How Blockchain Will Transform Supply Chain Sustainability
Blockchain is a term that people, from finance to food safety to supply chain operations, are encountering. A recent World Economic Forum Report states that around 10 percent of GDP by 2025 will be stored on blockchain and similar technologies. Already, companies such as Microsoft and IBM have announced various services based on blockchain. The financial sector is heavily investing in related applications. Between 2014 and 2016, the venture capital community poured around $1 billion into various blockchain startups relating to blockchain technology, with promises that it will make transactions more efficient and secure, ensure food safety, and reduce product counterfeits.
What Is Blockchain Technology?
In 2008, Satoshi Nakamoto, who is believed to be the inventor of digital currency Bitcoin, came up with the concept of blockchain as a core component of his digital currency Bitcoin, where it functions as the public ledger for all transactions. The most notable feature of this database is it can be used autonomously with the use of a distributed time-stamping server and a peer-to-peer network.
Basically, a blockchain is a distributed database that maintains a constantly growing list of transaction records, referred to as blocks, and in which every block contains a link to the previous block. More specifically, it is an open and distributed ledger that captures transaction data between two parties in a permanent and verifiable way.
In simple terms, think of each block as a packet of transaction records related to each participant in a financial transaction, or in the case of a supply chain, each stakeholder ranging from raw material supplier to producer to wholesaler to retailer. At each stage of the journey, a new permanent block of information is created, one which cannot be altered — only read. Each block is sent to all supply chain participants to verify and is then added to the chain.
A blockchain is very secure by design and its decentralized consensus makes it perfect for the recording of business transactions, identity management, events, management activities and medical records.
In supply chain applications, subsequent stakeholders, for example, retailers, would contractually be permitted access to agreed-upon data in the previous blocks, such as product origin, temperature control or other business-critical information, providing them with important visibility into supply chain operations.
Major Benefits of Blockchain Technology
Blockchain comes with a range of benefits that no other technology has been able to provide the business community in the past. Following are some of the key talking points:
- Transparency and immutability: As it is a shared database, data are readily available to all parties involved in any kind of transaction, providing maximum transparency. The immutability of data makes it even more trustworthy as well. So, once the data are created, it can’t be deleted or altered.
- Process integrity and disintermediation: The parties in any transaction will know that everything will be done exactly as the agreed upon protocol dictates. Readily available and trustworthy data also eliminate any needed intermediation by a third party.
- Lower costs And faster transaction: Blockchains have a great potential to cut overall transaction cost and time by eliminating the overhead costs of exchanging assets and the involvement of third-party intermediaries. For example, the cost of invoice factoring, or financing of invoices, can be reduced as much as 25 percent because Blockchain reduces risks such as the multiple selling of invoices.
- Access to high-quality data to everyone: All parties involved in a transaction will have accurate, timely, consistent and complete data they need to know to make a well-informed decision.
How Blockchain Will Help Supply Chains
Improved visibility. The registration of transfer of goods on a blockchain ledger will help promote visibility, identifying all parties involved in a transaction, the state, quality and price of the products as well as date and location of the transaction. The availability of information about the product to all parties helps to ensure data integrity. As blockchain is a decentralized in structure, no single party will be able to have ownership of data or manipulate it for their personal advantage. The immutable and cryptography-based nature of data will make it completely impossible to compromise the ledger. From manufacturing to final sale of the product, every time a product changes hands, the details will be documented in the blockchain database, so there will always be a permanent history.
Elimination of errors and faster response to issues. With the new technology, recording, tracking, verifying properties of physical products, linking and sharing will be done in real time. It can effectively reduce human errors, while eliminating costs and time delays that plague transactions in today's supply chains. For example, load condition factors such as temperature data may be agreed upon measures in contracts. As such, participants are obliged to report them, or to have them be captured automatically by sensors. Systems can be designed to identify any violation of agreed upon limits, thus creating the ability to respond to problems and mitigate them at the time of occurrence, rather than days later, and several steps further removed.
“With blockchain, you can do strategic removals, and let consumers and companies have confidence,” Frank Yiannas vice president of food safety at Wal-Mart said to Bloomberg at the time of the Wal-Mart launch. “We believe that enhanced traceability is good for other aspects of the food systems. We hope you could capture other important attributes that would inform decisions around food flows, and even get more efficient at it.” Wal-Mart also introduced its new Wal-Mart Food Safety Collaboration Center in Beijing in October 2016, announcing a collaboration with IBM and Tsinghua University to improve the way food is traced, distributed and sold to consumers in China.
Early detection of unethical suppliers and counterfeit products. Corporate Social Responsibility (CSR) initiatives are anticipated to benefit from the secure record of product history which provides proof that raw materials or products were generated from acceptable sources. The pharmaceutical supply chain is also extremely interested in blockchain, and in particular, its potential to put an end to a counterfeit drug industry that generates an estimated $75 billion annually in sales while being responsible for the deaths of 100,000 people
Proactive supply chain sustainability can be achieved using Blockchain as the data it offers can help identify and correct contract violations, redundancies and bottlenecks in the flow of goods.
Blockchain and the Sustainability Opportunity
As major technology providers like IBM and Microsoft invest in infrastructures to support blockchain, it will be easier for a number of applications to move in this direction. Working as a single source of truth, Blockchain can change the way business transactions take place. From a supply chain perspective, such visibility will help ensure efficient transactions, while promoting food safety, efficient recalls, the elimination of counterfeits, and the assurance of ethical trading partners.
Sustainability gains in the form of reduced environmental impact and better assurance of human rights and fair work practices seem to be promising outcomes of blockchain applications. In the case of human rights and fair work, a clear record of product history helps product buyers to be confident that goods being purchased are coming only from sources that have been recognized as being ethically sound.
In terms of reduced environmental impact, there is much work to be done. Simply in terms of more accurately tracking substandard products and identifying their occurrence further upstream in supply chains will help reduce the scope of rework and recalls, providing considerable greenhouse gas reductions and other resource savings. With regard to improved supply chain optimization, access to a more complete longitudinal supply chain dataset will undoubtedly lead to improved practices including the elimination of redundancies and bottlenecks, and ultimately, decreases in resource consumption. These are all positive outcomes from a sustainability perspective.