Blockchain is a hot topic requiring attention from supply chain managers, many of whom are scrambling to understand where it might apply in their companies. An efficient method for completing financial transactions that is enabled by peer-to-peer involvement and shared networks, it functions as a distributed ledger that provides visibility of transactions to all parties in the chain. A blockchain is built on an immutable database; nothing can change unless all parties agree to it. It also enables the automatic execution of transactions when specified conditions have been met.
This technology, which takes advantage of the network connectivity that is prevalent in modern business, is a logical next step in the technological development of supply chain management. Because it is unfamiliar and represents radically new changes—an uncharted frontier, you could say—supply chain managers are understandably uncertain about how blockchain will impact them. But it is possible to anticipate to some extent how blockchain will affect their operations by drawing parallels to previous experiences with supply chain technologies. Consider the introduction and growth patterns of important, now-ubiquitous technologies such as electronic data interchange (EDI), advance shipping notices (ASNs), and radio frequency identification (RFID). Some experiences associated with the adoption and implementation of these technologies occurred repeatedly. By examining these patterns, supply chain managers can anticipate how and when blockchain will take hold in mainstream supply chain management practice.
Benefits and applications
Sometimes articles about blockchain tout advantages that, at first glance, may appear unrealistic. However, the technology does offer a wide range of benefits, and they are indeed possible to achieve. Among them are reduced costs, increased competitive advantages, increased flexibility, higher levels of security, less reliance on banking services, less requirement of trust between supply chain partners, lower overhead, quicker settlement of financial transactions, and greater availability of real-time information.
There are two general application areas for blockchain in supply chain management. The first is support of supply chain finance, including areas such as clearing financial payments, using digital ledgers, and executing "smart" contracts. Digital ledgers include transactions that are maintained and verified by multiple parties. Smart contracts are automatic executions of events whenever certain, pre-specified criteria are met. These events may be the execution of traditional contracts, such as for buying material, or they can be other types of activities that are less legally focused. For example, when credit limits have been reached, e-mails could automatically be sent to supervisors to alert them.
The second general application area is the use of blockchain for inventory and asset tracking. Using an application similar to a digital currency like bitcoin, key inventory and asset resources can take on a digital footprint, which provides additional security and tracking capabilities. A good example of this can be found in the diamond industry, where a type of serial number is being assigned to individual diamonds to authenticate and track them from dirt to store to consumer, and throughout the secondary market. This blockchain application helps reduce the incidence of synthetic diamonds being mistaken for real ones, of purchases of diamonds mined in war zones, and of insurance fraud.
A recent article in Supply Chain Quarterly titled "Why blockchain is not just for banks" concentrated on applications for supply chain finance.1 An important point made was that distributed ledgers require willing participants to monitor and authenticate the transactions of other parties. Without such participants a blockchain may become inoperable. The article suggested that banks, insurance companies, and credit rating agencies would likely be interested in providing blockchain support in exchange for information they could use to provide better services. Since companies in these industries would have something to gain, the author argues, they would willingly participate in maintaining digital ledgers for other companies' transactions, thus making blockchain work.
There's no doubt that widespread adoption of blockchain will require the willing participation of many different parties. However, blockchain will not become a widely used technology unless other important conditions are met. These conditions can be anticipated by examining the past progress of other technologies that have played a part in revolutionizing the supply chain—technologies such as the previously mentioned EDI, ASNs, and RFID. To learn from the history of these other technologies, this article will analyze blockchain in the context of four components familiar to supply chain managers: the network platform, industry standardization, suitable applications, and the participants.
1. NETWORK PLATFORM
A plethora of software providers are developing platform solutions and application programming interfaces (APIs) to support blockchains. Platform solutions encompass the total operating environment of a blockchain and include important development areas such as software, hardware, network connectivity, user interface, and communication protocols. APIs are prepackaged sets of software code that can be used for developing and connecting software. For example, Google Maps provides APIs for developers, who can use them to easily export map data for use in software applications. Much has occurred already during the evolution of this emerging technology, the market is undergoing rapid growth, and there are many independent development efforts in progress. Supply chain managers who want to experiment with or adopt blockchain in their operations must therefore select from competing software platforms.
Supply chain managers can expect blockchain software developers to specialize in certain types of blockchain methods or industry applications. By specializing, intracompany (within the software company) development is more rapid; however, intercompany interfaces (between companies using the software) are thwarted until the industry reaches some commonality. For example, not so long ago information technology (IT) departments were known by the primary platforms they used and supported. Some companies were known as "IBM shops," which meant they operated IBM-manufactured hardware and used IBM software, such as DB2 for database management and OS/2 for an operating system. Similarly, IT departments specialized in certain kinds of programming languages, like C++ or Java.
Such specialization can inhibit the progress of technology development and adoption. In the 1990s, companies searching for a suitable warehouse management system (WMS) eliminated many outstanding software vendors from consideration simply because the software didn't run on their preferred platform. This situation may recur with blockchain technology in the short term. Currently, a company that wants to use blockchain must choose a network platform; but unless the software it uses supports multiple platforms, that company would not be able to provide distributed-ledger support for blockchain participants that operate on different platforms.
