Introduction to Blockchain in Supply Chain Management
The global supply chain that underpins all consumable goods involves billions of daily movements across the globe and, as a result, has vast complexity.
Compared with the financial system, where central banks and governments play a role in regulating and overseeing the circulating supply, there is no central authority monitoring and overseeing supply chain activity.
Typically, sending and receiving parties must keep track of product movements, meaning that each company must maintain their own records. This can introduce significant inefficiencies, even in the digital age.
For large companies with multiple sites and product lines, merely keeping track of internal inventory can be a challenge. Companies must also face the possibilities of lost or wasted products (known as shrinkage), counterfeiting, a lack of visibility into the depths of multi-layered supply chains, and other issues. These issues can potentially result in failures to comply with trading regulations and reputational damage from supply chain scandals.
Companies are continually seeking ways to improve their supply chain operations by enhancing visibility into the movement of products and their whereabouts, the provenance of raw materials and ingredients, and the ability to authenticate products.
If adopted by multiple parties in a supply chain, a blockchain can act as a shared point of truth between those parties. Goods can be recorded as assets or tokens on the blockchain, and their movements entered as transactions, which are agreed upon between all parties before being entered as an immutable record on the ledger.
Blockchain Use Cases in Supply Chain Management
Creating an immutable record of goods and transactions in a supply chain offers several benefits.
First, it improves the ability to track and trace goods in real time. When used with other technologies, such as geolocation-enabling devices, tracking can easily be automated.
Second, it can help demonstrate the provenance and authenticity of products, increasing trust and enhancing the reputation of supply chain operators. For example, products that claim to use sustainably sourced ingredients can show consumers the origins and production processes that are used. Authentication can also help to reduce incidences of supply chain fraud and counterfeiting.
Finally, the reliability and transparency of blockchain data can also help to facilitate financial flows in the supply chain. Historically, these have involved complex paper trails between companies, their banking institutions, and their creditors. With the ability for all parties to reach a consensus over the availability of goods, location, and delivery dates, it may be easier to quantify risk and agree on credit terms. These capabilities may allow further transaction automation using smart contracts.
Private vs public blockchains
Depending on company preferences, blockchains used in supply chains do not always have to be public, open networks. Private, or “permissioned”, blockchains only allow access to participants who hold the required permissions. They are often preferred by enterprises since they offer more discretion over the disclosure of transaction data than public blockchains. Furthermore, they can make it easier to comply with regulations such as anti-money laundering laws, which may require publicly listed companies to identify the parties with whom they transact. In contrast, public blockchains typically allow pseudonymous participation, but transaction data is published for anyone to see.
IBM Food Trust is an example of a supply chain solution offering a private (or permissioned) blockchain solution to its clients, which include Walmart and Nestlé. Aura, a consortium of luxury goods companies, operates a permissioned implementation of Ethereum.
However, other solutions, such as VeChain, are based on public blockchains. Public blockchains tend to offer greater security if the network is more decentralized and has been successfully functioning for a long time. Examples of companies using public blockchain architecture in their supply chains include BMW and DB Schenker, the logistics division of Deutsche Bahn, a German rail operator.
Blockchain versus Other Technologies in Supply Chain Management
Since blockchain is not yet a widely adopted technology in supply chains, firms rely on other methods to collaborate in supply chain management.
One technology-based solution is Electronic Data Interchange (EDI), which is effectively a middleware that sits between different company systems and allows them to communicate in a standardized way. EDI systems can enable automated transaction flows such as creating invoices for approval and payment plans for a firm based on a delivery confirmation from one of its suppliers.
However, EDI systems suffer from problems, including poor data management, no universal point of truth, and a lack of visibility and transparency over the full state of the supply chain. Therefore, blockchain may still offer some advantages, such as immutability and security, that are lacking in EDI systems.
Benefits and Challenges of Using Blockchain in Supply Chain Management
The primary benefits of using blockchain technology in supply chains are a decrease in operational costs and incidences of counterfeiting, and enhanced visibility over movement of goods and inventory levels.
Operational costs are reduced due to improving process efficiencies, like automated transactions and lowering shrinkage. For providers of perishable goods, maintaining verifiable records of temperature and storage conditions could reduce food waste and help to demonstrate that foods have been stored safely.
Some industries, including pharmaceutical and luxury goods, often suffer at the hands of counterfeiters, who frequently exploit a lack of transparency in supply chains to produce fraudulent versions of goods on the black or grey markets. Counterfeiting not only damages brand reputation and profitability, but it can also help support criminal enterprises.
Other benefits of using a blockchain include the opportunity for streamlining compliance and reporting. For example, the rollout of the U.S. Drug Supply Chain Security Act, which comes into effect in 2023, requires that firms use an interoperable electronic system to trace the movement of drugs. Several pilot projects run in collaboration with the Food and Drug Administration demonstrated blockchain-based solutions to help firms meet this requirement.
One of the bigger challenges for incorporating blockchain technology in supply chain management has been coordinating adoption by various supply chain participants. Successful implementation requires multiple parties to coordinate on the same or interoperable solutions, but each firm has its own agenda, budget, and appetite for such an extensive digital transformation which makes coordination difficult.
An inherent limitation of blockchains is their deterministic nature. The truth and veracity of on-chain data is limited to what takes place on-chain and can be verified under blockchain consensus – for example, account balances or the state of smart contracts.
Therefore, for blockchain to be effective in a supply chain context, it must be able to process data that is generated off-chain, for example, by a geolocation device. Public blockchains typically rely on decentralized oracles for off-chain data, so the oracle problem represents a substantial barrier in developing a blockchain solution fit for purpose in supply chains.
Prospects for Blockchain Adoption in Logistics and Distribution
The prospects for blockchain adoption in logistics and distribution took a blow in 2022 when global shipping giant Maersk announced it was shutting down TradeLens, a permissioned ledger solution it had developed together with IBM.
The closure announcement noted that the team was unable to get enough supply chain participants involved in the project which hampered its effectiveness. This demonstrates one of the main challenges involved with implementing blockchain in a complex supply chain setting.
Blockchain in supply chain essentials
- Blockchain enables parties in a supply chain to share a single point of truth regarding the state and location of goods.
- Blockchain use cases in supply chains include tracking and tracing goods, authentication, and improving trade finance flows.
- There are many benefits to firms in adopting blockchain in supply chains, including efficiency, reduced losses and counterfeiting, and enhanced compliance. However, due to the requirement for many large entities to collaborate, barriers to entry are substantial.