Blockchain innovation and supply chain
Disruptive innovations, by definition, create new markets and value networks. Eventually they disrupt the existing markets and value networks, displacing established industry leaders and alliances. Examples are plentiful: bones, pebbles and counting boards were replaced by computers. The compass by a GPS. The questions I’m considering today are about blockchain and the link to the Supply Chain. Will Blockchain create its own niche? How can we use it to disrupt the established way of managing global supply chains? Maybe it’s a riddle: what breaks before we use it? Some brainteasers have an answer so obvious that it makes you bang your head when you see the answer. Mine today definitely doesn’t fall in that category: how can supply chains benefit from blockchain technology?
A blockchain is a distributed data chain that holds data in a tamper-proof way in many, many locations. The underlying idea, famously adopted for Bitcoin, is that new data is added at the end the public data chain together with a mathematically condensed and encrypted version of the previous data. This makes the old data tamperproof, because, as new data is added, substantial effort (=computer power) is needed to falsify the history, not least because you would need modify the history in all the available copies of the distributed database.
A good real life analogue could be found in the Micronesian State of Yap. During many centuries, the tribes of these islands in the South Pacific used stone money called Rai. Rai are large circular carved disks of limestone, up to 4 m in diameter and weighing up to 4.5 tonne. The scarcity of the disks, and the effort and peril required to get them from other islands, made them valuable to the Yapese. Money supply is fixed because no more stones are imported on the island. The islanders know who owns which piece but do not necessarily move them while trading. Payments are cleverly done my memorizing ownership and orally handing down the transaction history. Hence, the database is public and distributed amongst the Yapese and tamperproof, because you can’t go change the history of previous transactions in the islander’s brains.
Blockchain technology can allow two parties to exchange data, without making use of a central authority of third party intermediaries. In other words: there is technology available that can allow you to share data directly with any counterparty around the world, in a secured, fast and cost efficient manner. And many, many other ‘neutral’ systems confirm that this data has integrity and authenticity.
Applied to the supply chain
I found four broad strategies on how to use the underlying idea of blockchain technology to broker all data about a product’s supply chain to improve the supply chains themselves or develop new business models. I’ve given examples where I know of them – please let me know of the ones you know of and I will share them in a follow-up piece.
1. Enhancing transparency e.g. Provenance
- Authentication of products (“is this medication genuine or a counterfeit?”)
- Secure traceability of certifications (bio, halal, fished sustainably)
- Track the journey of the product through the supply chain (“was this made using child labour?” “is this really local produce?”)
- Reduce the audit burden required by internal systems and processes,
- Understand product characteristics (“what went into this product”?)
2. Optimise the Supply Chain footprint & interactions
- Facilitate Collaboration, (e.g. communicate demand patterns up and down the chain)
- Provide end-to-end data about where you are in the supply chain
3. Streamline the business and financial processes e.g. Skuchain, Ethereumor Fluent
- Simplify and automate invoicing and payments,
- Scale up processes easily,
- Unlock capital locked up in Letters of Credit and other instruments of global trade.
4. Facilitate interaction with the end user
- Facilitate manufacturer based reward programmes (instead of retailer based)
Basically, every data flow in a supply chain could benefit from blockchain. Whether it is about exchanging “classic” information, such as volumes and demand patterns across tiers, or more recent developments to streamline the accompanying financial flows to minimise working capital and transaction times. And all in a very transparent, trustworthy and scalable way. From an IT perspective: messages are being replaced by APIs, and I expect APIs to be replaced by their blockchain equivalent.
Chicken or the egg
Why don’t we see a more rapid adoption of the technology then? A couple of reasons: A) the idea is still very young and too high on the hype charts. I still expect it will have to go out of the ‘ultra’ fashion list and mature first. B) While the idea of decentralising the information about supply chain seems a wonderful idea, we always forget there is already a lot of decentralisation in the supply chain. The data is typically kept ‘local’ by sceptical people, company borders and legal hurdles and we actually spend a lot of time trying to centralise it. C) There is no dominant standard for blockchain information swaps in the supply chain. Let alone a standard for managing a supply chain. Of course, that won’t prohibit ambitious companies for trying to set the de-facto standard for block-chain exchanges in the supply chain.
While the technology has these immediate drawbacks, the benefits of the technology in Supply Chain could be incredible. A) The data is an auditable record that can be inspected and used, with the appropriate permissions, by companies, standards organizations, regulators, and customers; B) its real-time and agile. Everybody with a copy gets the same information, as soon as it happens; C) its cost avoiding: the set-up avoids double spending by sharing the same information, lessens audit requirements, and simplifies business and payment processes; D) there is a guaranteed continuity as long as some businesses use the chain, because there is no central operator managing the scheme.
The main hurdle is a “chicken and egg” riddle. Where do you start? Or who starts? I won’t answer these questions, but history does point at lessons from related evolutions. Solutions need to be developed, the industry will mature, some new players will leave, and others will join. And ultimately, a common approach shall be found, or maybe a couple of common approaches.
Impacting your business?
On the short term: no, not yet. Blockchain startups are still in their infancy and I haven’t heard from large non-financial, organisations who are into this market. On the longer term: yes, of course! I expect: financial institutions to develop blockchain based products focused on cross border trades, supplier payments and inventory financing, manufacturers will use blockchain products to track demand, end-user experience and feedback for their products, logistics companies will use the technology to track parcels, standards organisations will use simplified processes for compliance schemes using the blockchain and, of course, innovative ways for speeding up the exchange of data in the core supply chain world will emerge and become the norm.
I still owe you the answer to the riddle “what breaks before we use it?” An egg. But I can’t answer the other one, was it the chicken or the egg which came first – and who made their nest-egg as a result?