Implications of blockchain for supply chain management

Blockchain technology has already begun to drive a seismic shift in the supply chain management sector, and we at TM Insight expect this disruption to continue.

In this article we explore how blockchain technology will impact supply chain management, and provide some examples. If you’re looking for an introduction to blockchain, check out our article Introduction to blockchain for supply chain management.

Background: the analogue gap

Historically, logistics and supply chain activities have been notoriously difficult to track and manage, due to the many siloed and disparate systems that exist throughout a typical supply chain. Experts have termed this disconnection the “analogue gap”. Although organisations in the supply chain industry have come a long way in knitting together their various platforms and data sources, there are still inevitable limitations including time lags, errors and information gaps, meaning that there are instances where reporting and data do not accurately reflect the actual situation in the supply chain. As supply chains become larger, more complex and more dynamic than ever before, the analogue gap multiplies. Blockchain technology promises to overcome this gap, by uniting multiple discrete systems in a cohesive system that is verifiable, instantaneous and trustworthy.

What’s all the fuss about distributed ledgers?

The distributed ledger principle underpins blockchain technology, and enables the integration of multiple complex data sources. It means that instead of data being stored in discrete systems, it is shared among every participant on the blockchain simultaneously. When the blockchain is updated, the update is shared with every participant immediately, so there is always consensus between all parties within the blockchain.

End-to-end visibility of the supply chain

Major retailers have begun using blockchain to track their logistics and supply chains in fine detail. This has implications for food and grocery supply chains and for maintaining food safety in the supply chain. In 2018, a number of people in the United States suffered from food poisoning from a supply of romaine lettuces. Unfortunately, the source of the contamination could not be identified because retailers and their logistics partners simply did not have that level of visibility into their supply chains. In particular, major retailer Walmart could not determine the origin of their lettuce and decided to remove all lettuce from their shelves as a precautionary measure. To prevent such a situation being repeated, Walmart has implemented a blockchain solution which enables them to track individual items through the supply chain, from source, to consumer, gaining an accurate view of the provenance of individual items. The blockchain solution monitors requirements such as temperature, time-in-transit and even vibration, and triggers an alert if there is a breach of requirements. Similarly, in China, retailers are using blockchain technology to trace the provenance of meat, so consumers can see the provenance of individual cuts of meat, in the store. Blockchain provides all participants in the supply chain with a clear view of the supply chain, enabling them to track and monitor activities in real time, and identify any breach of standards in the supply chain in an effective manner.

Ethical sourcing

The ability of blockchain to unite vast stores of data, including origin and procurement information, can give all partners in the supply chain confidence in the provenance of their product. It is expected that this transparency and traceability will reduce instances of fraud, counterfeits and non-compliant quality. In addition, these characteristics of transparency and traceability will bring to light use of slave labour, and other unethical labour practices in supply chains. Modern slavery in supply chains is becoming an increasingly pertinent issue; there are currently over 40 million people living in slavery worldwide and Australia has introduced legislation requiring large companies to report on how they tackle slave labour in their supply chains. Australian start-up Lumachain has an ambitious agenda of using blockchain to eliminate slavery. It works with organisations to develop blockchain solutions that aim to drive ethical labour practices, by identifying and eliminating slave labour in supply chains.

Smart contracts

Blockchain gets really interesting when we consider its ability to store and execute smart contracts. A smart contract is a software program that administers and executes an agreement between multiple parties. A smart contract takes input from the blockchain (for example timely delivery from a logistics partner) and triggers an event (for example paying for goods). Likewise, if a logistics requirement is not met, the smart contract can trigger an agreed penalty (for example a fine or refund). In the case of a food or grocery supply chain, if a requirement (such as the requirement for cold storage) is breached, a smart contract could trigger an alert to notify all relevant parties, and trigger a penalty or terminate the contract.
Hong Kong shipping and logistics company 300Cubits is experimenting with blockchain smart contracts to optimise the utilisation of their ships. Like all shipping companies, 300Cubits, regularly experience clients whose goods do not turn up in time to be loaded on to the ship. To compensate for this, they routinely overbook their ships. This means there is always a risk that the ship will be too full to fit all the goods which are booked for shipping, so some clients will not receive their agreed service. This constant guesswork means that their ships are rarely perfectly utilised at 100%. In 2018, 300Cubits initiated smart contracts with a number of their clients, whereby each party deposited a token (of cryptocurrency Ethereum) in escrow. When the clients upheld their end of the agreement by delivering their load to the ship on time, the smart contract triggered the return of their deposit token and they received 300Cubit’s deposit token. In cases where the client did not uphold their end of the agreement, they forfeited their deposit token to 300Cubits and 300Cubits retained their own deposit token. In addition to incentivising both parties to fulfil their obligations (therefore optimising shipping utilisation), this smart system eliminates a layer of administration because it executes the contract immediately and automatically.

Better visibility into procurement sources, more accurate and reliable data for analytics, and increased trust among all participants in the supply chain are some of the benefits that blockchain offers.

Here at TM Insight, we’re always helping clients stay at the forefront technological trends and drive the best possible outcomes from their supply chains. Contact us today if you’d like a confidential discussion.