This is how blockchain can transform the supply chain
You can read this article in 19 minutes
Supply chain has become complicated. Some would say cumbersome. It takes days to make a payment between a manufacturer and a supplier, or a customer and a vendor. Contractual agreements require the services of lawyers and bankers, each of which adds extra cost and delay. Products and parts are often hard to trace back to suppliers, making defects challenging to eliminate.
Regardless of the commodity involved, whether it is equipment, consumer goods, food products, or digital offerings, supply chains have headaches a-plenty.
Friction in the supply chain is a big problem. There are too many go-betweens. There is too much back and forth. The rise in uncertainty stops supply chains from working well. Suppliers, providers, and clients must interact via central third-party entities instead of directly with each other. Ostensibly simple transactions turn into lengthy multi-step procedures.
Blockchain could be the answer to many of these issues. This recent technology is what drives Bitcoin and other so-called cryptocurrencies. However, it goes much further than an unhackable way of holding and exchanging money. Blockchain can manage any form of exchange, agreement, or tracking process. In a supply chain, it can apply to anything from self-executing supply contracts to automated cold chain management.
A blockchain primer for supply chain
What is blockchain? Here’s a simple explanation. A blockchain is a distributed, digital ledger. The ledger records transactions in a series of blocks. It exists in multiple copies spread over multiple computers, typically known as nodes.
The ledger is secure because each new block of transactions links back to previous blocks in a way that makes tampering practically impossible.
Because it is decentralised, the blockchain ledger does not depend on any single entity (like a bank) for safekeeping. The nodes connected to the blockchain network get updated versions of the ledger every time a new transaction takes place.
The multiple copies of the ledger are the “truth” about every transaction made so far in the blockchain. Any attempt at falsification would mean having to tamper with all the copies at precisely the same moment. The chances of being able to do this in blockchain networks of any useful size are negligible.
Bitcoin as an example of blockchain
The brief description of blockchain above may seem a bit abstract, so let’s look closer at the real-life example of Bitcoin. Bitcoin is just one way of using blockchain. However, it also happens to be the most well-known example. Bitcoin is a recently invented currency that is separate from any state-controlled fiscal mechanism.
Entirely digital, Bitcoin exists thanks to the distributed ledger of transactions on computers across the world. You can buy Bitcoin from Bitcoin exchanges. You can then use the Bitcoin as currency over the Internet to make and receive payments.
Each payment transaction is added to the ledger, which can be consulted by anyone at any time. Details like the amount, time, and date of each payment are visible, although the identities of participating parties are not. Bitcoin holders therefore usually do not know each other. To deal with this anonymity, Bitcoin uses another distributed mechanism called mining to add blocks of transactions to the ledger in a secure, tamper-proof way.
Now, let’s compare with the supply chain. The key blockchain features of Bitcoin align with the basic needs for reliability and integrity in a supply chain.
All the entities in the chain agree that each transaction is valid. For Bitcoin, that means a transfer of an amount of Bitcoin. For the supply chain, it could be payment, warehousing, transport or delivery.
The entities in the chain know where each asset originated. They also know who owned it before and at what time. For Bitcoin, the asset is money. For the supply chain, assets can be anything from iron ore and wheat to cash, machines, and copyrights.
No entity can tamper with an entry in the distributed ledger. It is not possible to erase a Bitcoin transaction. Only a new Bitcoin transaction can reverse the effect of a previous one. Similarly, with blockchain, it would not be possible to falsify a supply-chain payment transaction or the records of inventory, warehousing conditions, delivery times and dates, and so on.
The copies of the shared ledger all hold the same version of the truth. What works for the Bitcoin network also works for any other blockchain network, supply chain included.
Beyond bitcoin to business blockchain
Bitcoin is a useful way of getting to grips with the blockchain concept. It is also just one particular example. Blockchain for supply chain uses the same four basic principles. However, there can be significant differences in the way these principles are applied.
First, Bitcoin uses “mining” as the way to update and extend the ledger. Mining uses enormous amounts of computer power. It also involves many mining teams over the Internet, each competing to be the one to add the next block to the ledger. Blockchain for business and specifically for the supply chain is not obliged to use mining. There are other options for securely updating a business blockchain.
Second, the applications for blockchain in supply chain are far more diverse than making or receiving payments. A large part of this diversity comes from the use of smart contracts.
A smart contract is a software program that uses blockchain to execute an agreement. The program is stored on the blockchain so the smart contract can only function according to its programming. No fraud or other interference is possible.
A smart contract can take input from a ledger and trigger an event. For example, after receipt of payment as part of a transaction, the smart contract can trigger a delivery. Conversely, if a requirement (such as timely delivery or proper storage) is not met as expected the smart contract can trigger a penalty or similar sanction.
