How to use blockchain in supply chain management?
Blockchain is a technology that took the market by storm. Although it is most associated with Bitcoin and other cryptocurrencies, it is not the only option to implement a blockchain. It is also successfully used in other branches of business. It is one of the key innovative technologies that revolutionize, for example, digital supply chain management. Why is this happening? Mainly through blockchain capabilities that affect the improvement of data flow and the management of increasingly complex supply chains. The blockchain in the supply chain can help participants record all relevant data including price, date, location and more. The availability of this information in the blockchain can increase material supply chain traceability, reduce waste, improve visibility and compliance, and potentially strengthen an organization’s position as a leader in responsible manufacturing.
What a blockchain is and how does it work?
Generally, Blockchain is an architecture for storing information in a way that guarantees the integrity of historical data. It is a decentralized and distributed database that functions as an ascending, one-way list of records called blocks. Blocks have links to previous blocks created using cryptographic functions and timestamps. Blockchain is a technology that is valued for its ability to openly check, record, and distribute transactions in stable, encrypted ledgers. By associating blocks in a chain, where each successive block stores the hash of the information from the previous block, the information in the blocks is only writable during block creation and impossible to modify once the block is made public and distributed.
The first application of this technology, and at the same time, a common solution of this type was Bitcoin. It originally appeared in the form of a white paper published by Satoshi Nakamoto. In 2009, the public Bitcoin network was launched, and the first block aired.
Blockchain technology is one of the safer than even the banking model itself. The transactions are encrypted and distributed, meaning they are not monitored by a primary broker. They are processed by computers on a peer-to-peer network that does not verify transactions by using central computers. The term “blockchain” is derived from “blocks” which are the fundamental building blocks and store lots of important encrypted transactions. Each block contains the cryptographic hash of the previous block in the blockchain, combining both. Connected blocks form a chain. Blockchains are divided into 2 types, private and public. There are also hybrid and side chains but we will not focus on them, this time. Bitcoin is an example of a public blockchain where everyone has access to real-time history. In turn, a private blockchain is a chain that is under the direct control of an entity, person or company. Only those who have been granted rights to have access to the chain, and it is a centralized network.
Types of supply chains
Many categorizations can be found on the internet and industry literature. According to Supply Chain Management and Advanced Planning by Herbert Meyr and Hartmut Stadtler, there are for types of the supply chain, based on their functional attributes:
Procurement can be described as the process of acquiring goods and services the company needs to carry out its basic requirements. In this area, blockchain can act as a proven source of reliable data for all entities that purchase or negotiate terms with suppliers. A blockchain database can store relevant data from all stakeholders, giving you an overview of the total number of purchases, regardless of who has been managing the purchasing activities. Thanks to the use of blockchain, audits will be carried out automatically, eliminating resource-intensive processes and no data exchange by individual users will be needed for verification.
The manufacturing industry is currently one of the most likely to benefit from the blockchain. It is also worth mentioning the potential of the use of IoT capabilities in combination with blockchain, which can bring many benefits for the supply chain in the manufacturing industry. Blockchain does not allow manipulation of systems based on it, so any fault or mistake in the factory will be immediately detected and repaired. This reduces business risk and helps maintain full transparency of procurement and production processes. Additionally, manufacturers responsible for converting raw materials to end products can gain more control overflows from suppliers, automate to some extent compliance and gain better control on production.
Blockchain in the field of logistics and distribution can help improve the flow of documents and information between all parties of the interest. This will increase the transparency and predictability of logistics operations. Greater automation, thanks to the blockchain, will also generate savings and reduce errors in processes.
When it comes to sales in supply chain management, blockchain has a positive effect on transaction transparency, too. Besides, it enforces the efficiency of processes, e.g. it improves invoicing. Thanks to the use of smart contracts developed in the blockchain, all those processes will be automated. They will also help reduce data redundancy and eliminate costly errors by analyzing and verifying incoming documents from business partners. Smart contracts will act as an independent third party that reviews all aspects of the contract and clauses, accepting only entries that match the programmed values. This means that we eliminate errors and increase the security of the entire system.
Blockchain technology for supply chain
By cleverly using blockchain, you can achieve a lot of assets for your supply chains business. However, there are also some limitations, and the implementation of this technology requires good understanding and management of the entire process.
