Blockchain – can it work in supply chain?

Blockchain—the technology behind the digital asset and payment system Bitcoin – is being mooted as the next big thing for supply chains. But how can this fledgling technology be used to benefit logistics and the greater supply chain? The answer lies in its potential to speed up administrative processes and to take costs out of the system while still guaranteeing the security of transactions.

The underlying principle of blockchain is to provide a secure environment where encrypted business transactions between buyer and seller can happen without the need for third parties such as banks and clearing agents to intervene. These middle-men currently process, verify and reconcile transactions before the ownership of the goods or services can pass from sellers to buyers. In the disruptive blockchain world, there is little need for intermediaries: this means that it could be a game changer for supply chains.

Understanding blockchain technology

Blockchain is a type of decentralised database that keeps encrypted records of digital transactions in a distributed ledger. Rather than having a central administrator like a traditional database, a blockchain has a wide network of replicated databases, synchronised via the internet and visible to anyone with approved access to the private network.

When a digital transaction is carried out (for example a purchase order), it is grouped together in an encrypted ‘block’ with other transactions and replicated across the private network. Certain members of the network validate the block of transactions, which is then timestamped and added to a ‘chain’ of transactions in a linear, chronological order – hence the name ‘blockchain’. Read more detail about how this works here.

What traditional buyer-to-seller transactions look like today:

What’s in it for the supply chain?

The advantages of better data-sharing across the supply chain would allow for:

  • faster and more accurate tracking of products and distribution assets, e.g. containers, as they move through the supply chain
  • reduction of errors on orders, goods receipts, invoices and other trade related documents due to less need for manual reconciliation
  • sharing of information about process improvements and maintenance in real-time
  • a permanent audit trail of every product movement or financial transaction from its source to ultimate destination, reducing opportunities for fraud.

Accredited users in a specific supply chain would be able to access specific blocks of data in the system, either to view or transact.

It’s early days but the take-up is accelerating as its possible applications is becoming better understood. Because of blockchain’s encrypted structure, people are able to transact peer-to-peer without the need for intermediaries. What does it mean for the banks? Even though they may have a lot to lose there is evidence of banks already working with other financial institutions on developing profitable blockchain applications.

What buyer-to-seller transactions could look like:

Transacting using “smart” contracts

Blockchain can be used to create ’smart’ contracts that execute the terms of any agreement when specified conditions are met. The “smart” part is a piece of computer code that predefines a set of rules under which the parties to that smart contract agree to interact with each other. The code facilitates, verifies, and enforces the performance of contract conditions.

In a retailer-supplier relationship, for example, we are able to route purchase orders, invoices, receipts, shipping notifications, inventory data and other trade related documents to be automatically matched and verified. We can also trigger payments and replenishment orders automatically, based on the codified rules within a smart contract. There are obvious cost-saving opportunities in administratively heavy industries such as aviation and marine shipping.

What are the obstacles?

The law

The digitally defined, automated and global nature of blockchains and smart contracts will be difficult to align with maritime law, international customs regulations and the various commercial codes such as incoterms that govern the commercial transfer of ownership. Wells Fargo has already committed to working with the new technology but “significant regulatory, legal and other concerns remain to be addressed” says Chris Lewis, trade services manager.

The human factor

Business leaders immersed in the old world ways of working will need to be more open to sharing information with their tier 1 suppliers and others deeper in the supply chain. There will be some mistrust, especially around market share and sales data, until the system is entirely proven in practice. The old-age question “what’s in it for me?” will need an answer before everyone is confident to share everything in these private ledgers.

What about the hackers?

One objective of blockchain technology is to repel cyber attacks and forced outages. Hackers would not only need to hack into a specific block to alter existing information but would have to access all of the preceding blocks going back through the entire history of that blockchain, across every ledger in the network, simultaneously. It has been suggested that because a network of participants shares a blockchain, it has no single point of failure, until it happens of course.

In their recent article in HBR, Michael J. Casey and Pindar Wong said that “the challenges must be weighed against the demands of a global economy that hasn’t properly recovered from the financial crisis of 2008 and is fueling disintegrating, isolationist forces in the U.S. and Europe. Any system that promises to counter those trends by removing the inter-commercial frictions that curb trade, while also enhancing transparency and control for businesses and their customers, is inherently worth exploring. It’s why an increasing number of investors, businesses, academics, and even governments are starting to view blockchain technology as a much-needed platform for economic renewal.” However, they also accepted that there are challenges in the development and governance of the technology.

This is the first in a series of three articles. In the next article, we will look at some current real-world examples of blockchain-enabled supply chains in action.

Images courtesy of Resolve Solution Partners.

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