Third-party go-betweens are not necessary for the execution of smart contracts. Manual checking of conditions and events are obsolete endeavours. A software program that runs automatically, using information that is guaranteed by the blockchain to be correct, saves both time and money.
Applications of blockchain in supply chain
The following examples are now in use or can be implemented today using existing technology.
Automotive supplier payments
Blockchain allows the transfer of funds anywhere in the world without the need for traditional banking transactions, as transactions are made directly between payer and payee. It is also secure and rapid; taking minutes, compared to days for automated clearing house payments, for example.
Bitcoin transfers specifically also incur lower fees. Australian vehicle manufacturer Tomcar uses Bitcoin to pay some of its suppliers. Currently, three partners in Israel and Taiwan accept payment from Tomcar using Bitcoin.
Tomcar’s supplier agreements use standard terms. The advantage is in the cost savings. On the other hand, the firm is careful to avoid hanging onto too much Bitcoin. While Bitcoin is international by nature, some national governments see it as a way for companies to invest. Companies may, therefore, be subject to taxation on Bitcoin holdings.
Companies can use distributed ledger systems (blockchains) to record product status at each stage of production. The records are permanent and immutable. They make it possible to trace each product to its source. Global retailer Walmart uses blockchain to track sales of pork in China. Its system lets the company see where each piece of meat comes from, each processing and storage step in the supply chain, and the products’ sell-by date. In the event of a product recall, the company can also see which batches are affected and who bought them.
Electric power micro-grids
This example shows how entities of any size can use blockchain. In other words, blockchain is not just for the big players. Smart contracts are being used to redistribute excess power from solar panels. The Transactive Grid is an application running on blockchain to monitor and redistribute energy in a neighbourhood micro-grid. The program automates the buying and selling of green energy to save costs and pollution. The process uses the Ethereum blockchain platform, designed specifically for building and executing smart contracts.
RFID-driven contract bids and execution
RFID tags are commonly used in the supply chain to store information about products. IT systems can read the tags automatically and then process them. Therefore, the logic goes; why not use them for smart contracts in logistics?
The possible setup could be as follows. RFID tags for cartons or pallets store information on delivery location and date. Logistics partners run applications to look for these tags and bid for a delivery contract. The partner offering optimal price and service gets the business. A smart contract then tracks the status and final delivery performance.
Cold chain monitoring
Food and pharmaceutical products often have specialised storage needs. Moreover, enterprises see the value in sharing warehouses and distribution centres instead of each one paying for its own. Sensors on sensitive products can record temperature, humidity, vibration, and other environmental conditions.
These readings can then be stored on a blockchain. They are permanent and tamper-proof. If a storage condition deviates from what is agreed, each member of the blockchain will see it. A smart contract can trigger a response to correct the situation. For instance, depending on the size of the deviation, the action may be to adjust the storage. However, it could also extend to changing “use-by” dates, declaring products unfit, or applying penalties.
Blockchain and Internet of Things (IoT)
Other ambitious ideas come from using blockchain and the IoT. One suggestion is for smart contracts to manage rentals of driverless cars. A smart contract could check for rental payments. If there has been no payment or the rental agreement reaches the end of its term, the smart contract could lock the car and tell it to drive itself back to the hire company’s premises.
Challenges to be met
Blockchain of course, is still an emerging technology and is, therefore, not without its share of potential issues. Enterprises that want to harness blockchain power for their supply chain will need to watch out and be ready for the following challenges.
Ecosystem still in progress
The first telephone was useless until the second one arrived. In time, the phone spread across the world, and now we cannot do without it. The situation is similar for blockchain and companies that want to do business with specific partners. Those partners will need to buy into blockchain as well.
For example, Tomcar can currently execute Bitcoin payment for about 2% of the parts it buys. However, niche uses of blockchain are on the rise. It may be just a matter of time until businesses “join the dots” for widespread acceptance.
Bitcoin is an easy way to start using blockchain. The problem is that the rate of exchange between Bitcoin and other currencies can change rapidly. Payment terms must be short enough or flexible enough to be able to cash in Bitcoin and recover the value expected.
Bitcoin and other cryptocurrencies (Ether, for example, for the Ethereum platform) are also volatile in another sense. If you lose the digital key (passcode) to your cryptocurrency reserve, there is no way to recover it.
Technology and knowhow
Blockchain programming takes a mix of software skills. It also helps to understand economies and businesses, especially your business. You may have to train staff or hire new people with these skills. You could also outsource your blockchain development to a third party. The best choice for you will depend on your current situation and future aspirations.
Blockchain arose when people began searching for a way to decentralise applications and operations. They wanted to make dependencies on centralised entities like banks optional instead of obligatory. It is a new way of thinking, so don’t be surprised if it takes you or your colleagues a little time to shed your mental shackles and get into the swing of the blockchain movement.
