturity and a certain level of trust is prerequisite for the conception of any Blockchain technology enabled supply chain solution. Unless the industry is screaming/rallying to solve an industry-wide issue this will be a non-starter.  
  3. Cost of technology and positioning conflict with internal ERP systems: Most of the companies already have multiple ERP Systems which companies have incurred heavy investment over the last 5-10 years. A Blockchain technology solution in its most ideal form competes with and replaces a significant role played by these ERP systems. This is not going to be an easy battle both within and outside the companies.

Can Blockchain unblock Supply Chain?

Blockchain technology is no doubt a disruptive innovation that has the potential to rewrite the books of supply chain management as we have known it, but like all technology hype, it is important that supply chain professionals don’t consider this as a panacea for all their supply chain problems.

Blockchain technology has a place in complex supply chains but the ecosystem maturity is a pre-requisite for any investment in the technology, and the success of the solution will heavily depend on the problem faced by the whole ecosystem rather than one player (conflict diamonds is a great example to quote). It is important that the players in the ecosystem align on the problem to be solved to ensure that there is focus on the solution that emerges.

Needless to say, the investment in these ecosystems are most readily accepted if they come from a neutral party rather than one involved in the supply chain and this is where the governments, economic development boards and banking groups can play a role.

Leading experts are predicting the Blockchain technology adoption to be in the following manner: (1) early adoption during 2016-2017 (2) Growth during 2018-2024 and (3) Maturity from 2025 and beyond. It is important for leading supply chain strategists to form a POV on the applicability of the Blockchain technology to their own supply chain from a strategy perspective.

Can Blockchain unblock Supply Chain?

Can Blockchain unblock Supply Chain article and permission publish here provided by “SK” Sanjeev Kumar Roy. Originally published on Supply Chain Game Changer on March 20, 2019.