Blockchain

Blockchain Technology – The New Foundation of Effective & Transparent Supply Chain Management

MEDICIGlobal Head of Content

Consumers know surprisingly little about most of the products in everyday use. A highly connected and extensive network of retailers, distributors, transporters, storage facilities, and suppliers stand between individuals and products they consume. An average consumer only gets to enjoy the end result of design, production, delivery, and sales process of products, without ever knowing the chain of events and parties making it possible.

Let’s look at the flower business as an example of the scale and level of inefficiency of modern processes. The value of the global flower trade industry is nearly $105 billion. Around 700,000 metric tons of cut flowers are shipped each year. Shipping information passes through many hands, increasing the potential for delays in transport. One shipment can require sign-off from 30 unique organizations and up to 200 communications. A single lost form or late approval could leave the container stuck at port.

The entire process can take more than one month, but with digitization and blockchain-based process management, the container’s path can be traced with exceptional transparency and security, not mentioning the elimination of delays, resulting in significant cost savings for all parties. Any interested party with the goal to explore a particular step in the process to perform the quality assessment will be able to audit the network in which every step is verified by the relevant performing party.

The above-described inefficiencies do not cover all existing issues. Sweetbridge Foundation details more pressing problems facing global supply chains today, which include:

  1. Lack of liquidity: At any given moment, there are $3.9 trillion tied up in the net working capital in supply chains. Liquidity solutions are frequently expensive, tie up borrowing capacity, and are often unavailable to companies that need it most. Working capital optimization is a critical need for supply chain participants.

  2. Inefficient allocation of resources: Only 75% of the $70 trillion in global supply chain assets are utilized at any given time. Factories, warehouses, planes, ships, trains, and trucks are expensive, yet there is a surprising amount of excess capacity across the extended network. Companies maintain information silos and asymmetries as a competitive advantage and avoid disclosing their unused capacity. This prevents significant optimizations in supply chains.

  3. High risks inherent in optimization: Organizations find it difficult to measure the performance of their systems and, consequently, to retain effective talent for the purpose of supply chain optimization. Enabling such optimization can easily lead to efficiency gains of 5 to 10% ($2.7 trillion to $5.4 trillion globally).

  4. Disruptive change: Today’s disruptive pace of technological change presents existential risks for entities from all industries. Current supply chain participants must increase their global agility, transparency, and efficiency to quickly respond to sudden shifts affecting today’s markets.

Needless to repeat, supply chain management remains one of the most complex and impactful parts of commerce and retail, with very little innovation brought into this seemingly unsexy industry. Fortunately, supply chain management and logistics are among the cases where blockchain technology is believed to be having advantages over conventional systems. The specter of benefits resulting from supply chain processes being carved into ledgers encompasses greater security, efficiency & transparency, among other things.

In fact, as IBM emphasizes, traceability and transparency are some of the most important foundations of logistics. Supply chain management on a distributed ledger allows for a more efficient issue tracking and resolution, reduces delays from paperwork, increases consumer and partner trust, minimizes courier costs, improves inventory management, as well as offers to reduce or completely eliminate fraud and errors. The tech corporation explains that distributed ledgers that create a permanent and shared record of every transaction associated with an asset create an unbroken chain of trust. Each record is time-stamped and appended to the event before it. With that, blockchains have the potential to generate breakthroughs in three areas: visibility, optimization, and demand.

Particular areas where distributed ledgers can be transformative: produce traceability, electric power microgrids, RFID-driven contract bids and execution, cold chain monitoring (sensitive cargo), etc. There are a limited number of notable examples (and a few worth paying attention to). The tasks that can be improved with blockchain-based systems can be summarized as follows:

  • Recording the quantity and transfer of assets (pallets, trailers, containers, etc.) as they move between supply chain nodes.

  • Tracking purchase orders, change orders, receipts, shipment notifications, or other trade-related documents.

  • Assigning or verifying certifications or certain properties of physical products (for example, determining if a food product is organic or fair trade).

  • Linking physical goods to serial numbers, bar codes, digital tags like RFID, etc.

  • Sharing information about the manufacturing process, assembly, delivery, and maintenance of products with suppliers & vendors.

