Managing today’s supply chains is extraordinarily complex. According to shipping giant, Maersk, one shipment of refrigerated goods from East Africa to Europe can pass through roughly 30 people and organizations, involving more than 200 interactions. Successful supply chain operations rely on robust, transparent and end-to-end communications across geographically dispersed partner ecosystems. Due to the complexity and lack of transparency in current supply chains, the role of blockchain for supply chain management (SCM) is becoming an area of increasing interest. The blog looks at 5 of the top blockchain use cases for the supply chain.
The modern supply chain is broken, says Forbes. No longer a linear and sequential chain from raw material to final product, the current supply chain is a multi-tiered ecosystem of suppliers, partners and customers all working much more closely together. This is multi-region, multi-geography and increasingly multi-industry. The modern supply chain is creaking under its own complexity.
Forbes says of the modern supply chain: “It’s incredibly difficult for customers or buyers to truly know the value of products because there is a significant lack of transparency in our current system. In a similar way, it’s extremely difficult to investigate supply chains when there is suspicion of illegal or unethical practices. They can also be highly inefficient as vendors and suppliers try to connect the dots on who needs what, when and how.”
Without visibility, transparency and trust between potentially thousands of players, the modern supply chain can’t function effectively. Blockchain in the supply chain offers the potential to deliver on all these factors. However, we’re still in the early days and for all the possible advantages of blockchain there are problems with blockchain in the supply chain.
Why are companies implementing blockchain in their supply chain?
Let’s start by defining blockchain. A blockchain is a distributed, digital ledger. The ledger records transactions as a series of blocks that are linked together sequentially in a chain. The ledger itself is spread across multiple computers that are each updated every time the blockchain changes.
The way that blockchain works means that the data within a block can’t be altered, and tampering with blocks is all but impossible. There is a single source of the truth for any transaction and blockchain in supply chain management allows for complete verification and auditability of any transaction flow. This means that for blockchain in the supply chain, companies can build trust that transactions are correct and secure–even in instances where there is little of no trust established between the parties.
For example, where a company is working with suppliers and logistic carriers across the globe, it will be able to track all parts and be assured that parts are genuine without the need for third parties and intermediaries to continually check. Blockchain technology in supply chain management allows organizations to operate in an almost ‘zero trust’ environment.
Features of blockchain in the supply chain
Bitcoin is perhaps the best-known implementation of Blockchain. But, Blockchain doesn’t just create cryptocurrencies, its distributed ledger features enable help execute and monitor any transaction. It’s reliability and integrity that drives application of Blockchain in the supply chain. Key features include:
For a transaction to be valid, all parties have to agree. No new blocks are created or changes made without this consensus. This means that all parties know when a change is being made and agree to that change. All the entities in the chain agree that each transaction is valid. For the supply chain, blockchain technology can be used to bring consensus to a wide range of transactions such payment, warehouse management, transportation and delivery.
What is provenance in blockchain and how does it apply to the supply chain? In fact, the major feature used in the supply chain is provenance. Blockchain technology allows you to know exactly where raw materials or products originated and where they are in the supply chain. With provenance, supply chain professionals can quickly see who owned assets and at what time. Within a supply chain, provenance can be attached to any asset such as iron ore, foodstuffs, money, machines or, even, intellectual property.
It’s virtually impossible to tamper with an entry in the distributed ledger. There are multiple copies of each entry and they all have to be changed simultaneously. Only a new blockchain transaction can reverse the effect of a previous one. Implementing blockchain in the supply chain makes it incredibly difficult to falsify a payment transaction, inventory records, warehousing conditions, delivery times, etc.
The copies of the shared ledger all hold the same version of the truth. This builds trust as all parties have a single view of the transaction. For supply chain management (SCM), blockchain delivers a finality that reduces disputes and can develop better relationships between all partners.
The key benefits of blockchain for supply chain management
Any transaction where trust is an issue can potentially be improved through blockchain technology. Supply chain management is full of those types of transactions where hundreds or thousands of partners must conduct business as efficiently as possible. McKinsey has highlighted three areas where blockchain in the supply chain can make a difference:
Replacing slow, manual processes
Many supply chain processes, especially those in the lower supply tiers, are slow and rely almost entirely on paper—think of the logistics industry. Blockchain technology in the supply chain can replace these manual processes with an end-to-end digital process that delivers new levels of visibility and transparency. However, this does involve a good deal of work to create the 100% digitally-enabled supply chain necessary for blockchain to operate. According to McKinsey, blockchain technology is not yet capable of capturing data across a high number of untrusted partners.