A primary issue that must be addressed in the development of blockchain software is version control. Open-source software development, which is prevalent today and is the present path for much of the development of blockchain software applications, has a tendency to generate "forks." These occur when software providers and users do not agree on a particular function, a scenario that leads to multiple copies of software, which doubles the software-maintenance task. Any required changes must be made to both systems. This compounding tendency leads to high overhead costs and less-responsive software development. This pattern did not originate with open-source software; traditional software development had a similar issue. Software companies strived to maintain one set of code, but when their customers did not agree on functionality, and when both options could not be supported by user-defined, table-driven development techniques, multiple versions of the software had to be built and supported. From that point forward, whenever software companies wanted to enhance their software or apply bug fixes, the changes had to be done in multiple versions of code. We can expect that blockchain will encounter similar development situations in its path toward mainstream adoption in the supply chain.
2. INDUSTRY STANDARDIZATION
This leads us to the second condition that must be addressed before blockchain becomes a mainstream technology. Widespread adoption in the supply chain is not possible without standardization. Therefore, in addition to operating on compatible platforms, blockchain will have to operate via standardized protocols that dictate communication methods, data definitions and formats, and procedures for applying and maintaining that data.
In the past, organizations such as the Uniform Code Council (UCC) were instrumental in the widespread adoption of standardized stock-keeping unit (SKU) numbers known as Universal Product Codes (UPCs) and European Article Numbers (EANs). The organization Voluntary Interindustry Commerce Solutions (VICS), now part of the standards organization GS1, was instrumental in the development of EDI by providing standardized templates for common supply chain transactions such as purchase orders and advance shipping notices.
However, some industries became impatient with the progress of global standardization, which led to the development of industry-specific standards. One example is the International Standard Book Number (ISBN), the standardized SKUs for books developed by the publishing industry. Another example is the Vehicle Identification Number (VIN), a serial number applied to every automobile. VINs were first used in the 1950s but became a required standard in 1981. A similar pattern of industry-specific standards appears to be happening in blockchain development. We are already seeing the formation of supply chain-related groups, such as the Blockchain in Trucking Alliance (BiTA). Today, two organizations continue the quest for standardization across all areas of supply chain management, GS1 and the International Organization for Standardization (ISO). The progress toward industry standardization made by these organizations and the global marketplace in general will be an important component in the adoption of blockchain.
In the short term, varying blockchain standards are inevitable. This may be a good thing. Free-ranging creativity and the pursuit of profits will combine to nurture the development of products and processes. Over time, the better products and procedures will win, and they will gradually gain more supporters/users. Then, at some point, organizations like GS1 will be able to impose standards that help, rather than inhibit, companies' use of blockchain.
3. SUITABLE APPLICATIONS
The third component required for widespread blockchain adoption is finding suitable applications. Blockchain is not appropriate for every type of transaction. It will probably be most appropriate in application areas that have relatively "clean" transactions, or transactions without exceptions. That's because applications with a high number of transactions that do not clear the blockchain will require elevated manual intervention, thus undermining one of blockchain's main benefits—automated transactions. In such applications, traditional transaction processing will likely remain an easier, more appropriate business resolution.
Five general areas for the application of blockchain in the supply chain are currently being discussed. These include: 1) processing supply chain finance transactions; 2) executing smart contracts and maintaining legal documents; 3) tracking inventory and assets; 4) verifying material sources; and 5) verifying material end of life.
The most commonly discussed application right now is supply chain finance. Specifically, blockchain offers an alternative method of completing financial transactions between companies that buy and sell products and services. Today, payment transactions are conducted through trusted, mediating institutions such as banks, but blockchain completes account transfers by using digital ledgers that are maintained and verified by multiple participating companies. The data is centralized and near real-time. Furthermore, if the transactions do not have discrepancies they can be completed almost instantly. This is far better than transactions that may require a week or 10 days to clear via traditional financial institution processing.
The second application area includes the execution of smart contracts and the ability to maintain and verify legal documents. Smart contracts can be executed by blockchain when certain actions have occurred. For example, freight invoices can be automatically and immediately paid when valid proofs of delivery (POD) are received. Also, strides are being made in the use of blockchain for document sharing.2 As a result, documents such as PODs, bills of lading, manifests, and international letters of credit can be centrally viewed and maintained in real time by all participants. The same applies for legal documents, which can be centrally located, updated, and verified by all interested parties. For example, in some states only the original copy of a will is accepted for probate; a digital signature could be used to identify the original and any changes that are made to it.
