Better Supply Chain Management With Blockchain

Saeed Zeinali Published on Jan 21, 2020
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Blockchain will change the way we do things in future. We don’t know how long it will take for it to become mainstream, but no one disputes the fact that disruption is on the way. There are startups and companies all over the world working on creating the next generation of banks, insurance companies, gambling platforms, etcetera. These companies have piles of cash from Initial Coin Offerings (ICOs) or institutional funds. The huge sums of capital poured into the technology will be the fuel to deliver on the promises made by those companies.

Most people think blockchain is the same as bitcoin. Bitcoin is using the blockchain technology to facilitate decentralized transactions. Bitcoin and other cryptocurrencies are interesting to follow but the real value is in the technology itself. The concept of decentralized echo-systems gives us a new lens to look at the world and the world’s problems. One of the more matured use-cases of the technology is in supply chain. In this article, we will take a high-level look at this use-case.

1. What is blockchain?

Blockchain is a database structure that was first employed to facilitate transactions of bitcoin currency. Think of it as a distributed ledger or decentralized database that keeps a permanent digital record of all transactions that happens in between the parties without a central database [1].

A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible, and which carries a very strong crypto economically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies.

Vitalik Buterin (Founder of the Ethereum)

Blockchain’s decentralized (and secure) nature allows multiple parties to interact with each other directly in an ecosystem in which trust is meaningless. Also, the fact that the records are kept permanently and cannot be changed, gives the technology a competitive edge in applications where tracing and record-keeping are key. These two characteristics make blockchain a potentially useful tool to make improvements in supply chain management.

2. Supply Chain Traceability

“A supply chain is the network of all the individuals, organizations, resources, activities and technology involved in the creation and sale of a product, from the delivery of source materials from the supplier to the manufacturer, through to its eventual delivery to the end user” [2]. According to ISO 9000- 2000, traceability is defined as “The ability to trace the history, application or location of that which is under consideration” [3].

Traceability can be discussed in two fashions: the ability to track and the ability to trace [4]. Tracking is forward looking by nature, the same way as you would track your parcel till it gets delivered. Tracing is backward looking though, for example, when that parcel is lost and you want to investigate what has happened.

I am not going to dig deep into supply chain management here. But there are some basic points to consider. For example, to begin with, we have to identify the unit that are we tracking or tracing first. The tracing unit can be a single product, a batch of products, a container or a shipment of product. The traceable unit shall be identified with a unique ID, i.e., there can’t be a duplicate [5].

Also, that unit shall be traceable to begin with. For example, if the product is liquid, liquid is not traceable, but a bottle of liquid is. Also, an important assumption is that there is a means for recording the traceable data (either by labour or sensors) [5]. Another important factor is that there should be a system for different parties to share information and can match their records if needed.

The case for blockchain is becoming more and more clear. But there are very important questions that are needed to be asked.

3. The blockchain use-case

Traceability can be important for a supply chain system as it can: a) improve the efficiency of the chain and b) mitigate future audit risks and ease compliancy for regulated products (i.e. drugs, foods, etc.). Blockchain can remove some of the hurdles that are currently in the way to reach to a traceable supply chain.

Imagine a distributed (and transparent) ledger that tracks every transaction between different parts of a supply chain system. The record of transactions cannot be eliminated or altered. There is no need for two parties to call their HQs to get permission to receive a product and facilitate a payment and update the records. In an ideal chain powered by blockchain, the product has its history attached to it and no approval is needed on either parts when a transaction is happening.

There are two types of off-the-shelf blockchain solutions that we can build on top: private ledgers (like HyperLedger) and public ledgers (like Ethereum). Another option is to create a system ground-up but likely, that not the best idea. Read this article to learn more about the difference between the private and public ledgers.

For supply chain management, a private ledger may likely be a better option. Although the supply chain management is a more studied use-case, there are some limitations with the current public ledgers such as bitcoin’s blockchain[7]:

  1. Limited capacity: The current off-the shelf solutions have a limitation in terms of the number of transactions they can process in a second.

  2. Security: Public and private ledgers could be subject to a 51% attack. Read [8] for more details

  3. Latency: Transactions take time on the BCT platform.

  4. Privacy: One of the top features of the BCT blockchain is that the entire history of transactions is available to everyone and on each node.

  5. Cost: There is a high computational cost to facilitate transactions on a public ledger. There needs to be economical incentives for “miners” of a public ledger to facilitate transactions. Read [9] to learn more about Cryptoeconomics.

Private ledgers such as HyperLedger, although may seem to be a more favourable enterprise solution, have their own limitations. The blockchain technology is in its early days and lots of work has to be done to advance the technology. Such advancements are on the way as the technology becomes more and more popular.

Blockchain is like a Ferrari but with a Chrysler engine.

Heard this awesome description from Ameer Rosic, The co-founder of BlockGeeks over a coffee chat

There are some none-technical barriers to think of as well. Adoption of the blockchain technology requires coordination and standardization throughout the entire chain. Also, a completely transparent system might not be desirable. Different parts in the chain may have confidential dealings with each other.

Although blockchain has some limitations, the potential is endless. At the end of the day, for a businesses, it all comes down to the cost/benefit analysis. The benefit of adoption verses the implementation cost. At the end of the day, the economics will drive the decision making. Blockchain has the potential to become a tool to solves problems that are not solvable with the available tools. Businesses do not like solutions in search for problems.

Regulated industries with big legal risks may be the early movers. Lots of utility companies are looking at blockchain to modernize their girds [10]. It also depends on how much the history of a traced good is important! De Beers just announced that they are going to use blockchain to guarantee diamond purity! [11]

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