What is Blockchain and how can it Affect Supply Chain Management?
When an unknown researcher going by the name of Satoshi Nakamoto first set out the principles for a radical new decentralized virtual currency called Bitcoin, few but the most ardent cryptography enthusiasts gave the idea much close attention. But little did they know that the white paper entitled “A Peer-to Peer Electronic Cash System” would go on to form the basis for one of the most significant new technologies of the 21stcentury.
Introducing the Blockchain
Nakamoto’s paper introduced the concept of digital scarcity to the world. Cryptocurrencies could not be duplicated and spent again, which meant that it was now possible to assign intrinsic value to digital assets, something that had never been possible before in the online world.
This was enabled through the Blockchain, a universally accessible ledger system which was used to record and tally every digital transaction. Whenever a crypto coin was spent, it would be sent through the Blockchain at which point large groups of third-party users known as miners would use purpose-built processers to reconcile the coin’s unique encryption code with a time-stamped recording of the asset’s entire payment history. For their work, the miners would be awarded a small fraction of the transaction value.
If anybody wanted to tamper with a digital transfer, they would need to be able to replicate this entire validation step-by-step, a feat that would practically impossible for any modern computer. In one fell swoop, Blockchain solved many of the problems created by standard record-keeping systems. Here was a ledger that was incorruptible, self-verifying and completely transparent. All of a sudden, every computer user had the ability to transfer their digital assets securely and reliably. Now everything from documents, videos, images, contracts and recordings could be encrypted and transmitted without the need for third-party intervention.
The Modern Supply Chain
Supply chains have been become increasingly complex over the past couple of decades. The growth of E-commerce and same-day shipping has forced suppliers to cut down their lead times, and create more specialized manufacturing systems. At the same time, rising customer expectations have led companies to develop their product and service lines significantly in an effort to deliver more personalized buying experiences. Many of these products enjoy truncated lifecycles, as manufacturing is quickly ramped up and winded down to make way for newer models.
Apart from these front-end considerations, there is the constant need to create top-line growth in an already saturated local market. Many organizations have looked to answer this concern by extending their national and international presence. Of course, this has caused a commiserate increase in relationships along the supply chain with global 3PL providers and overseas suppliers entering the picture.
Big Data, Big Problems
Corporate supply chains have implemented a variety of enterprise resource planning (ERP) systems and management tools in an effort to streamline their rapidly expanding operations. Today, almost every supply chain function is digitized; from IoT connected warehouse equipment to digital shipping notices and wireless RFID scanners that are used to track packages across shipment routes.
However, this massive influx of data has created new problems within the enterprise. It is almost impossible for supply chain managers, to maintain visibility across such a massive digital infrastructure. These problems are only thrown into sharper focus in areas where clear information gaps exist between analogue and digital processes.
While product picking and packing might be supervised with a sophisticated warehouse management tool, the actual shipping notice is entered into the system as a scanned PDF document that cannot be referenced against any digital database. Similar issues can be seen at any point where products are passed from one function to another; as a result managers are rarely able to take full advantage of the real-time information sent out to them.
Knowledge Gaps in the Supply Chain
· Inadequate benchmark reporting causes organizations to draw the wrong conclusions about functional performance and cost factors. In turn, this stymies efforts to assess your supply chain efficiency, and to set achievable metrics that can lead to reliable performance improvements.
· A clear deficiency in reporting translates to less effective supply chain strategies, as managers will have little clue about the actual capabilities of their systems and staff.
· A lack of knowledge regarding outsourcing partners will lead to poor vendor selection, less cost-effective contracts, and might even necessitate an exit if unpalatable details about your supply chain partner emerge at a later date.
· Incomplete sales and production data will adversely impact your budgeting and planning, leading to higher inventory holding costs, and lost revenue opportunities.
· Many supply chain relationships are built on flimsy legal contracts that are difficult to enforce in any meaningful way.
Blockchain Can Disrupt the Supply Chain
The question for supply chain managers is how do you break through these data silos and create a truly decentralized data management system that can retrieve information from any area of the enterprise quickly and reliably.
Until recently, organizations relied upon third-party intermediaries to facilitate the secure transfer of information between supply chain partners. These independent service providers were tasked with processing and verifying critical data (such as banking information) to the satisfaction of all parties within the supply chain. While these transfers have traditionally been conducted on a trust-basis, the growth in participants across the supply chain has meant that individual parties can no longer rely on mutual working histories to guarantee the data sharing.
The Blockchain removes this dependence on third-party intermediaries. Instead of appointing supervisors to oversee the handoff of information along the supply chain, companies can simply implement this decentralized record-keeping system across their network. Blockchain would allow each successive recipient in the data transfer cycle to confirm the source, veracity, and accuracy of the information they receive.
