Blockchain Applications in Supply Chain

Blockchain Technology for Supply Chain

Managing the modern, often global, supply chain is a series of intensive processes that require perfect orchestration between many moving parts and actors. Linking and creating the links to distribute goods and services looks much more like a web than a chain in our increasingly “smaller” global world.

When processes become multi-stage and involve many third-party agents scattered across several countries they often become less and less transparent. The more people involved, the more complex and the more difficult it can become to fight the good fight against informational sprawl. Opaque operations are unconsciously created when the systems used to manage the supply chain are outdated and bulky. Bureaucratic layers occupied by paper-pushing parties become a necessary expense. These further obfuscating intermediaries serve as a short-term solution to compensate for the inefficient old ways that haven’t caught up with the demands of a fast-paced global market.

Now with blockchain technology, we have the solution to iron out bloated and incompetent supply chains. Blockchain-based supply chain solutions are changing the way industries do business by offering end-to-end decentralized processes via the distributed and digital public ledger.

When we talk about supply chain management, we are also talking about the logistics industry, shipping, freights, trucking, and every other mode of transport we use to transfer goods. Where there is a system that needs streamlining and a need for transparency, there is a multitude of use cases for distributed ledger technology (DLT). Huge tech companies like IBM have already seen the potential for blockchain supply chain management and have web 3.0 solutions in development or pilot program stages.

This guide to decentralizing supply chain management using blockchain applications will explore these topics:

• What is a Supply Chain?
• Why is the Centralized Supply Chain Management System Broken?
• The Benefits of Decentralizing Supply Chain Management
• Blockchain Supply Chain Use Cases
• The Future of the Supply Chain

What is a Supply Chain?

A supply chain is how goods get from point A to point B, more specifically how the materials are sourced initially, manufactured, and then finally distributed to the end-user. As we have already discussed, this could be an incredibly lengthy process. Supply chains require active management to keep the chain functioning and affordable for a company’s bottom line.

The goal for supply chain managers is to produce and distribute goods as effectively as possible while sticking to the budget and ensuring a certain level of customer satisfaction.

Here are the main moving pieces that make up an active supply chain:

• Development
• Sourcing
• Production
• Logistics
• Information systems management
• Coordination

There are two flows that link each part of the supply chain together, “informational flows” and “physical flows.” Both have pretty obvious definitions, physical flows are all about the actual physical movement of the goods and raw materials, this includes temporary storage and shipping. Informational flows are how the physical flows are coordinated, information about where the products are, current inventory and available space, etc.

Physical and informational flows are directly intertwined with logistics, which is a field in its own right. Logistics refers to shipping, warehousing, courier services, and all types of transport (air freight, road, rail, boat).

Every product that reaches its intended retailer and then end-user has traveled through the supply chain. Supply chain management (SCM) helps to coordinate the culminating efforts of multiple parties. Supply chains are currently managed on centralized software platforms, and the chain activities rely on human paper-and-pen processes to ensure certified products are delivered as intended to final consumers.

Blockchain Supply Chain News

Why is the Centralized Supply Chain Management System Broken?

The current supply chain management system as it exists today is outdated and unable to keep up with growing interconnectedness that the global industry presently demands. Consumers are also demanding more transparency about where their goods are sourced from and if their goods are “real” and “certified.” Buyers want to know the true value of what they are purchasing or reselling. Lengthy systems are expensive and ineffective in delivering the best outcomes for processors, manufacturers, vendors, and consumers. What are some of the consequences of relying on outdated supply chain management systems ill-equipped to handle modern globalized market demands in all its complexity?

• Slow

The speed of the current supply chain is very slow due to the presence of intermediary heavy authentication processes, doing business across time zones, and logistics management inadequacies. Transacting across time zones is a slow process that requires third-party financial services that are expensive and multi-day. When payment is delayed, the supply chain becomes mired in transactions that take 3-5 business days.

• Counterfeiting & Fraud

Millions are lost annually in counterfeiting and fraud. Counterfeiting not only damages manufacturers’ reputations, but it can also potentially endanger lives (i.e., pharmaceutical fraud in developing countries). Fraud is so rampant because global supply chains are not able to know for sure the volume of every item stored in every location. Companies have completely lost track of their on-shelf inventory in the complex distribution web. Quality checks are no longer a sufficient way to authenticate goods and prevent fraud.

• Expensive

Fraud, slow processes, and intermediaries all add to costs for everyone in the supply chain. Consumers end up paying for these added expenses and companies take their fair share out of their revenue. General inefficiency is expensive, especially when time is money and customer service is valued.

