Application of Blockchain
Technology in Supply Chain Management
Blockchain is creating a lot of buzz in this transforming world which has often been described as ‘VUCA,’ i.e., Volatile, Uncertain, Complex and
Ambiguous. Often people confuse blockchain with bitcoin which is not so, as
they are not synonyms. The blockchain is a concept whereas bitcoin is an
application. Bitcoin is an unregulated shadow-currency and was the first
popular blockchain application.
Contemporary Business Model
Currently, most businesses operate on either on public
or private networks. Tangible and intangible assets are transferred across networks to network participants. Ledgers
are used to document all those transactions, and networks are governed by a contract. Business networks today are
often inefficient because each participant in the network keeps records of all
transactions between all the parties that the supply chain interacts with on a
daily basis. Maintaining and Auditing multiple ledgers is a challenge for
businesses in Supply Chain Management which makes it inefficient, error-prone,
Blockchain as a concept
At the highest level, a blockchain is a trusted,
distributed ledger with shared business processes. It is a chain of the information storing blocks wherein every block
contains information such as transactions, parties involved, date and amount. A
blockchain database retains a complete
history of all the assets and transactions executed. Every transaction authenticity in blockchain is validated by a network of
users often called as miners. This distributed validation method makes
it transparent and trustworthy.
When we talk about Blockchain implementation in
the business process we emphasize on the three factors, which are:
Identity over anonymity
Selective endorsement over
proof of work
Broad set of assets
Any blockchain has majorly six major
Messages: A message is a submission of data in a transaction for cryptographically
verification by participants’ computers(nodes). Once it’s verified, it becomes
a transaction record.
Blocks: When messages related a transaction are
bundled together, it gets stored in a software generated container
headers: It is
formed by combining messages in a
block, it refers back to a hash of the most recent block.
Time stamp: It represents the point of time when the messages under a block
header were listed.
Hashing: A unique number is given to a
group of data after processing it. It’s
effectively a digital
Chaining: The block
header for a new block contains a reference to the hash for the previous block,
and the process continues making it a
chain. To change one block of the chain,
it’s necessary to convert all the blocks which will come after it. This results in indelible records
Blockchain & Current supply chain – A permission
The change in permission given to a particular
node and whether or not there exists a centralized authority divides the
blockchain into three different parts;
public blockchain, private and hybrid/consortium blockchain. A bitcoin is established over permission-less or public
blockchain where protocol to build that trust. But in the most supply chain, the parties are known and
trusted. Moreover, supply chains will not want to reveal their propriety
details like demand, orders, capacities, margins, etc. to the public. Hence a private
blockchain where the access is governed centrally
so that it is restricted to known and
trusted parties is more likely to be adopted by supply chains.
Blockchain’s value addition to supply
The requirements for a Blockchain for business
are a shared ledger, smart contract, privacy, and trust. Here shared ledger is
an append-only distributed system of the record shared across the business
network. Privacy ensures appropriate visibility, transactions being secure,
authenticated and verifiable. Smart Contract is the business terms embedded
with transactions which link the information collected in a blockchain to its
consequence. It’s the actual progression of blockchains from a financial transaction protocol to an
all-purpose utility. Smart contracts are pieces of software that extend
blockchains’ utility from simply a record of financial transaction entries to
automatically implementing terms of multiparty agreements. The last aspect is a
trust which means that the transactions are
endorsed by relevant participants. Blockchain helps participants to
store price, date, quality certifications and location of the materials. These
information increase traceability of the materials, prevent losses from
counterfeit products, improve compliance and reduce administration paper work.
Material traceability feature originates many
applications in food and cold supply chain industry. The famous case of Chipotle Mexican Grill outlets which left 55 customers
ill and company couldn’t trace the contaminated food which hugely impacted
their reputation and shares fell overnight tells us about the need to bring in
a more transparent system where the traceability of the ingredients is easier.
