BLOCKCHAIN CAN ENHANCE TRUST, EFFICIENCY AND SPEED.
Blockchain, the digital record-keeping technology behind Bitcoin and other cryptocurrency networks, is a potential game-changer in the financial world. But another area where it holds great promise is supply chain management. Blockchain can greatly improve supply chains by enabling faster and more cost-efficient delivery of products, enhancing products’ traceability, improving coordination between partners and aiding access to financing.
A blockchain is a distributed, or decentralized, ledger — a digital system for recording transactions among multiple parties in a verifiable, tamper-proof way. For cryptocurrency networks that are designed to replace fiat currencies, the main function of blockchain is to enable an unlimited number of anonymous parties to transact privately and securely with one another, without a central intermediary. For supply chains, it is to allow a limited number of known parties to protect their business operations against malicious actors while supporting better performance. Successful blockchain applications for supply chains will require new permissioned blockchains, new standards for representing transactions on a block and new rules to govern the system — which are all in various stages of being developed.
THE ADVANTAGES OF BLOCKCHAIN
Led by companies such as Procter & Gamble Co., considerable advancement in supply chain information sharing has taken place since the 1990s, thanks to the use of enterprise resource planning systems. However, visibility remains a challenge in large supply chains involving complex transactions.
Adding to the challenge, execution errors are often impossible to detect in real time. Even when a problem is discovered after the fact, it is difficult and expensive to pinpoint its source or fix it by tracing the sequence of activities recorded in available ledger entries and documents.
One common approach to improving supply chain execution is to verify transactions through audits. Another way to strengthen supply chain operations would be to mark inventory with either radio frequency identification tags or electronic product codes that adhere to GS1 standards (globally accepted rules for handling supply chain data), and to then integrate a company’s ERP systems with those of its suppliers to construct a complete record of transactions. However, the experiences of the companies we studied showed that integrating ERP systems is expensive and time-consuming.
When blockchain record-keeping is used, assets such as units of inventory, orders, loans and bills of lading are given unique identifiers, which serve as digital tokens (similar to bitcoins). Additionally, participants in the blockchain are given unique identifiers, or digital signatures, which they use to sign the blocks they add to the blockchain. Every step of the transaction is then recorded on the blockchain as a transfer of the corresponding token from one participant to another.
A blockchain is valuable partly because it comprises a chronological string of blocks integrating all three types of flows (information flows, inventory flows and financial flows) in the transaction, and captures details that aren’t recorded in a financial ledger system. Moreover, each block is encrypted and distributed to all participants, who maintain their own copies of the blockchain.
Let’s take a look at how companies we studied are applying blockchain to tackle needs that current technologies and methods can’t address.
— ENHANCING TRACEABILITY: The U.S. Drug Supply Chain Security Act of 2013 requires pharmaceutical companies to identify and trace prescription drugs to protect consumers from counterfeit, stolen or harmful products. Driven by that mandate, a large pharmaceutical company in our study is collaborating with its supply chain partners to use blockchain for this purpose. Drug inventory is tagged with electronic product codes that adhere to GS1 standards. As each unit of inventory flows from one firm to another, its tag is scanned and recorded on the blockchain, creating a history of each item all the way through the supply chain — from its source to the end consumer.
This kind of application requires minimal sharing of information and the benefits are clear. If a company discovers a faulty product, the blockchain enables the firm and its supply chain partners to trace the product, identify all suppliers involved with it, identify production and shipment batches associated with it and efficiently recall it.
— INCREASING EFFICIENCY AND SPEED, AND REDUCING DISRUPTIONS: Emerson, a multinational manufacturing and engineering company, has a complex supply chain that has to contend with long, unpredictable lead times and lack of visibility. As a result, a small delay or disruption in any part of the supply chain can lead to excess inventory and stock-outs in other parts.
A practical solution is for participating companies to share their inventory flows on a blockchain and allow each company to make its own decisions, using common, complete information. Companies would utilize a kanban system to place orders with one another and manage production. Kanban cards would be assigned to the produced items, and the blockchain would record digital tokens representing the kanban cards. This would enhance the visibility of inventory flows across companies and make lead times more predictable.
CREATING A WORKABLE TECHNOLOGY
Using blockchain in supply chain management will require the creation of new rules, because the needs of supply chains differ from those of cryptocurrency networks in important ways.
— KNOWN PARTICIPANTS: Supply chains require private blockchains among known parties, not open blockchains among anonymous users. So that members of a supply chain can ascertain the source and quality of their inventory, each unit of it must be firmly coupled with the identity of its particular owner at every step along the way.
— SIMPLER CONSENSUS PROTOCOLS: Blockchain requires a consensus protocol — some mechanism for maintaining a single version of the history of transactions that is agreed to by everyone. Since cryptocurrency networks are peer-to-peer without a central authority, they use a complex method called proof of work. It ensures that all transactions on the network are accepted by the majority of participants, but unfortunately, it also limits the speed at which new blocks can be added.
Fortunately, if a blockchain is permissioned and private, the proof of work method is not necessary to establish consensus. Simpler methods can be used to determine who has the right to add the next block to the blockchain. One such method is a round-robin protocol, where the right to add a block rotates among the participants in a fixed order.
IT IS NOW time for supply chain managers who are standing on the sidelines to assess the potential of blockchain for their businesses. They need to join the efforts to develop new rules, experiment with different technologies, conduct pilots with various blockchain platforms and build an ecosystem with other firms. Yes, this will require a commitment of resources, but the investment promises to generate a handsome return.
Vishal Gaur is the Emerson professor of manufacturing management and a professor of operations, technology and information management at Cornell’s SC Johnson College of Business. Abhinav Gaiha is a product manager at Google.