• Requires Trust

Many steps in the supply chain are linked together by nothing more than trust, trust that the item you have purchased is the item as advertised or trust that because you have already paid the manufacturer’s shipment will come exactly as you have ordered it. Centralized SCMs require that all players trust that the others are operating honestly and will be on schedule. Without automation and better technological infrastructure, all processes hinge on trust or costly third-party verification.

• Unreliable & Insecure Data

Data analytics help to improve supply chain management, when data is inaccurate this data is less likely to be useful and work towards a more robust chain. Additionally, insecure customer data leaves consumers vulnerable to identity theft. Servers and cloud storage are easy to hack as they have a single point of entry that can in most cases be penetrated.

What is Distributed Ledger Technology?

A distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, and/or institutions. Users of Distributed Ledger Technology (DLT) significantly benefit from the efficiencies and economics by creating a more robust environment for real-time and secure data sharing.

Shared data? Across multiple geographic sites? Sounds like a perfect fit for the supply chain where logistics must be coordinated between multiple parties across the globe. The Digital Ledger can be used to help track and automate communication.

The blockchain is a list of digital records stored in blocks secured using cryptography. The blocks each contain data that is immutable thanks to the crypto-hash security system where each block refers to the one before it. Blockchain is a single type of distributed ledger, so when we are referring to distributed ledger technology, we are talking about the broader decentralized technology.

The Benefits of Decentralizing Supply Chain Management

Deploying Distributed Ledger Technology can improve supply chain management in countless ways. Supply chain management, as we have already noted, requires intensive data coordination. When critical information is disorganized, difficult to share across multiple locations, and payment processes are slow, decentralization is a beacon of hope for alleviating these paint-points. The flaws of the supply chain management web 2.0 systems we love to hate can be integrated onto the blockchain or a distributed ledger for fast and easy information sharing, counterfeit prevention, and enhanced customer experience. Decentralization works to eradicate needless bureaucracy and trim the fat of the supply chain to reimagine how we move goods from point A to point B.

Here are some of the main benefits of decentralizing supply chain management using distributed ledger technology and blockchains:

• Traceability and transparency

Blockchain helps to facilitate more transparent supply chain operations. Every time a product moves from one location to the next, it will be documented on the public ledger creating a not only transparency but also a trail to trace in the event of a recall. Customers will know exactly where their goods came from. This will also help support supply chain logistics allowing managers to track assets at any point in time.

• Real-time tracking

Speaking of transparency and traceability, the distributed ledger supports real-time track. You cannot only locate the items you can also know what condition they are in. This reduces the opportunity for human error and adds to industry transparency.

• Faster transactions

 Faster transactions mean faster supply chains. Blockchain technology has the potential to break Visa’s currently held record of about 10,547 transactions per second (tx/s). Speed is the most coveted, attractive feature for any payment platform. Objectively, the faster a blockchain can process a large number of transactions the better. Blockchain, as a technology, has more potential for scalability than Web 2.0 financial services, this makes transacting in cryptocurrency on the blockchain the faster option when compared with fiat. It not only becomes easier to make many small transactions; it is faster to move large amounts of money across the globe as well.

• Trustless Chain

Instead of trusting that a product is authentic or that your item will be delivered on a certain date, you can know. Smart contract technology opens the doors for released payment automation; smart contracts can be used to hold payment between manufacturer and vendor or vendor and consumer in escrow. No party has to pay, trust, and wait. The money will only be released from escrow after the shipment has arrived, authenticated and as promised.

• Eliminates fraud and error

Certifying items on the blockchain can help save industries millions that would otherwise be lost to counterfeiting and fraud.

• More secure

The immutable ledger is a more secure environment for data and facilitates improved accuracy. Decentralized networks are inherently more difficult to breach because there is no single point of entry for hackers to target. To launch a successful attack on a blockchain the hacker would have to perform multiple attacks from multiple devices all at once which requires more resources and expertise than hacking a server.

• Reduced carbon footprint

Decreased need for returns results in a reduced carbon footprint. Distributed ledger technology prevents errors and miscommunications from occurring during the shipping and distribution process. This means that shipping will happen only once, rather than twice or three times in the event of a mistake. Millions of items are returned annually all along the supply chain, adding to global carbon emissions. Improved logistics can also open the doors for more efficient shipping and storage, and therefore greener transport systems.

• Cheaper

All of the previously mentioned benefits of decentralization help to reduce the overall cost associated with distributing and moving materials through a supply chain. Blockchain helps to prevent duplicate processes without sacrificing accuracy and security. Middlemen added onto supply chains for quality assurance and verification significantly add to the cost of doing business. With fewer people on the chain, more secure/reliable data, and faster overall operations, distributed ledger technology can considerably cut supply chain overhead.

