Blockchain technology for supply chains—A must or a maybe?

Original article was published by Davidson Phil on Artificial Intelligence on Medium

Because the transactions and ledgers are encrypted, blockchain technology offers more security than the banking model, and its instantaneous transmission via the internet eliminates banks’ two- to three-day clearing process and accompanying costs for transferring money from one account to another. The term “blockchain” is derived from the “blocks” of validated and immutable transactions and how they link together in chronological order to form a chain (exhibit). Hence the term “blockchain.”

In essence, blockchains come in two dominant types. “Permissionless” distributed ledgers, such as bitcoin, reside in the public domain, while “permissioned” ledgers are centralized and governed by “actors,” “nodes,” or “miners,” and are held outside the public domain. This distinction has important consequences in the supply-chain context.

Blockchain’s value in today’s supply chains

In most cases, today’s supply chains operate at-scale without blockchain technology. Even so, the technology has excited the IT and supply-chain worlds. It has also inspired many articles and prompted established IT players and start-ups to initiate promising pilot projects, including:

Walmart tested an application that traces pork in China and produce in the US, to authenticate transactions and the accuracy and efficiency of record keeping.

Maersk and IBM are working on cross-border, cross-party transactions that use blockchain technology to help improve process efficiency.

BHP is introducing a blockchain solution that replaces spreadsheets for tracking samples internally and externally from a range of providers.

Provenance, a UK start-up, raised $800,000 to adapt blockchain technology to trace food. It previously piloted tracing tuna in the Southeast Asian supply chain.

Yet to date, the authors are not aware of any at-scale applications to the supply chain, raising an essential question: Can blockchain technology add value to supply chains?

Let’s start with a reality check: As most practitioners know, many of today’s supply chains have good data, which they are able to transfer across supply chain tiers at close to real time speed. To assess blockchain technology’s value at stake for the supply chain world, we looked at three areas where it could add value:

  • Replacing slow, manual processes. Although 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 industry.
  • Strengthening traceability. Increasing regulatory and consumer demand for provenance information is already driving change. Moreover, improving traceability also adds value by mitigating the high costs of quality problems, such as recalls, reputational damage, or the loss of revenue from black- or grey-market products. Simplifying a complex supply base offers further value-creation opportunities (see sidebar, “A complex supply chain of unknown parties”).
  • Reducing supply-chain IT transaction costs. At this stage, this benefit is more theoretical than actual. Bitcoin pays people to validate each block or transaction, and requires people who propose a new block to include a fee in their proposal. Such a cost would likely be prohibitive in supply chains because their scale can be staggering. For example, in a 90-day period, a single auto manufacturer would typically issue approximately 10 billion call-offs just to its tier-one suppliers. Also, together all of those transactions would significantly raise demand for data storage, an essential component of blockchain’s distributed-ledger approach. In addition, creating and maintaining numerous copies of data sets would be impractical in the supply-chain environment, especially in permissionless blockchains.

The biggest blockchain barrier: who would give permission?

In adopting blockchain technology for its supply chain, a company must first decide on the type of blockchain it would need to build. Recall that the bitcoin approach is a permissionless blockchain populated with parties that are not known or trusted. It resides in the public domain and uses a consensus verification protocol to establish trust in each block. There is no central database or central governance in these blockchains.

A bias for privacy

Conversely, in most supply chains, the parties are known and trusted. Moreover, the supply-chain world is unlikely to accept open access because its users don’t want to reveal proprietary details, such as demand, capacities, orders, prices, margins, at all points of the value chain to unknown participants. This means most supply-chain blockchains would need to be permissioned, with access governed centrally and restricted to known parties who may be limited to certain segments of data.