Increasing regulatory and consumer demand for provenance information is already driving change. For this reason companies are already turning to blockchain for supply chain transparency. The track and trace style application of blockchain in the supply chain is one of the most popular. Supply chain transparency give greater visibility across supply chain operations leading to better utilization of inventory, better delivery times, improved quality, and reduced loss of revenue from black or grey market products.
Reducing supply chain transaction costs
At a base level, the ability of blockchain-based cryptocurrencies to enable cross-border funds transfers without the need for banks and clearing means blockchain technology in the supply chain can speed payments while reducing the incurred fees. However, the development of smart contracts–such as through the Ethereum platform–means that many supply chain operations can be triggered automatically through the smart contract. For example, a smart contract may set out the agreed delivery of product and what should happen if the delivery is late or missed. The contract can monitor the delivery and automatically trigger actions where the terms are breached. This significantly reduces costs, especially where third parties had been previously used to conduct part of the process.
To the McKinsey list, we’re going to add two more entries:
Accelerating supply chain processes
In theory, blockchain technology protects the integrity of both the information and the transaction. There are fewer errors and disputes. The entire process is accelerated as there is less need for product recalls or re-filling a missed order. In addition, the use of smart contracts means that, as noted above, you reduce the need for intermediaries or third parties. For example, blockchain in the supply chain can reduce the need for banks or clearing houses in the payments process.
Creating the ethical supply chain
Consumers demand a greater understanding of where their products come from and the operation of the company producing them. This has sparked a drive to create the ethical supply chain. Blockchain helps supply chain companies in two ways, The first is provenance. Supply chain professionals can use blockchain to establish where everything they use has come from and pass this information on to the customer. Secondly, you can use blockchain for supply chain transparency so the customer knows exactly how their product was manufactured and shipped.
Top 5 blockchain use cases for the supply chain
While blockchain examples in the supply chain are still in short supply, there are an increasing number of supply chain management use cases for blockchain being investigated, including:
Supply chain finance
Recently, there has been a good deal of interest around blockchain and supply chain finance solutions because it can increase the efficiency of invoice processing and provide more transparent and secure transactions while increasing the efficiency of invoice processing. For example, invoice payment terms are usually 30 days and often much longer. By combining supply chain finance and blockchain technology, you can apply smart contracts that trigger immediate payments as soon as the product is delivered and signed for.
Supply chain logistics
Friction is a major problem for modern supply chains with many go-betweens and much back and forth between partners. The result is that suppliers, providers and customers interact via third party entities rather than directly with each other. The promise of blockchain in supply chain logistics, according to DHL, is that transactions can be verified, recorded and coordinated autonomously without third parties–eliminating an entire layer of complexity from global supply chains.
American Express says: “Blockchain technology promises to facilitate fast, secure, low-cost international payment processing services (and other transactions) through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses”. One example of supply chain blockchain for supplier payment is within the coffee industry. Bext360 is using blockchain technology to better track all elements of the worldwide coffee trade—from farmer to consumer—and thereby boost supply-chain productivity. Using cryptocurrencies, this application of blockchain in the supply chain ensures payment directly to the farmers immediately their products are sold.
Cold chain traceability
Food and pharmaceutical products often have similar storage and shipping needs. Blockchain allied to IoT sensors on product can record temperature, humidity, vibration and other environmental metrics. The data is stored in a blockchain and smart contracts applied to ensure automatic redress if any of the readings go out of range. One early example of blockchain for the food supply chain is Walmart’s innovative use of the technology to track the provenance and condition of its pork products coming from China. With the success of blockchain in the supply chain, Walmart now requires all its spinach and lettuce suppliers to deploy the technology.
Many food safety issues, such as cross-contamination, are difficult to track and isolation. The lack of data and supply chain visibility leads to slow action when an issue arises and well as unnecessary waste and the economic and reputational cost of recalls. A consortium is using blockchain within supply chain tracking to ensure the supply chain has transparency of all product movement and status. Companies including Nestle, Walmart and Unilever are using blockchain to reduce the time it takes to pinpoint and remove the source of foodborne illness within the supply chain.
The need for a blockchain platform for supply chain operations
A company successfully implementing blockchain in the supply chain depends on their solution being able to deliver the performance and scalability they require. With the increased technical maturity of blockchain, supply chain development is likely to examine ways to introduce blockchain into operations where it makes the most sense. Transforming the supply chain industry requires blockchain platforms that can build trust and efficiency into a wide range of transactions.
We’re not there today but the indications are positive. When looking at blockchain, supply chain companies have to see past the hype to where the technology will bring tangible benefits to their business.