Real-world supply chain blockchains in 2019
It’s always exciting to see how emerging technologies like blockchain progress and develop. Nearly a year after first publishing this article, we are seeing the supply chain and logistics domain evolving into one of the most active sectors for blockchain take-up.
For that reason, it seemed a good idea to document a few examples of how our industry is embracing distributed ledger technology and applying it to solve long-standing business problems. Let’s start with ocean freight shipping, which is an area in which blockchain innovation has been prolific over the last 12 months.
Tokenising the shipping industry with Ethereum
Hong Kong-based company 300Cubits set out in 2018 to solve an expensive and lingering problem in the container shipping industry—the preponderance of no-shows, when shippers fail to deliver cargo booked on a container vessel, and rolling, which is the outcome of shipping lines’ choice to safeguard vessel utilisation by overbooking to compensate for expected no-shows.
The 300Cubits response to the problem was to issue a TEU cryptocurrency and distribute a quantity of the tokens to shippers and shipping lines in 2018. Participants in the scheme use 300Cubits’ blockchain solution, based on Ethereum, to make deposits using the tokens when cementing a shipping transaction (the contract).
How does the system work?
The way it works is that the shipper and the shipping line both deposit a token in the blockchain when the shipper books cargo onto a sailing. To recover their escrowed tokens, both the shipper and the shipping line must honour the booking.
If the shipper does not present the cargo in time for loading on the vessel, the shipping line can recover its token—along with the shipper’s token—from escrow. Similarly, if the shipping line fails to transport the shipper’s cargo as agreed, the shipper receives both deposited tokens.
While 300Cubits issued the initial batch of tokens, free of charge, to participating shippers and shipping lines, it will sell subsequent batches for payment in fiat currency, ensuring that the tokens acquire monetary value. This value ensures financial consequences for shippers or shipping lines that renege on a booking. A smart contract, executed using the 300Cubit’s solution, automatically assigns tokens when a booking is made and reassigns them based on the outcome.
How does blockchain solve the problem?
The 300Cubits venture essentially makes it less likely that shippers will fail to deliver their cargoes to ports as promised since it will cost them money to do so. At the same time, the shipping lines will lose out if every time they roll a customer’s shipment.
If successful, the scheme should reduce overbooking activity by shipping lines, ensuring that shippers do not suffer delays in the transportation of their cargoes. It should also help shipping lines utilise vessel capacity more effectively.
Walmart’s blockchain traceability drive continues
Since we first reported on Walmart’s early explorations of blockchain for traceability, which focused on the Chinese pork supply chain, the retail giant has continued investing in the technology, in partnership with IBM, and recently announced that it would require its suppliers of green vegetables to join in by September of 2019.
The move follows an outbreak of E.coli in the United States last year, the source of which turned out to be a variety of lettuce grown in Arizona. Walmart was one of the grocery chains that had to remove the lettuce from its shelves during the food safety scare, even though there was no clear indication that the product came from the affected location.
The removal of the product from Walmart’s shelves was purely a safety precaution, necessary because it would have taken as long as seven days to trace where the lettuce originated. In the future, such an issue will not occur, because with all suppliers using the IBM Food Trust blockchain, the timescale for tracing a shipment’s source will contract to a mere two seconds!
Key takeaways from the Walmart example
What Walmart’s confidence in the blockchain and its ability to provide traceability tells us, is that we are getting close to that pivot point at which the technology will move into the mainstream. It has to because now the largest corporations—the ones with all the influence—are using their commercial muscle to push suppliers onto their blockchains.
With that in mind, it is probably fair to say that over the next year or two, many companies will become involved in blockchain initiatives, either voluntarily or under duress.
The Walmart project also highlights the point raised earlier in this article, that a blockchain venture is not something that can be entered into unilaterally. By its very nature, a distributed ledger requires the collaboration of multiple parties, whether it is to be used for traceability or executing commercial transactions with the help of smart contracts.
Therefore, if it is something your company is considering unless you are a Goliath in your particular industry, you will need a strategy to persuade your supply chain partners to get onboard. Walmart doesn’t have such an issue, as it is powerful enough to tell its suppliers what it wants—and to get it.
Blockchain can transform supply chains, industries, and ecosystems. Interestingly, even organisations like banks, that would appear to be losing out to the new technology, can see opportunities to exploit it in the streamlining of their operations.
In-depth transformation of supply chains will not happen overnight. However, supply chains can already start using blockchain in some areas of their operations. Smart contracts can help eliminate costly delays and waste generated by manual handling of paperwork. From there, new doors may open to faster, more intelligent, and more secure processes throughout the entire supply chain.