Why Supply Chain Needs Blockchain Technology

Although blockchain technology can hardly be considered a familiar tool at
this point, Abraham Kaplan’s law of the instrument (Kaplan, 1964) already
seems to apply. ‘Give a small boy a hammer, and he will find that everything he encounters needs pounding.’ For companies to avoid this mistake and consequently select the wrong use-cases while sifting through the countless ideas, we need to look carefully at the unique capabilities of blockchain technology and how they relate to the supply chain management pains.

Read more about blockchain use cases

Supply chain resilience

Although digitization of supply chains has been an important issue for the
last two decades in industries such as retail, automobile, electronic, aviation
and chemical, it has not received similar attention in other industries
(Korpela et al, 2017). These forerunner industries are normally dominated
by a small number of large corporations as a result of economies of scale.

To achieve coordination, the dominant member in the supply chain can enforce standards and platforms on their sourcing and distribution partners with whom they have a contractual relationship. This results in a highly centralized system where the other supply chain members have little or no control over their data, offers them little or no benefits and is susceptible to collusion and the unauthorized alteration of data. The vulnerability of these centralized systems should not be underestimated, as the effect of the cyberattack on the results of the AP Møller-Maersk Group to the tune of $300 million (Novet, 2017) clearly shows. Crippling operations at a number of their container terminals in main ports such as Rotterdam for several days, it also had profound effects on the supply chain operations of their clients. While little is known about the direct and indirect damage to the supply chains affected by the attack, a report filed by the American pharmaceutical company Merck with the Security and Exchange Committee indicates that the attack severely impacted Merck’s global production,
research and sales operations (Security and Exchange Commission, 2017).

Blockchain, a distributed database for transaction processing:

  • Removes the presence of a central authority and consequently the single point of failure;
  • Provides a tamper-proof transaction ledger;
  • Provides trusted transactions based on algorithmically enforced rules without human interaction. As such, blockchain provides a secure end to-end delivery of data.

This is likely to result in a lower susceptibility to manipulation and forgery
by malicious participants. Not only does this apply to more traditional enterprise resource planning (ERP) and SCM applications, blockchain-based
identity and access management systems can address some of the key challenges associated with IoT security as well (Kshetri, 2017b).

While blockchain technology is by no means a cybersecurity ‘silver bullet’,
and many of today’s cyberattacks could have been prevented with adequate
ICT security policies, more rigorous patching procedures and replacement
of end-of-life (operating) systems, it could provide a way to contain the effects of a security breach in a targeted way, in particular when IoT devices are involved (Kshetri, 2017b).

Business-to-business integration

Even in cases where there’s a dominant member in the supply chain, their
control remains limited to their first tier suppliers or distribution partners,
primarily as a result of contractual agreements. However, disruptions at n th tier suppliers can severely disrupt supply chains. This can be seen in light of a disruption in 2012 at a polymer plant, for Ford a second tier supplier, in Europe, which caused a shortage of a polymer used by most manufacturer suppliers to make fuel tanks, brake components and seat fabrics. It took six months to restart production, a delay that had a large financial impact on the auto industry. As Simchi-Levi et al (2014) showed, when it comes to supply chain risk management the ‘devil lies in the detail’, with disruptions at suppliers of less expensive components having a much bigger impact on the results of the focal company than, say, expensive parts that fall into the high financial impact segment.

Currently, the data to manage the risks associated with these suppliers is
simply not there in a centralized system, primarily because of costs reasons
and their lack of flexibility, making it difficult to enforce sharing of data,
even when there is a contractual agreement in place. Open-source blockchain technology offers data security and cost-effective transmission of transactions in peer-to-peer networks with no central system. In this way,
blockchain technology simplifies business-to-business (B2B) integration
(Korpela et al, 2017) while removing the aforementioned trust concerns.

Furthermore, B2B integration so far has primarily between two companies,
either directly or via an information broker platform such as Seeberger
or Descartes. However, often multiple specialized intermediate companies,
such as banks and insurance companies, are needed to conduct supply chain transactions (Chauffor and Farole, 2009) with related exchange of documents and money. The involvement of multiple parties in a transaction, increases the complexity of those transactions, making them cost-ineffective and slow using existing B2B integration methods (Korpela et al, 2017).

Blockchain, on the other hand, makes it possible to automate these transactions using smart contracts.