Here are some additional perks of decentralizing supply chain management:

• Improved inventory management
• Lower courier costs
• Less paperwork
• Faster issue identification
• Happier customers
• More time to innovate better products

Blockchain Supply Chain Use Cases

There are many uses cases for virtually any industry’s unique supply chain management system. Most use cases involve smart contract technology to help automate processes on the blockchain. Smart contracts run on the blockchain and are called into action automatically when a “trigger event” occurs. These event-based smart contracts are the mechanism for new automated supply chain operations. Here we will highlight some examples of major use cases for blockchain applications in supply chains.

Provenance Tracking

It is difficult for big companies to keep track of every record, especially when it is a multi-national operation. This demeans every aspect of the company’s reliability and reputation. Blockchain-based solutions for provenance tracking makes it easy to access product information on demand using embedded sensors and RFID tags. The product can be tracked all the way back to its origins and traced from every point on the chain.

Inventory management

Companies often lose track of their inventory, how much room they have for storage, how much of their product is for sale on what shelf. This opens the doors for fraudulent behavior and poor data analytics. The distributed ledger is an ideal environment to manage products in multiple locations and share that data across all involved parties.

Identity verification

Blockchain identity verification is a popular use case for the technology. With universal blockchain identity, we don’t need a third-party to handle global business interactions and enter contracts that rely on trust alone that someone is who they say they are. A big part of the supply chain is not only the verification of goods and services but the person behind the promise. The immutable ledger can help to authenticate identity.

Shipping logistics

To operate a global supply chain, shipments need to move on time, and all parties should be in the know about where the materials are in the chain. Blockchain brings real-time tracking to all supply chain participants to view that accurate, tamper-proof data as it is automatically realized by GPS trackers. More efficient shipping routes can be constructed the more data the blockchain is able to securely manage. Distributed ledger technology makes for an ideal platform for managing every aspect of shipping logistics.

Procure-to-pay gap reduction

It is expensive and time intensive to get customers to pay for products that have already arrived in many cases. Blockchains can use smart contract technology to connect delivery logistics and payment into digital contracts that act as a financial service. Smart contracts can be written so that terms are payable upon receipt. Proof of delivery from a carrier will trigger the contract to invoice the customer automatically. In many cases, smart contracts can be used to hold funds in escrow and then are automatically released once the goods have been verified. Smart contract escrow can eliminate the procure-to-pay gap and create more trustless interactions.

Food Supply Chain

Foodborne illness would be easier to stop in its tracks thanks to the blockchain as a traceability platform. It would be simple to identify where all of the food goods had been distributed and what communities have consumed the contaminated goods. Without data and traceability, there is a lack of accountability in current models and a lack of trust as a result. Food source traceability could be potentially lifesaving for some consumers.

Automotive Supply Chain

An entire vehicle history could be stored on the immutable, tamper-proof blockchain to make purchasing a used vehicle trustless or preserve the resale value of your new vehicle. Being able to document all repairs on a car via public ledger helps future buyers know the value and for owners to receive the exact value of the vehicle. Counterfeiting is also a significant issue in the automotive industry. Counterfeit spare parts are a costly occurrence that ruins brand reputations and can put drivers in dangerous situations. Digital identification for spare parts can up the transparency ante.

The Future of the Supply Chain

As blockchain innovations improve, the technology has the potential to bring a lot of positive change to supply chain management across all industries. The supply chain has been the most widely piloted use case for distributed ledger technology inching us closer to a more decentralized world. With companies like Walmart already using IBM’s supply chain blockchain platform to trace the origins of their produce, it becomes easier and easier to imagine on-chain, supply chains.

The technology gains more traction daily and presents itself as a viable, improved alternative to current SCMs. The benefits are easy to point to and can be quantitatively accounted for throughout the pilot and early adoption process. Better methods for getting goods, and authentic goods, to build trustless consumer-vendor and vendor-manufacturer relationships benefit every actor involved in the supply chain (except maybe counterfeiters and fraudsters).

Error-proof and trustless systems save time, money, and in some cases lives. As the excess is pared away from bulk supply chains, consumers can benefit from lower prices and employees from higher pay. Companies can reinvest the savings into creating better products, rather than fighting the issues of running a complex pen-and-paper operation on a global scale.

As companies team up with blockchain solutions to work through their pain-points and apply new systems, we can all start enjoying faster shipping, certified products, and fewer headaches. Centralized databases have been proven ineffective and maxed out their performance levels falling short in meeting the current market’s demands. As the benefits of blockchain become more widely recognized with each news article and pilot program more supply chain teams will be encouraged to keep up with the decentralized Jones’s and adopt web 3.0 solutions.