Pros of using blockchain in supply chain
- Reliability – due to its distributed nature, peer-to-peer networks such as blockchains lack centralized vulnerabilities that can be exploited by hackers and have no central point of failure. Consistency and irrevocability of all transactions processed in the blockchain additionally eliminates the risk of fraud;
- Transparent transactions – blockchain does not have an intermediary in transactions. This results in faster and more transparent settlements as the ledgers are updated automatically. Everyone verifies everyone, there is no possibility of fraud due to the transparency and openness of the network. As long as we have the private key, the funds signed with this key belong to us;
- Improved flow of internal documents – validation of information exchanged between partners makes it impossible to create multiple versions of a document. Using the blockchain, each of the parties involved in the transaction will have access to the same data;
- Streamlined processes and reduced administrative costs – supply chains can now handle complex datasets, but many processes, especially those at lower supply levels, are slow and are sometimes completely paper-based. Blockchain allows you to streamline processes and get rid of unnecessary manual work.
Cons of using blockchain in supply chain
- Access to competition data – blockchain technology is projected to underpin complex and diverse global supply chains. Therefore, the likelihood that competing manufacturers, suppliers or logistics companies will be participants in the same blockchain and will have access to the same central data record, and thus to information about competitors. Accordingly, despite the greater transparency and trust achieved by blockchain, entities connecting digital supply chains will need to consider whether and how to manage data access rights for users;
- Lack of technical knowledge and infrastructure – integrating smaller vendors into the blockchain supply chain is not easy and can cause many problems due to the lack of technical knowledge and/or infrastructure. This is likely to be a query common to many supply chains. When deciding on such a technical solution, you should keep it in mind and provide yourself with appropriate technical facilities, such as a specialized development team;
- Contested data integrity – supply chain blockchains are unlikely to be public. In such a network, the aspect of immutability comes from reliance on proof of work and from the fact that tremendous computing power would be required to change the previous data block in the chain. Transparency depends not only on the integrity of the data but also on its immutability. In a private network, this mechanism may differ. Depending on how the blockchain is supposed to work, the information it contains may not be unchanged. This means that most supply chain blockchains would require an authorization, with access managed centrally and limited to known parties that may be limited to specific data segments.
Blockchain in the supply chain – examples
Even though blockchain is quite a new technology, real-life examples of its use in the supply chain are numerous. Here are some notable use cases.
Oil supply chain
In the United Arab Emirates, the state-owned oil company Abu Dhabi National Oil Company (ADNOC) has successfully launched a blockchain supply chain system pilot in partnership with IBM. The program will help you track oil production from wells to customers, recording and automating transactions at every stage. The program is still in an early stage, but the company aims to extend the chain to include customers and investors to provide greater transparency in the business process. Due to the production of several million barrels of oil per day, implementing blockchain will effectively help to track the entire production and distribution process, reducing the time and costs associated with shipping.
Blockchain is being used fruitfully in the food supply industry to allow retailers and consumers to track the provenance of food products from their origin to stores and restaurants. Such an attempt to use a blockchain-based system to monitor the supply chain of leafy greens was undertaken jointly by Walmart and IBM. All blockchain nodes are administered by Walmart and reside in the IBM cloud. Such use of technology has numerous benefits, such as tracing contaminated products and, by knowing their place of origin and the entire route to the stores, eliminating them from distribution.
Wholesalers, retailers and customers can successfully track the origin of gemstones and other valuable goods through the use of blockchain. For example, blockchain technology company Everledger has worked with IBM’s blockchain-based tracking service to trace the origin of diamonds to make sure they have been ethically mined. The Diamond Trading Company was involved in building a diamond trading supply chain product called Tracr. This program tracked several dozen diamonds that travelled from the mine to the jeweller. Introducing such a program into the diamond industry can prevent illegal activities while mining diamonds around the world.
The wine industry is struggling with the problem of illegal sales, especially in China. Unfortunately, these products often contain additives that are hazardous to the health of consumers. Two companies, Origintrail and TagItSmart, have decided to solve this problem using blockchain. The company is trying to stop the production of illegal wine by using QR codes. This way, customers will be able to scan the code on the bottle and receive all information about their purchase. Origintrail and TagItSmart program helped track down over 15,000 questionable bottles of wine.
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Blockchain technology can transform organizations in many different ways and on many levels. It is not just popular Bitcoin and cryptocurrencies anymore. Thanks to blockchain, transparency, and efficiency can be easily achieved, and each event can be registered and verified. This is why the use of blockchain in the supply chain can potentially contribute to the elimination of the inefficiency of the traditional management model. In conclusion, blockchain is a technology that should be watched and certainly taken into account when developing a supply chain business project.