Traceability in the extended supply-chain

Closely related to the challenges of risk-management in a multi-tier
supply-chain is tracking and tracing in an extended supply chain. Global
Standard One (GS1), an international organization that develops and
maintains data standards across various industries, defines track and trace
as ‘the ability to track forward the movement through specified stage(s) of
the extended supply chain and trace backward the history, application or
location of that which is under consideration’ (Ryu, 2012). The value of
better traceability is best illustrated with the example of the 2015 E coli
outbreak at Chipotle Mexican Grill outlets that left 55 customers seriously
ill. As supply chains become more complex, their transparency and accountability are reduced, compromising prevention or containment of
such contamination (Kshetri, 2017a).

At the same time, companies face customer demands for product information and having the means to verify sustainability claims (BSR, 2014).

The first is partly achieved through the use of labels and certifications,
while the latter is opaque to consumers, NGOs, governments, advocacy
organizations alike (El Maouchi, 2018). A major stumbling block that prevents the whole-chain traceability in the case of centralized systems is the fact that the central authority has to administer identities and data, giving it full visibility over all the relationships and data being exchanged. And even if the central authority manages to impose this on all his first tier suppliers, it will not include second tier to nth tier suppliers. Not only do they not have a contractual obligation towards the central authority to provide data or show that they act sustainably, the first tier suppliers will be most hesitant to expose their relationships with their suppliers, for example out of fear that the focal company will bypass them and source directly.

Blockchain allows for the preservation of privacy of the actors and make
transactions unlinkable to the sender or recipient of the transaction while allowing full traceability through a single product-specific tracking key
and validation of the authenticity of transactions (El Maouchi, 2018).

Know your transaction

Although ‘know your transaction’ (KYT) can be considered a specific case
of traceability in the extended supply chain, we are of the opinion that this
is such a vital, but up to now overlooked, functionality of blockchain technology that it deserves a separate paragraph.

It is not surprising that the financial industry, which was the first industry
to adopt cryptocurrency and blockchain, is the one industry where
KYT has received attention. The rise of cryptocurrency posed new challenges for banks and financial institutions around the world to comply
with policies for the prevention of money laundering and the financing
of terrorism (Camino et al, 2017). As existing ‘know your customer’
rules proved difficult to implement on digital currencies, primarily as a
result of their varying ranges of anononymity, banks needed to start
looking for alternative ways to ensure compliance. This has led to the
development of big data driven analytics of ledger transactions, to identify
unwanted behaviour such as whaling (hoarding of coins) and anomalous
delays.

Similarly, combining data about transactions from the shared ledger allows
for unwanted behaviour, such as delays or inaccurate data, to be identified
in the supply chain. In turn, if this unwanted behaviour is reflected in
their reputation within the network, members would be able to spot ‘bad
apples’ and not use them in future transactions. As the reputation score is
built from the ground up, based on the level of adherence to mutually agreed upon transactions, and continuously assessed, this measure provides a much better indication of actual reputation than passing a one-off know your customer process. In other words, KYT on blockchain would allow for bottom-up and upfront compliance.

Machine-to-machine integration

Up to now, digitization of supply chains has been primarily the realm of
B2B transactions. Data is transferred from one data silo to the other. What
happens between the physical points these silos represent remains largely
unknown. ‘Where’s my container?’ ‘Under what conditions were my products transported?’ ‘Where’s my railway carriage?’ – these questions can
normally not be answered until the data is available in one of the data silos.

And although blockchain technology can impact B2B integration, we believe
that IoT machine-to-machine integration is a much more powerful application of the technology and set to transform many industries. This is
corroborated by early research (Christidis and Devetsikiotis, 2016; Kshetri,
2017b).

With each IoT device having its own identity and containing data about
the physical item it represents, a virtual ecosystem is created. The ‘virtual
ecosystem’ (Kok, 2014) is a system that supports cross-chain collaboration
in the transportation of containers, or any packaging unit for that matter,
such as cartons, cases, trollies and products (Figure 5.1).

Each container creates a digital shadow of itself that virtually categorizes
relevant information. This virtual container uses an electronic dossier, stored on a blockchain, which contains the characteristics of the load, the location, shipping conditions, such as humidity and temperature, and the specific shipping instructions of the cargo. Encrypted data is being pushed to authorized supply chain partners, depending on their access rights in the dossier or certain parts of the dossier, based on smart contracts, upon changes in the electronic dossier. Companies now have the ability to share crucial information through the ecosystem, which can be used to make better decisions in optimizing the supply chain, for example, when it comes to truck utilization and CO2 reduction across organizational boundaries. Note that each point, or address in blockchain parlance, in this ‘virtual ecosystem’ can have multiple connections with other points. Creating this n–n network using existing hierarchical systems would require all data to be available in a single hierarchical database

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