Building Supply Chains of the Future: Blockchain

The Blockchain Boom
Right now, is an incredibly exciting time in the world of technology as blockchain is finally gaining well-deserved attention around the world for its potential to create more frictionless value networks. This can most likely be attributed to the astronomical rise in the prices of cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Dash, to name just a few. All of this attention around cryptocurrency has helped garner support and interest for the many use cases of the underlying technology behind these currencies: blockchain.

The greatest challenges in today’s global marketplace include establishing digital trust, ensuring information availability, transparency, high transaction costs, and maintaining security across networks. I personally believe blockchain is set to become a transformational technology with the potential to solve many of the largest problems and challenges faced by the world’s supply chains.

The World Bank estimates that global supply chains manage about two-thirds of $75 Trillion in global GDP [4]. Provided this information, the potential for cost and efficiency savings is truly massive. In this, I hope to explain what exactly blockchain is, why it deserves serious consideration for optimizing supply chain networks, and some of the key challenges the technology faces moving forward.

What is Blockchain?
To answer simply, blockchain is actually several principal technologies combined together to orchestrate the creation of a more idealistic network for value and information exchange. The three principal technologies are private key cryptography, a peer-to-peer network, and a software program, which consists of the blockchain’s protocol.

Private key cryptography is the solution to identity verification and privacy concerns. Participants in the blockchain carry both a public and private key with the purpose of creating a digital identity that is both secure and unique. During transactions, the keys combine in order to create a digital signature, which defines consent for the transaction to occur.

The distributed, peer-to-peer network is required for the validation and recording of transactions on the blockchain. This network is made up of “nodes” or computers that make up the network that both works to service the network and also record transactions in a shared public ledger. As the cryptographic keys are combined in the network a system of record is created and the new “block” – containing the digital signature and all relevant information – is broadcast out to all of the nodes in the entire network. This creates a network that is not only transparent but also incorruptible from any single point.

The blockchain protocol goes to work next. You can think of the blockchain protocol as the software platform containing the mathematical algorithms required for data validation and the creation of new blocks of data for the public ledger. During this process computers on each node of the blockchain create and maintain records by solving mathematical problems in order to reach consensus on transactions or reject invalid transaction blocks [1]. The blockchain protocol also opens the door for chain code or “smart contracts” that can include programmable functionalities and allow for the automation of transactions based on agreed upon terms.

Together, these technologies create the blockchain and allow for all parties to have universal visibility into a single record of supply chain value transactions, enhanced security and trust, and also opportunities for automation and assistive technologies to become embedded in the software protocol. These are all extremely desirable for supply chains.

Bridging the Gap and Redefining “State” in Supply Chains

Global supply chains today have inherently become increasingly complex and interconnected with suppliers and value networks spread across the globe. As a result, supply chains are constantly facing challenges and pressures on critical factors like cost, speed, and quality, but have failed to make bridge the transparency gaps in data exchange despite significant investments in the latest technology and information systems architecture [2]. With the use of these closed and proprietary information systems, “dark holes” have inevitably been created, which include all of the points where data is exchanged and the free flow of information is interrupted. These dark holes make real-time data translation, visibility, and the transfer of ownership or changes in status between parties particularly challenging, and almost unarguably, unable to be addressed with current enterprise systems. This being said, Enterprise Resource Planning (ERP) systems simply do not address the breadth and depth of the increasingly more complex supply chain transactions in today’s world. While it is likely that ERP systems will remain the structural system of record for transactions in supply chains, they are not sufficient in serving as a backbone for a system of record for a value network [3].

Anyone who has worked with ERP systems like SAP or Oracle understand these enterprise systems do very little to close these gaps regarding the “state” of supply chain operations. Ultimately, meaning companies have an incomplete view of things occurring outside the organization with suppliers and partners. ERP data is often incomplete, lagging, non-real time, and also dependent upon other applications or actors within the system. Additionally, the interdependency of the digital system and physical supply chain states has created multiple points of failure for supply chains where mistakes or errors in one system can cause problems in the other and vice versa [4]. Requirements planning, purchasing, inventory, forecasting and demand planning, and even information on the financial position of the company can become compromised due to data latency or errors in the data. The problem: an inability to maintain the “state” between the systems.

The establishment of a single record of the truth is something blockchain can provide and eliminate this disparity between digital and physical states.

Fundamental Changes Are Coming

Above, I have illustrated the core differences between the supply chains of today and the direction supply chains can take with the implementation of the blockchain.