A Blockchain Use Case
Think about the distribution of a single piece of inventory. Starting from the supplier, this inventory item could be scanned into the public ledger using a simple QR-code. The resulting data would be encrypted and accessible to all interested parties. As this item is passed down the supply chain, each successive handoff would be validated through the ledger, and updated to reflect the new ownership of the item. Each handoff would be time-stamped so functional efficiency could also be confirmed at each stage.
This capability brings enormous benefits in a variety of industries. In the fresh foods sector where local sourcing and organic production methods are extremely important, this self-validating system could be used to satisfy customer curiosity about the production process behind a fruit, vegetable of slice of beef. With a simple scan of the QR code, the customer would be able to check where the product was prepared, and the steps it went through before it was delivered to the produce aisle of their local supermarket.
Blockchain Brings Visibility to the Supply Chain
For supply chain managers, Blockchains create visibility at every step of the delivery cycle. By checking the Blockchain a manager can confirm who currently owns an asset, where it has been previously and where it is headed next. Some businesses in the agricultural space have even implemented product sensors that transmit real-time data about the condition of their goods, updating each change automatically in the Blockchain.
These real-time insights give managers an unprecedented ability to supervise quality standards or production and distribution; it also equips them to take real-time strategic decisions that can avert delayed, inaccurate or damaged shipments.
Data security has been a huge concern for companies in recent years. A variety of high profile breaches, have brought the issue to mainstream attention, and both regulators and consumers are on the lookout for poor practices. From an organizational perspective, the lost of critical information can lead to hefty penalties, a loss of customer confidence, and the permanent derailment of critical projects.
In the past, a close supply chain relationship generally required shared information systems, which inevitably lead to more vulnerability across the enterprise. With the Blockchain each supply chain participant has the ability to transmit information on a one-to-one basis without revealing details about their larger production, distribution or supply infrastructure. Now, each organization has the ability to set up individual Blockchain networks for each supplier relationship, these can be used to transfer information in a far more focused manner without revealing other sensitive information.
IBM and Maersk
The recently announced blockchain venture between IBM and Maersk is a perfect example of this kind of information sharing infrastructure. The two corporations have established a shared Blockchain ecosystem that is used to monitor and verify each step along the document chain, ensuring that the information and authorizations have been received at every stage. From there, documents can be checked to confirm that they have arrived at the correct location place at the right time, along with the associated goods. This program was initially piloted in a flower shipment from Africa to Europe, where it proved to significantly reduce the time and effort across the shipment journey.
While this sort of shared approach might be beyond smaller businesses at this time, ultimately collaboration will prove to the most effective way to leverage the promise of Blockchain in the supply chain. Think about what this level of accessibility could mean for shipment and delivery forecasting for smaller businesses.
For example, Shippers will usually receive order details a few days before they are required, which makes it harder to optimize shipment methods and delivery routes for specific goods. But by combining the data gathering capabilities of the Blockchain with advanced analytics and AI, these suppliers will be able to receive and process vast volumes of shipment information from across the world, instantly. This will give them real-time insights into atmospheric conditions, shipping rates, political instability, blocked routes and other external factors from a range of geographic locations.
One of the most interesting uses of the Blockchain is in something called smart contracts. These agreements function very similarly to real-world paper contracts except that you don’t need a third-party arbitrator to guarantee the deal. That’s because the contract is only executed once the terms of the agreement are triggered. Since the agreement is built upon the Blockchain, no party will be able to initiate early payment, or tamper with the details of the contract without alerting every other participant instantly. Smart contracts can save you the time and expense of a legal intermediary, and reduce conflict during a negotiation.
In the supply chain this capability can be used to manage a number of different transactions. Payment for overseas components or products could be linked to certain conditions, which can be confirmed upon deliver through IoT-enabled sensors. Once the terms have been fulfilled, payment could be triggered through a Blockchain linked account. A similar method could be used to initiate monthly payments for a software service subscription, provided that the terms of the SLA are being met. Recently, aerospace firm Moog began implementing smart contract with a number of their suppliers. Each contract laid out the number of parts and pieces to be shipped, the price at which they would ship, and the date at which delivery was expected. Once terms were met, payment was made automatically.
Once again, this implementation would save procurement and supply chain functions a significant amount of time in assessing deliverables and ensuring complete fulfillment of a deal.
Blockchain isn’t Ready Yet
Before supply chain can be reliably implemented across the supply chain a number of key gaps will need to be covered.
Organizations will need to find sufficient technical talent to oversee such a massive implementation. Currently, these employees are largely monopolized by financial sector firms.
As a peer-to-peer system, Blockchain requires a large user base in order to facilitate efficient transaction processing. Smaller businesses may need to pool together resources in order to create this sort of economy.
In order to integrate other supply chain participants into the Blockchain, you must ensure that technology implementations are standardized. It may be difficult to achieve this sort of standardization in a technology that is generally valued for its lack of centralized oversight.