One of the famous examples of international scale is the blockchain pilot IBM and Maersk worked on. Two companies first partnered on a blockchain trial in summer 2016. Michael J. White, the new company’s CEO, said this pilot which traced a container of flowers that sailed from Mombasa, Kenya to Rotterdam in the Netherlands, plus several follow-ups convinced Maersk of the system’s potential. IBM and Maersk’s technology is built on Hyperledger Fabric 1.0, a blockchain first developed by IBM that is now maintained by the Linux Foundation’s Hyperledger group. Fortune also reports that IBM has separately partnered with companies such as Walmart, Nestle, Unilever, and others on food safety and supply chain trials using its blockchain technology. The company is also working on pilots in finance, healthcare, and other industries.

“The potential from offering a neutral, open digital platform for safe and easy ways of exchanging information is huge, and all players across the supply chain stand to benefit,” said Vincent Clerc, Maersk’s Chief Commercial Officer who has been also serving as board chairman of the joint venture.

While large-scale cases are yet comparatively scarce, there are localized interesting examples such as Everledger and Ascribe, which offer solutions for the diamonds industry and anti-counterfeit in digital artwork respectively. In another area, one very critical for any nation – the food industry – there’s Provenance, an initiative aimed to create transparent supply chains for all types of products throughout every part of a product life cycle. The company counts 200+ retailers and producers in the food and drinks industry using its software.

The way Provenance aims to bring transparency into supply chains is by implementing supply chain certification on the blockchain. In its white paper published in 2015, the organization described its proposition in the following way:

“…we propose an alternative approach to the certification and chain-of-custody challenge in sustainable supply chains: a system to assign and verify certifications of certain properties of physical products; e.g., organic or fair trade. We will outline a model of the various materials and components from initial production through manufacture and assembly to the final customer.

“At each point in time, the prototype of our model details four key properties concerning all materials and consumables it covers: the nature (what it is), the quality (how it is), the quantity (how much of it there is) and the ownership (whose it is at any moment). Key attributes may be read and linked from pre-existing datasets such as barcodes, or newly ascribed along the way.”

Provenance emphasizes that every step of the supply chain recorded on an immutable ledger allows to securely audit all transactions that brought the final state of being into effect (to inspect the uninterrupted chain of custody from the raw materials to the end-sale).

Given the complexity of networks responsible for filling up the stores, the transparency of every step is a great deal for every relevant participant. Provenance brings up an example of a system with six types of players in the chain:

  • Producers

  • Manufacturers

  • Registrars, which are organizations that provide credentials and a unique identity to actors

  • Standards organizations, which define the rules of a certain scheme

  • Certifiers and auditors, which are agents – usually separate agents, to maximize security – that inspect producers and manufacturers and verify certain standards, like annual production capacity

  • Customers, the buyers of products all along a supply chains, including the end-consumer

Each step requires a particular type of data to be registered in the ledger and its way of representation in the consumer-facing applications. If we were to take the example of manufacturers, participants would be required to input the data on the amount of raw materials used for production.

“Much as with production programs, once deployed by the certifier the programs are operated by manufacturers, but with one additional constraint: input goods must be ‘used’ for any output to be created, just as in the physical world. For example, the registration of a certain amount of organic cotton fabric requires as input the appropriate amount of raw organic cotton, and after this usage, the raw organic cotton should no longer be usable. Because of its audibility, the blockchain provides the same cast-iron guarantee as in the physical world; namely, that creation of an output good can happen if and only if the required input is used.”

While notable, Provenance and Everledger are not the only initiatives aimed at transforming the supply chain management industry and changing the way goods are produced, marketed, purchased, and consumed around the world. Other cases worth studying include Kouvala Innovation, T-Mining, and Sweetbridge Foundation, an alliance with deep knowledge of the flaws of modern systems, and a blockchain-based protocol stack for global commerce and supply chains.

Challenges in the supply chain management industry described earlier represent an opportunity of an unimaginable value for all participants. Solutions that tackle inefficient banking practices, outdated communication modes, unreliable data sources, lack of collaborative business practices, and insufficient transparency will be replaced with a new framework utilizing today’s innovative tools, and business models.

Elena Mesropyan

MEDICIGlobal Head of Content

Global Head of Content, MEDICI

Elena is a research professional with a background in social sciences and extensive experience in consumer behavior studies and marketing analytics. She is passionate about technologies enabling financial inclusion for underprivileged and vulnerable groups of the population around the world.