Introduction of New Supply Chain Architectures
Currently, there are a number of different platforms from which blockchain-based architectures for supply chains are beginning to come to life. The Hyperledger project, hosted by The Linux Foundation, is one of the leading open-source blockchain technology projects that is working on collaborations for modular frameworks and tools that will help bring shared ledger databases to the world of business. They are currently working on blockchain projects in the fields of supply chain, finance, and healthcare to streamline settlements, enhance liquidity, and improve overall transparency. IBM, Huawei, Intel, Ernst & Young, and Deloitte are just a few companies using Hyperledger to build blockchain architectures for a variety of supply chain applications [5].

The Ethereum project also offers another open-source foundation for the development of blockchain-based applications and architectures. The Ethereum blockchain is a decentralized platform specifically designed for running smart contracts, storing value, document exchange, payments and exchanging the ownership of property [7]. All of these attributes are highly desirable and well-suited for fundamentally changing value networks into a frictionless and automated ecosystem. Ethereum Solidity is ethereum’s private blockchain architecture. Intel, JP Morgan Chase, Microsoft, ConsenSys, and dozens of other companies are using ethereum blockchain code to build distributed ledger systems.

Everledger is another open-source blockchain collaboration startup working on developing new architectures for a variety of industries. Their development is focused on a hybrid technical model that utilizes both public and private blockchains to combine the benefits of each. Public blockchains offering high security, and private blockchains offering more control over permissions in the network [8]. SAP, IBM, and Britannia Mining, Inc. are some notable Everledger collaborators.
For now, Hyperledger, Ethereum, and Everledger are some of the prominent platforms for development in the blockchain space. While minimal information is currently known about the full-scale implementation of blockchain in supply chain, one could expect to see the majority of large blockchain network deployments to come from these open-source collaborations.

A Few (Of Many) Compelling Use Cases for Blockchain

Provenance, Track and Trace:
Reliable and accurate traceability from start to finish in supply chains remains to be seen in today’s world. Blockchain applications will allow for an incorruptible record to be created of a product’s entire lineage, providing valuable detailed information about each product. Project Provenance Ltd. has been working on a blockchain product for complete transparency by creating a digital “passport” for each product. Blockchain for track and trace uses like this can help eliminate counterfeit product, reduce supply chain monitoring costs, and provide other valuable insight into social responsibility goals. Food, pharmaceutical, and precious metals supply chains all stand to significantly benefit from blockchain.

Monitoring Social Responsibility:
Corporate social responsibility has become an important issue for many supply chains, yet it is also extremely difficult to monitor and measure social responsibility metrics. With the use of the blockchain, a public chain of custody can be created and also can include information about carbon emissions, water usage, labor practices, and other important social responsibility measures. A great example of this application is IBM and Everledger’s collaboration to track diamonds and prevent the flow of “conflict” gems [10].

Supply Chain Liquidity and Asset Sharing:
Blockchain technology and shared value networks open up the floodgates for significant potential in supply chain finance. According to PwC’s 2015 annual working capital survey, over $4 Trillion dollars of net working capital is tied up in supply chains. At the same time, since 2011, return on capital has declined by over 15% [9]. It’s clear that supply chain applications have strong potential for faster payment processing as well at the digitalization of assets to secure lower-cost liquidity and enhance overall capital utilization. Sweetbridge is one such blockchain technology company working to enable companies access to low-interest or even zero interest loans. This is a game changer for small suppliers with limited access to affordable capital or access to capital at all. Along with liquidity issues, blockchain-based protocol stack also addresses settlements, accounting, resource sharing, and even optimization through the creation of a “liquid talent” network. If you ask me, this is one of the most interesting blockchain and supply chain ecosystem projects to date, especially with their recent acquisition of Aperio, a blockchain-based solutions company. I would highly recommend reading the Sweetbridge whitepaper.

Maintaining Supply Chain Agility in a Disruptive World:
Blockchain has the potential to address all of Hau L. Lee’s “Triple-A” supply chain objectives by providing a near all-encompassing solution for agility, adaptation, and alignment [11]. Supply chains in today’s world should be prepared for constant changes not only in terms of supply and demand, but also innovative new technologies like 3D printing, virtual reality, artificial intelligence, and one could argue, blockchain. Blockchain allows for supply chains to remain highly agile and adaptive with the frictionless exchange of information and assets, while at the same time being able to strategically align and maximize the interests of all parties and suppliers in the supply chain. Managing “state” in the supply chain is critical to enabling this new level of efficiency and agility.