According to a survey by Deloitte, 90% of the
consumers consider food product transparency as a critical factor in deciding
food products. The journey towards this change in food industry starts with the
registration of farmland on the
Blockchain. This’ll make it easier for
the consumers to track the origin of their food and helps in improving food
safety while reducing the potential for frauds. This
will also help in increasing demand for organic farming as producers will know
that customers have visibility of their
name and product and same goes for customers. Currently, it takes up to two
weeks to track down the source of contaminated foodstuffs, but latest blockchain implemented methods can
give its members access to a constantly-updating ledger of food, from source to
store. For the growing supply chains having multiple suppliers to deliver the
parts and ingredients, traceability becomes even more important. Provenance, a
supply chain transparency startup, recently completed a six-month pilot for
tracking responsible sourcing of tuna in Indonesia via blockchain. Similarly,
Walmart in partnership with IBM has already run two blockchain experiments to
track Chinese Pork and Mexican Mangoes.
This provenance tracking through blockchain is finding
its way into pharmaceuticals industry as well. Drugs giants like Pfizer and Genentech have
completed a successful pilot to track drugs last year and are now working on
project MediLedger which will imbibe the delivery of drugs from drugs maker to
wholesalers to the hospital to the customer in the blockchain.
2. Counterfeit Prevention
can also help in fighting the scourge of counterfeiting. Counterfeit goods
account for 2.5% of global trade or $461 billion. In fact, Amazon has begun
taking counterfeit resellers to court. Most common counterfeits items are
footwear (18%), electronics (15%) and eyewear (13%). Even the e-commerce
platforms aren’t untouched by these
counterfeit items. According to INTA, global e-commerce platforms like Amazon, eBay and Alibaba also have 23% cumulative share
in selling counterfeit products among top 10 global e-commerce platform.
blockchain, retailers can provide their customers with unchallengeable proof of
the origin and authenticity of their products at every step in the supply
chain. The diamond industry is working with Everledger to verify the origins
of precious stones, and they have
already added over 1.6M gems to a ledger. One sneaker manufacturer is using
blockchain and 3-D-printed smart tags to prove product authenticity.
3. Improve Compliance
can effectively maintain more compliance with
the outsourced contracts since it can reduce communication and data transfer
errors. Even though supply chains can currently handle large, complex data
sets, many of their processes, especially those in the lower supply tiers, are
slow and rely entirely on paper—such as is still common in the shipping
With the implementation of the blockchain, less time can be spent on verifying the data and more time
can be spent on improving quality and
reducing cost. Maersk And IBM have
completed the first test of a system last year that would improve the company’s
cargos process efficiency using blockchain.
4. Reduction of
Administration cost & Dispute resolver
Processes involving manual checks for compliance or credit purposes
currently takes weeks. Not only this causes a delay
in process completion, but it also is the
cause of many disputes in supply chain
members. As per IBM there exist more than 100 million dollars of invoice worldwide which are
in dispute between buyer and supplier at any given time and takes and an average
of 44 days to be resolved.
a contract, proof of origin, receipt,
delivery, and payment transmitted through
blockchain this all can be avoided up to 90-95%.
Blockchain & ERP
can work in collaboration with other enterprise applications like ERP, CRP, and WMS. Using blockchain will only increase
capabilities of existing ERP in multi-echelon and multi-staged supply chain of the organizations. Walmart-IBM
Hyperledger based blockchain has been integrated
with their retail corporation’s safety system that tracks the shipment of fresh produce mangos. Much of the
information about mango shipment is taken directly from Walmart’s ERP system.
of many tangible and intangible benefits of blockchain in the supply chain, the road to wide acceptance in
supply chain management has some challenges for blockchain.
Data privacy – These counterfeit combating systems need to find a right balance
between privacy and transparency. There is a need of stronger authentication, private
transaction channels and granular authorization for large acceptability.
Performance – increasing number of traded products and the requirement to
generate unique id at the point of every transaction will lead to the huge chuck
of data, and the performance of
blockchain with this high chuck of data
is another challenge.
Cost – The cost of providing the processing speed to deliver instant
transaction in bitcoin is also one of the reasons
that it’s not getting accepted as it should have been and currently most of the
blockchain application is in high-value assets not in high volume assets.
the expectations are high from blockchain but in order to have a mass
acceptability in supply chain, this technology has to evolve further to mitigate
transformation of supply chains isn’t going to happen overnight. But the future
combination of blockchain, IoT, predictive
analytics and machine learning can bridge the gap of trust based information
with portable solutions brought to complex structures of global supply chains.
may still be down the road, but its potential demands attention now.