The Potential of Blockchain in Supply Chain Management
‘Blockchain’ is a word many of us have heard over the past decade and draws immediate association with cryptocurrencies such as Bitcoin. Yet beyond the realm of financial technology and cryptocurrencies, few of us fully understand the disruption blockchain will bring to the world of business. Behind the boom and bust headlines surrounding cryptocurrency, the underlying blockchain technology is predicted to have a transformative impact across many industries and business areas, including supply chain management. As observed with the rise of the internet, a new technology at its embryonic stage can be difficult for some to comprehend and truly realise the powerful applications that will one day be possible. In this article, we take a look at how blockchain may impact supply chain management and disrupt current practices.
What is Blockchain?
In simple terms, blockchain is a database (or digital ledger) that contains time-stamped, encrypted data distributed across a network of computers. When any changes are made to the database, a new block of data (a record or transaction or an executed event ) is added, without deleting any previous entries. Every record has a time-stamp and a unique “fingerprint” from the previous block in the chain, forming a link between the new block and the previous block — hence, a chain of blocks. For each new entry, this data is authenticated across the distributed network of computers where those nodes on a blockchain all must agree on the state of the network, following the predefined rules, or protocol. Given the scale of the computation involved in creating just one block, this system is theoretically tamperproof with a cryptographic fingerprint and a “consensus protocol”. Any retroactive changes to the ledger would require the calculation of a new link for every subsequent block faster than the other nodes can add new blocks to the chain [1]. However, making the blockchain tamperproof, or “immutable”, can be much harder in practice.
The Blockchain Opportunity for Supply Chain
There are three inherent and distinct features of blockchain technology that make it highly applicable to drive innovations in supply chain management: Trust, Transparency and Traceability.
The 3 Ts of Blockchain
Trust
Some of the largest blockchain networks today are mostly decentralised, removing the reliance on a central authority, and the distributed verification method within these models ensures the blockchain does not have a single point of failure. Moreover, all information processed on the blockchain is immutable and irrevocable. Such data integrity provides assurances to all participants on the blockchain to safely engage in exchanges without the need for any intermediaries.
Transparency
All authorised participants can access the data on the blockchain and verify any information in real-time. When a new block of data is added, the ledger is updated automatically and visible to all parties involved without the presence of a single central controller.
Traceability
All records on the block are time-stamped and no previous block of data is ever deleted. Thus, verifiable audit trails exist of all events or transactions, with all information guaranteed to be free of any tampering or deletion in the blockchain.
Source: 2020 IBM survey (n=917)
With around 85% of CTOs and CIOs expecting to work with multiple blockchain technologies by 2023 [2], blockchain is at the heart of the digital supply chain management revolution. The opportunity exists to use the blockchain as a single source of truth for every stage of a company’s supply chain, enabling a wide array of applications. For example:
1. Provenance and Authenticity of Products
Blockchain can allow manufacturers and businesses to ensure products are ethically and sustainably sourced to comply with corporate standards. Physical assets can be digitised and recorded over the blockchain, allowing accurate end-to-end tracking of assets from source to delivery. All supply chain partners can record price, date, location, quality, certification, and other relevant information required. The availability of this information within blockchain allows businesses and consumers to have visibility on the provenance of raw materials that go into a final product and view critical certification credentials at every stage in the supply chain. With blockchain providing the possibility to certify the origin and paths of products, the authenticity of goods can be better verified to lower the impact of losses from counterfeit products and grey market trading.
2. Streamlined Administrative Processes
As supply chains have become more global, they have become increasingly complex and fragmented in turn, leading to a reliance on external intermediaries. Blockchain emerges as a strong contender for de-tangling all of the data exchanges occurring within the supply chain ecosystem. Since all parties on the supply chain have access to the same trusted information on the blockchain, the exchange of erroneous data and subsequent time validating information is reduced. Similarly, a distributed ledger of all activity increases the efficiency of administrative processes in compliance, such as credit checks and supplier verification. Blockchain can automate the validation and onboarding of supply chain partner credentials to eliminate time-consuming tasks and reduce the risk of fraud or error. Companies can thus focus more time on value-add activities, innovating goods or services to improve quality and reduce costs.
3. Smart Contracts
Blockchain can enable smart contracts to automatically enforce stakeholder-agreed rules and processes. Smart contracts can facilitate a procure-to-pay process in the supply chain as a blockchain can be programmed with set commands to automate actions when predetermined payment conditions are met, such as receipt of invoice, delivery notice or penalty fees. Smart contracts are capable of self-verification and ensuring the terms of the given contracts are carried out based on activity data within the blockchain. The total value and terms of the entire transaction are fully visible to all parties, with each stage of the process recorded on the ledger when its conditions are executed.
Still at its nascent stage, blockchain will have to overcome key challenges and limitations to encourage widespread adoption. These will include:
Enforcement of supporting laws and regulations
Openness of sharing between partners
Integration or replacement of existing systems
Acceptance of a decentralised network
Ensuring technology is truly immutable to alleviate privacy and security concerns
Complementary technological advancements in the internet of things (IoT) to link digital and physical assets
At Deecon, we recognise the promise that blockchain-based innovations hold, with a wide array of applications expected in the future within the procurement and supply chain management space. Through increased trust, transparency and traceability, this technology has the potential to improve both business relationships and operational performance to drive down the cost of purchasing.
Get in touch to find out how Deecon can help you gain greater insight into how advancement in innovative technologies will impact your industry and business.