The third promising area for blockchain functionality is digital verification of "smart" property—items or products that carry a digital identity to enable tracking and trigger system-related activities. This would be especially appropriate for highly valuable or duplication-prone inventory, such as the automobiles and diamonds previously mentioned. Blockchain technology could also reduce counterfeiting in the entertainment industry by providing digital signatures to authentic copies of songs and movies. By authenticating downloads and other movements of digital assets (much like authenticating with a distributed ledger), piracy could theoretically be diminished. Another potential application could be tracking the history of the contents of various types of freight containers. This ability could assure that food items, pharmaceuticals, and other products requiring certain levels of sanitation are not loaded into a container that previously held hazardous or "dirty" cargo. In addition to tracking inventory and freight, key assets could also be tracked. This could include trailers, rail cars, shipping containers, or even smaller items such as dollies and chassis.
Fourth, blockchain technology could be used to verify countries of origin and specific sources of the raw materials in each finished product. For example, information about all of the raw materials, including their sources, that are used to manufacture a particular vehicle associated with a specific VIN could be centrally maintained and verified. Furthermore, all vehicle history and maintenance records could be centrally maintained, completing the transparency not just for new vehicles but for those in the used marketplace as well.
Fifth, blockchain could be used for end-of-life verification. This may be of special interest in European countries that require verification of the end of life for certain products. The objective of such rules is to assure that manufacturers of products that will incur additional sustainability costs have plans for disposal of those products after their useful life has ended. This has primarily affected automobile and electronic-device manufacturers because recycling some products associated with those industries requires additional costs for storage, reconditioning, recovery, or cleanup. Since blockchain can tie original manufacturers and suppliers to a final product, the technology could be used to hold companies accountable for assuring that products brought to market are adequately disposed of at the end of their life.
Supply chain and IT managers will need to determine which of these blockchain applications are both suitable for their companies and worth their efforts. It's likely, too, that the number of supply chain applications for blockchain will grow in the future.
4. WILLING PARTICIPANTS
The last important component for widespread adoption of blockchain, as previously discussed, is reaching a critical mass of participants. Many new technologies require a certain degree of access and participation before they can be operable and sustainable. At some point, they reach a critical mass of users and adoption grows rapidly as the benefits and competitive advantages become widely known. The facsimile (fax) machine provides a good example. The technology was available prior to World War II, but only the military used it. Large numbers of people did not rush to buy fax machines until others were available with which to communicate. Once fax machines began to spread, companies quickly found ways to use them to introduce efficiencies into their operations. In the 1970s, for instance, once fax machines were owned by a majority of marine ports, they could send and receive stowage plans prior to vessel arrival, allowing stevedores to plan lading and discharge in advance. This saved days in port, shortening transit times and reducing labor costs. The same was true with tele-video and EDI; it wasn't until enough people had access to these technologies and could demonstrate their value that they became widespread. Blockchain will most likely follow a similar pattern of adoption.
The "sharing economy" revolution that is underway across the world may uncover other industries that are willing to provide transaction verification and maintain distributed ledgers. We're already seeing that many individuals are willing to perform distributed tasks, such as writing reviews (for restaurants, hotels, products, and services) and driving cars for Uber, Lyft, and the like. In fact, blockchain technology is a similar example of how our evolving "sharing economy" is making better use of idle resources and providing quicker service for demanding customers. Still, regardless of the level of volunteer participation, blockchain will not make significant inroads into traditional supply chain finance or supply chain operations until participants are enabled by compatible platforms and standardization, and they identify appropriate application areas to support.
Notes:
1. Alexander van Tuyll van Serooskerken, "Why blockchain is not just for banks," CSCMP's Supply Chain Quarterly, Q2/2017.
2. Cecere, Lora, "Seven use cases for hyperledger in the supply chain," CSCMP's Supply Chain Quarterly, Q2/2017.
Most articles about blockchain have concentrated on what the technology can accomplish. As a result, many supply chain professionals are unclear on how blockchains actually work, including how information is passed along, how one action triggers another, and how participants in a chain approve, facilitate, or delay a process. The following steps briefly outline how a blockchain operates.
1. Users (participants) are connected to a blockchain through pre-existing nodes (computers that are connected to a blockchain network and carry a copy of the entire blockchain). Private networks require access approval from the administrator.
2. Users participate in a blockchain network with private keys (for initiating their own transactions) and with public keys (for validating other transactions). The combination of private and public keys creates a secure digital identity.
3. Users' transactions are broadcast from their node to adjacent nodes, or peers.
4. Each peer validates the node by matching it with its stored information. If it is validated, then it is passed on to adjacent peer nodes. If not, it is discarded. No further notice of discarded transactions is required. Only valid transactions are passed along for further verification.
5. Next, a mining process is conducted at a specified time interval, which is different for each blockchain network. During this process, validated transactions on the network are collected and organized into time-stamped blocks. These blocks are broadcast back to the network.
6. This process continues. Valid chains grow, while unsubstantiated transactions die. Aside from a user's own transactions, data is not "owned" as we know it today. It is shared and mutually agreed upon to be valid.
Adapted from: Konstantinos Christidis and Michael Devetsikiotis, "Blockchains and smart contracts for the Internet of Things," IEEE Access 4 (2016): 2292-2303.
