Blockchain technology can be adapted to supply chain management applications, transforming the degree of transparency achievable and unlocking resilience.
Blockchains are distributed or decentralised ledgers which “record transactions between multiple parties in a verifiable, tamper-proof way”. For cryptocurrency applications, they’re designed to enable “an unlimited number of anonymous parties to transact privately and securely with one another without a central intermediary”.
Now, writing for Harvard Business Review, Vishal Gaur and Abhinav Gaiha, argue that a modified form of the technology could vastly improve supply chain transparency, efficiency and speed.
HOW APPLY BLOCKCHAIN TO SUPPLY CHAINS
- Every asset (units of inventory, orders, loans, bills of lading) has a unique identifier – a token.
- Each member of the blockchain has a unique signature.
- Members “sign” the blocks of assets (tokens) they upload to the blockchain.
- As each asset progresses along the supply chain, the record shows the token being passed from one signatory to another.
- A retailer places an order with a supplier and records the digital token for that order on the blockchain.
- The supplier logs the order and notifies the retailer it has been received; the blockchain is updated.
- The supplier requests a loan from the bank; the bank uses the blockchain to verify the order before issuing the working capital, and updates the blockchain.
ADVANTAGES OF USING BLOCKCHAIN
- No need to replace or interface separate enterprise resource planning systems (ERPs) since blockchain works with bundles of data output from these systems and uploaded to the ledger.
- Firms only share limited data.
- Blockchain provides a chronological record of all transactions with each block encrypted and shared to all members of the blockchain who each have their own copy of the blockchain.
- Captures far more data than a financial ledger since it records every event in the supply chain, in real time, so that anyone with permissions can see what is happening, as it happens.
- Identifies bottlenecks.
- Pinpoints mistakes as they happen (inventory data errors, missing shipments, duplicate payments).
- Manages complexity – syncing orders, shipments, and payments.
- Enables automation of supply chain processes through smart contracts – for example, the blockchain can verify when an order has been fulfilled and authorise the release of payment.
- Blockchain can be used for internal supply chain management.
CHALLENGES TO IMPLEMENTING BLOCKCHAIN SOLUTIONS
If blockchain is to be used for supply chain management, participants and system designers have a number of challenges to overcome.
- Governance. Blockchain has no central mediator, but all participating members, some of whom might be competitors, must adhere to a single set of rules that govern everything from allocation of permissions to dispute resolution, data sharing and encryption.
- Unpredictability of outcome. While it’s generally accepted that more transparency is good, greater clarity about, for example, the “quality or age of products in the supply chain” will affect pricing and allocation in ways that are hard to predict – there will be winners and losers.
- Speed. Bitcoin blockchain is designed to handle around 360,000 transactions per day, whereas the pharmaceutical industry produces four billion saleable units each year, generating 33 to 55 million transactions per day.
- Security of physical assets. While blockchain records are secure, physical products are not. Stringent auditing and dApps – apps that “track products through the supply chain” – are required to deal with issues like product counterfeiting and tagging errors.
HOW FIRMS ARE EXPERIMENTING WITH BLOCKCHAIN
Despite the technical challenges involved in implementing blockchain for supply chain management, companies are beginning to explore the potential of the technology within narrowly defined parameters.
IBM Food Trust is a partnership between IBM and Walmart which uses blockchain to improve food supply chain safety:
- Traces fresh food and other products.
- If a faulty product is discovered, blockchain enables “all supply chain partners to trace the product, identify all suppliers involved with it, identify production and shipment batches associated with it, and efficiently recall it.
- Internet of Things (IoT) enables blockchain to provide automatic real time quality monitoring: containers monitor temperature of fresh produce and update the blockchain so that unacceptable fluctuations are red flagged to all parties right away.
- Questions of authenticity of product returns are easily verifiable: “counterfeit goods would lack a verification history on the blockchain”.
Walmart Canada. Trucking firms that transport its inventory use a blockchain to “synchronise logistics data, track shipments and automate payments without requiring significant changes to the trucking firms’ internal processes or information technology systems”.
Pharmaceutical companies. “Drug inventory is tagged with electronic product codes that adhere to GS1 standards (technology-independent standards permitting full interoperability and compatibility). As each unit of inventory flows from one firm to another, its tag is scanned and recorded on the blockchain, creating a history of each item all the way through the supply chain – from its source to the end consumer.”
Emerson manufacturing and engineering. President Michael Tain says that with complex opaque supply chains, minor delays cause inventory pile up in one area, while stockout of the same component delays manufacturing in another area. Blockchain can resolve this:
- No need for a high level of integration between firms which might not trust one another or be prepared to accept centralised decision-making. Instead, “participating companies share their inventory flows on a blockchain and allow each company to make its own decisions using common, complete information”.
Hayward, multinational swimming pool equipment manufacturers. Senior VPO Don Smith says that when everything including “finished goods, process capacity, work-in-process capacity and raw materials” is treated as digital currency, double-spend, “the erroneous allocation of the same unit of capacity to two orders” is eliminated, making machine time allocation and inventory management far more efficient and responsive to customer orders.
FURTHER AREAS RIPE FOR BLOCKCHAIN INNOVATION
Banking and finance. Blockchain could make it easier, cheaper and quicker for banks to verify firms’ “business, quality of assets and it’s liabilities”. It would make it harder or impossible for a company to borrow against the same asset from more than one bank, or request a loan for one thing but spend it on another. Cost savings and risk reduction could free up lending for small firms.
Accounts payable. Blockchain could render transparent the “elaborate process that involves invoicing, reconciling invoices against purchase orders, keeping track of terms and payments and conducting reviews and approvals at each step”.
International trade. Blockchain could replace “manual processes, physical documents, many intermediaries and multiple checks and verifications at ports of entry and exit”.
Blockchain has huge potential to improve the transparency of supply chains, making them more efficient and more resilient to shocks, but designing and implementing workable systems requires commitment to cooperation, experimentation and trials: “It is now time for supply chain managers who are standing on the sidelines to assess the potential of blockchain for their businesses.” An investment of time and resources now will reap handsome rewards.