One of the most noticeable and important developments of the advance of free trade over the last half century has been the emergence of global value chains. These production and supply networks cross multiple borders and connect advanced and emerging economies. They are vehicles that can deliver on many of the promises of globalization. Yet operating them is complex and costly. Global trade since the great recession has slowed, in part because of a lack of transparency and interoperability within these networks. Blockchain, a technology with unique abilities to record, track, monitor, and exchange assets without need of an intermediary, may be the solution to many of the logistical and cost issues that plague the growth and operation of global value chains, especially in the case of food, agribusiness, and pharmaceuticals. It also has potential to address issues of inclusion.
Supply chains encompass the end-to-end flow of information, products and services, and money. The way these components are managed affects an organisation's competitive positioning in areas such as product cost, working capital requirements, speed-to-market, and service perception. Organisations are exploring innovative methods to streamline their supply chains to meet evolving consumer demands and optimise efficiencies. Technological advances are collapsing linear supply chains into dynamically connected and always-on digital supply networks (DSN), transforming how businesses exchange and share information and assets.
Building supply chain capabilities with digital technologies can result in greater levels of performance.
Blockchain is an enabling technology, which is most effective when coupled with other next generation technologies such as Internet of Things (IoT), robotic cognitive automation or smart devices.
Blockchain has been described as an information game changer due to its unique capabilities and benefits to provide greater information transparency. At its core, blockchain is a distributed digital ledger that lives on the internet and records transactions and events. The technology relies on well-established cryptographic principles and operates as a repository for information, which is recorded and shared through a peer-to-peer community. Within the decentralised network, all participants maintain their own copy of the ledger, referred to as a node, where they validate new entries to the chain through the use of a consensus protocol.
The problem with the supply chain
The supply chain represents all the links involved in creating and distributing goods, from raw materials to the finished product that goes into the possession of the consumer. Currently, supply chains can span over hundreds of stages and dozens of geographical locations, which makes it very hard to trace events or investigate incidents.
Customers and buyers have no reliable way to verify and validate the true value of the products and services they purchase because of the endemic lack of transparency across supply chains, which effectively means the prices we pay are an inaccurate reflection of the true costs of production.
Other elements that are affected or tied to supply chains are even harder to track. For instance, there’s currently no way to track the environmental damage that goes into the production of goods.
Also, investigation and accountability of illicit activities associated with supply chains is extremely difficult. This accounts for issues such as counterfeiting, forced labor and poor conditions in factories, or revenues being used to fund war crimes and criminal groups.
What Blockchains Mean to the Supply Chain
There are three key implications of blockchain technology to supply chain applications:
1. Shared ledgers of validated transactions serve as an immutable single version of truth (SVOT) across businesses. Such SVOT ledgers have many applications, such as providing provenance of high-value goods, maintaining a financial audit trail and enabling chain-of-custody solutions. The recently announced partnership between IBM, Nestle and Walmart is one example. In-fact, pervasive solutions such as chain of custody may well be the “killer app” that actually drives the wide adoption of blockchains. However, it’s important to note that a critical issue of managing data security and confidentiality across participants in blockchains must be tackled before blockchains can be used in broad supply chain applications.
2. Smart Contracts are ‘electronic’ contracts based on automated actions that are triggered through predefined events. Such contracts can be used e.g. for automated execution of payments in case of an in-quality and on-time delivery. In a bigger picture, this scenario is an essential foundation for fully automated order calls, particularly in multi-stakeholder contracting. The Blockchain smart contracting approach is also interesting in light of the inhomogeneity of used IT infrastructure – Large corporations typically use ERP based, private clouds, while suppliers (often Small and Medium-sized Enterprises) are frequently using cost efficient cloud-services. Blockchain technology can offer a public cloud service as an integration platform.
“Without understanding the impacts of goods and services, we buy into systems that deplete natural resources, worsen environmental and social problems and endanger humans and ecosystems. Supply chains are conventionally held secret, limiting the stakeholders who can prevent environmental, social and health and safety problems.” Leonardo Bonanni, Founder of Sourcemap
There is a growing rallying call by customers and governments demanding more transparency from brands, manufacturers, and producers throughout the supply chain. In the UK, 30% of consumers are concerned about issues regarding the origin of products but struggle to act on this through their purchasing decisions. The market for products of proven origin is growing. In the future, regulations like the European directive on non-financial reporting or the UK Modern Slavery Act will require companies to transparently disclose reliable information about their business footprint.
3. Traceability - Particularly – but not exclusively – in the food sector, the valid traceability of the origin of ingredients and goods is a prerequisite for operating a trustworthy business, or may even represent a license to operate. This difficult and challenging process of traceability can be automated, simplified and accelerated by efficient use of Blockchain technology and corresponding electronic tracking technology (such as WiFi, BLE or RFID). In a not-so-far-away future, it could be possible to trace back every product to the origin of raw material used. Potential cases of application in logistics are manifold: Tracking of quantity and transfers of material between Supply Chain partners or thinking of ‘smart tendering’ (containers equipped with tags publish a request to get from A to B on a platform; freight forwarders will subsequently place bids to win the order) are just some exemplary use cases.
Finally, blockchains shift the focus of technology solutions away from the enterprise onto a network that serves as a system of engagement across companies. This subtle point has, by far, the most profound impact on supply chains, as the industry continues to realize that supply chains are really networks.
What are the supply-chain applications?
As a whole, the technology guarantees both data authenticity and integrity.
Applied to procurement and supply chain, blockchain can be used to introduce hitherto unattainable transparency in sourcing and distribution channels. Currently, such information will be partial, unverified, unauthenticated, and most importantly, held by each of the numerous players in the supply chain. Data quality thus degrades with every transaction, and the end user has but a tiny pixel of the full picture on the purchased product. Blockchain can be used not only to track product origin and manufacturer, but also all of the components and raw materials that compose it, as well as all of the intermediaries who have handled, transformed, and transported it, thus breaking down the informational silos of traditional supply chains.
- Walmart and IBM are working jointly to develop a blockchain system to trace pork from producer to consumer. Blockchain technology is used to inalterably record every step in the meat’s journey. For the retail distributor, the ability to collect all this information (right down to details such as storage and shipping temperatures) from farmer to store shelf creates a major competitive advantage in terms of product quality, food safety, and consumer confidence.
- Kuovola Innovation is working on a blockchain solution that enables smart tendering across the supply chain. Pallets equipped with RFID tags publish their need to get from point A to point B on the ledger. Carrier mining applications will then place bids to win the move. The RFID will then award the job to the bidder with the most suitable conditions and the transaction will be registered on the blockchain. The shipment will be progressively tracked as the tag moves down the supply chain.
- The mining giant, BHP Biliton, is testing this technology to track the movements of rock-drilled shafts and fluid samples. Blockchain technology allows all involved parties to share sample location data in real-time, gathered from suppliers on every continent.
- Startup Everledger has uploaded unique identifying data on a million individual diamonds to a blockchain ledger system to build quality assurances and help jewelers comply with regulations barring “blood diamond” products.
- Maersk and IBM announced a joint venture to deploy a blockchain-based electronic shipping system that will digitize supply chains and track international cargo in real-time.
- London-based Provenance is aiming to build trust across the supply chain from the source to the consumer by deploying Bitcoin- and Ethereum-based blockchains that enable companies to be more transparent on how they build their products. This includes disclosing everything about environmental impact, where the products were made and who they were made by.
- BlockVerify will be using blockchain’s transparency to fight against product counterfeiting, especially the counterfeiting of drugs, which account for huge economic damage and the loss of hundreds of thousands of lives every year.