Future Adoption and Key Factors
All of this talk of blockchain technology, but what can we expect near-term as far as the actual adoption and use? With blockchain at the beginning of its technology hype cycle, it’s difficult to pinpoint exactly when we might begin seeing full-scale commercial applications in supply chains, however, it is clear that blockchain has undeniable benefits that will help forge new ways for supply chains to collaborate and conduct business. Collaboration in the space will be a clear driver to accelerating the advancement of blockchain and managing supply chains on the blockchain. My prediction is we will begin to see some of the major enterprise blockchain application in use within 5-10 years. The overall success of development will also hinge on other factors including:

Company Culture
Blockchain technology represents a pivotal shift in the more traditional ways of doing business. While many may see the great potential for blockchain, the transformation within industries will also likely be massive and the amount of process changes required represent a high-level of uncertainty and risk. In some industries and applications, early blockchain uses may not be feasible until the technology is tested and trusted within industry.
Cost and Scalability
All of the benefits of blockchain do not come at a low cost. Overall, blockchain implementation has high aggregate costs due to the size of the network and number of “nodes” required for validating transactions. For private blockchains, unlike Bitcoin or ethereum, the network servicing and “mining” represents a significant operating cost for companies. The scale of the network is required since the number of nodes is more important than extreme amounts of computing power at a limited number of nodes. Thus, both cost and scalability are key factors to implementation. For now, I see many companies shifting towards hybrid “permissioned” blockchains that are a mix of public and private blockchains.

Government Regulation
As usual, government regulations continue to significantly lag the rate at which technology is being developed. This holds true with blockchain as developers and companies are trying to work closely with local and national governments to pass regulation. Blockchain applications like Bitcoin do bypass regulation and third parties as a part of increasing network efficiency, however, not without concern from regulators. While the ability to bypass some regulations is attractive for some, during times of crisis or network failure, decentralized networks like blockchain do not have any “safety” features like governments can offer. Close attention should be paid to regulatory efforts now and into the future in order to integrate blockchain with government policy.

Talent Availability
While there is no conclusive blockchain employment data to prove a large gap in available blockchain talent, I believe this is another key factor for companies to consider. As the technology continues to take off, one can expect there to continue to be a massive shortage of development talent in the field. Visit almost any blockchain or cryptocurrency website and you will see “We’re Hiring” posted clearly, further proof that despite the impressive financial incentives offered, that the demand of qualified talent far exceeds the available supply. Companies focused on building blockchain infrastructure need to either encourage more development in the space or work together and collaborate on projects until the supply of talent catches up to the demand.

Sources:

[1] What is Blockchain Technology? - CoinDesk. (2017). CoinDesk. Retrieved 10 October 2017, from https://www.coindesk.com/information/what-is-blockchain-technology/

[2] Wyman, O. (2017). Blockchain: The Backbone Of Digital Supply Chains. Oliverwyman.com. Retrieved 2 November 2017, from http://www.oliverwyman.com/our-expertise/insights/2017/jun/blockchain-the-backbone-of-digital-supply-chains.html

[3] Seven Use Cases for Hyperledger in Supply Chain. (2017). Supply Chain Shaman. Retrieved 2 November 2017, from http://www.supplychainshaman.com/big-data-supply-chains-2/10-use-cases-in-supply-chain-for-hyperledger/

[4] Managing Supply Chains on the Blockchain: A Primer – Sweetbridge. (2017). Sweetbridge. Retrieved 2 November 2017, from https://blog.sweetbridge.com/managing-supply-chains-on-the-blockchain-a-primer-1f7dc293e3d9

[5] Taylor, Todd (2017). SCM 479 Blockchain Lecture. Arizona State University

[6] About. (2017). Hyperledger. Retrieved 2 November 2017, from https://www.hyperledger.org/about

[7] Ethereum Project. (2017). Ethereum.org. Retrieved 2 November 2017, from https://ethereum.org/

[8] Everledger | A Digital Global Ledger. (2017). Everledger.io. Retrieved 2 November 2017, from https://www.everledger.io/#do

[9] (2017). Pwc.com. Retrieved 2 November 2017, from https://www.pwc.com/gx/en/business-recovery-restructuring-services/working-capital-management/working-capital-survey/2015/assets/global-working-capital-survey-2015-report.pdf

[10] The power of blockchain + Watson - IBM Blog Research. (2017). IBM Blog Research. Retrieved 2 November 2017, from https://www.ibm.com/blogs/research/2017/05/power-blockchain-watson/

[11] The Triple-A Supply Chain. (2004). Harvard Business Review. Retrieved 3 November 2017, from https://hbr.org/2004/10/the-triple-a-supply-chain