At the time of its invention, the supply chain was an ingenious idea, made to streamline and facilitate the journey of raw goods as they made their way from their source to factories and ateliers, were turned into products and consumables, and were finally shipped to retailers and consumers.
But that was more than a century ago, before our economies became as globalized and fragmented as they are now. Today, things have become much more complicated and the old model no longer fulfills the needs of the supply chain as it spans over dozens and hundreds of stages and travels across half the globe during its lifetime. Today’s supply chain can at best be described as an opaque, black box that makes it extremely difficult to validate the costs and quality of goods, and offer little in terms of being able to track their geographical displacement.
Fortunately, blockchain, the technology that underlies the famous bitcoin cryptocurrency, can help solve many of the problems that are riddling the supply chain, and also create new opportunities. Here’s what you need to know.
What is blockchain?
I’ve discussed blockchain thoroughly in this post. But in a nutshell, blockchain is a decentralized ledger that uses cryptography to store transactions immutably. The database is replicated across participating nodes, and there’s no central server or trust to control and verify transactions.
Here’s what it’s got in stock for the supply chain.
The lack of transparency is endemic in today’s supply chain model and technologies. Consumers and other stakeholders have no idea about the material, labor and costs that go into producing the products they buy from stores.
And aside from the monetary expenses, we have no way to track the other factors such as slavery, child labor, violence which go into harvesting the material that are used in the products we use. Many companies engage in questionable practices to keep their costs low and profits high, such as hiring labor from regions where prices are cheap and work ethics and standards are substandard.
Tracking these things takes a lot of time and effort.
Furthermore, other issues such as whether quality grade material has been used in the products are very tough to track. How about getting to know how much profit manufacturers, suppliers and retailers are making?
This is something that can be remedied with blockchain technology, which can create the necessary infrastructure for a transparent and ethically minded, community driven supply chain management system.
In a blockchain-based system, every raw material and commodity would be registered on the ledger. Transfer of goods between different parties will be immutably recorded on the ledger as well, so you can precisely track what materials were purchased and used for the production of a particular product, who the vendors were, and what is their reputation. Furthermore, information is stored on the ledger as products move through the supply chain and change ownership between different parties until they finally reach retailers and go into the hands of consumers.
This is extremely transparent, as the exact cost, timing, geographical and parties involved in every leg of the journey can be tracked.
One of the positive consequences of having everything stored on the blockchain ledger is being able to hold everyone accountable. So the next time that a food poisoning crisis erupts, you can track every node to the point of contamination and determine the cause.
Also, the extended visibility will better enable us to fight counterfeit products and forgery because you can track down the history of each product down to the provider of the nuts and bolts that were used and eventually to the initial raw material that was used to produce every component.
Blockchain can also reveal and prevent illegal and unethical practices, such as purchasing from unauthorized sources, which is the case in some industries such as blood diamonds.
One of the greatest features of blockchain is its secure nature and its theoretically unhackable structure. The fact that there’s no central authority makes it extremely difficult to alter records that have been previously stored in the ledger and there’s no single point of failure and no single point of compromise.
This is especially useful in cases where sensitive data is being circulated through the supply chain. An example would be the healthcare and pharmaceuticals industry, where the need to store personal information across the chain is vital.
An added value of the blockchain would be the possibility of creating a supply circle, a system that would allow consumers to become directly engaged in the supply chain and establishes a platform for cooperation and collaboration.
For instance, in the case of food, this paradigm can help deal with the issue of vast swathes of urban areas having become deprived of fresh and affordable produce. In a Medium article that elaborates on the concept, the folks at ConsenSys describe how blockchain and smart contracts help consumers become prosumer—or consumers that produce as well.
Automated purchases and new markets
In an article posted on Coindesk, Reid Williams describes some interesting uses for bitcoin and blockchain in the supply chain. One of them involves using smart contracts to make automated purchases when certain conditions are met.
For instance, a supplier publishes wares on the blockchain at a certain price. A consumer sets up a smart contract that will automatically purchase a predefined amount of the product in question when the price drops below a certain range. These smart contracts will enable suppliers to make calculated decisions on their pricing policies and helps consumers automate their purchases when opportunities arise.
The piece also presents the concept of shared marketplaces, where consumers publish and trade goods on the ledger, just like the good old days before money was invented.
There’s much more to it
The blockchain’s disruptive working model creates a lot of unprecedented possibilities in supply chain management. There’s only so much I can cover here. Stay tuned for more on this in future articles I will write.