Blockchain in Supply Chain Management: Key Use Cases and Benefits
In the following blog post, we will discuss the Top 5 most important areas of supply chain management that can be improved with blockchain.
Viability of Blockchain for Supply Chain
Before moving on to the core topic of our discussion, let us recall the four most distinctive features of blockchain that make it highly applicable for the supply chain managers:
- Transparent and controlled transactions. Blockchain has no intermediary (e.g., a bank). It results in faster and more transparent settlements, as the ledger is updated automatically. Payment conditions can be pre-programmed automatically, including the visibility of a transaction, so that it can only be visible to the authorized participants.
- Preapproved transaction fees. When making cross-border payments with Swift, the commission for the transaction is deducted only after the transaction completion – or, to be more exact, upon running through a whole number of the intermediary banks, which have been executing this transaction. In case of blockchain, you know the fees beforehand.
- Auditability. All the transactions are immediately visible to authorized parties, meaning no one can tamper, delete or conceal any information added to the blockchain.
- Reliable. Due to its distributed nature, blockchain does not have a single point of failure. Besides, all the transactions processed on the blockchain are immutable and irrevocable, further eliminating the risks of fraud.
While blockchain supply chain use cases are still emerging, a number of successful pilots suggest that managers can realize big benefits from blockchain, ranging from cost-savings and increased efficiencies to new operational models, specifically in the following areas of supply chain management:
- Provenance and traceability
- Digital payments and contracts
Let’s review them one by one.
Blockchain can act as a “single source of truth” for all the entities (subsidiaries, partners, etc.) doing purchases on your behalf and negotiating different terms with suppliers. A blockchain-based database can store relevant data from all your partners, giving your company a 360-view of the total volume of purchases, regardless of who managed the purchase activity. There will be no need for individual users to constantly share operational data and someone else to crosscheck it – the audits will be conducted automatically, eliminating the resource-heavy processes such as extra price verification.
Here’s a quick example to illustrate this further. Your organization wants to negotiate a procurement deal based on total ecosystem volume – a figure that includes purchase data from both you and your partners. Storing data in a blockchain-based system means that you can effortlessly calculate the exact volume discount based on total purchasing and mathematically prove that it is correct. The best part? You can do so without disclosing each company’s individual volumes.
Furthermore, blockchain technology can have a major impact at nearly every element of the complex Procure-to-Pay (PTP) process as the diagram below illustrates:
Provenance and Improved Traceability
The food supply chain will likely be the first one to undergo major blockchainization, especially when it comes to the distribution of fresh produce. Recalls have been a major and costly industry issue for years. Thus, several major food-borne bacteria outbreaks, which have recently happened in the US, are encouraging more and more companies to look into blockchain as a new method for increasing visibility and traceability of the goods.
Consumers, as well, are putting pressure on businesses to provide more insights about the goods’ provenance, authenticity and “life before reaching the shelves”. Most consumers are ready to pay a premium for sustainable and ethically made goods. According to Nielsen, 49% of shoppers will pay extra for products that have high quality/safety standards.
Walmart is a pioneer in this domain, partnering with IBM since 2016 on a blockchain-based traceability solution that would be applied across the company’s food supply chain. The tested system allowed the retailer to track incoming food supplies from “farm to store” in near real-time. Aside from increased visibility, the company also explores how blockchain technology can be extended towards monitoring and controlling the spread of foodborne illnesses and help minimize costly recalls. In 2019, the food chain giant plans to roll out their blockchain-backed traceability program, mandatory for all lettuce growers.
Other businesses are exploring how blockchain can be used to certify the origin and paths of goods sold and provide data on the authenticity of those. For instance, OriginTrail in partnership with TagItSmart has recently tested the IoT and blockchain combo to prevent wine fraud. In China, nearly 30,000 counterfeit wine bottles are sold every hour. Some of them contain hazardous additives that can cause serious health problems among consumers. The companies’ blockchain-based protocol allows tracking every wine bottle from the vineyard to the stores. Its anti-counterfeit technology that utilizes photochromic ink together with unique QR codes helps to verify the provenance and authenticity of every bottle.
As early pilots prove, blockchain and supply chain management can be a powerful combination. So much so, that in the next six years, 20% of the top 10 global grocers will adopt blockchain for food safety and traceability to ramp up their visibility into production, quality, and freshness.
Beyond the food industry, other traceability-based blockchain projects are catching up too:
- IBM has ongoing collaborations with a number of gold and diamond industry leaders (Asahi Refining, Helzberg Diamonds, and others), helping them create new solutions for tracking and authenticating their products with blockchain throughout the supply chain. Everledger startup is attempting to do the same.
- LVMH conglomerate plans to release a cryptographic provenance platform for their portfolio of 60+ luxury brands.
- UPS has a pending patent application, describing a blockchain-based solution for planning package routes and tracking them globally, through multiple carriers.
Digital Contracts and Payments
Even the most successful companies have to deal with days sales outstanding (or even payment upon receipt.
This issue partially stems from the fact that the current invoicing processes are largely inefficient. Most invoice processing is still done manually by teams on both sides, and companies typically spend between $5-$25 per invoice.
Smart contracts devised on the blockchain can automate the invoicing process and “patch” the expensive procure-to-pay gaps. Payment terms can be codified and cash can be obtained immediately after the trade has been executed and proof of delivery has been provided by a logistics company.
Smart contracts in supply chain management can help reduce data redundancy across trading partners and eliminate costly mistakes. For instance, if a supplier sends a duplicate invoice, the blockchain-based system will analyze all the elements of the contract – contract terms, open purchase orders, or existing invoices. If things “don’t end up”, the system will reject the invoice and it will bounce back to the seller for additional verification.
In essence, smart contracts on blockchain act as an independent third party, which reviews all the contract aspects and clauses, only accepting entries that match all the pre-programmed values. This means, no errors, dubious or “lost” invoices can creep into your records.
To sum up, smart contracts can:
- Help ensure data consistency between all actors of the supply chain and enforce complete contract term execution;
- Automatically maintain consistency across all participating entities and streamline the process of managing trading relationships;
- Provide better security levels than most existing approaches.
The logistics industry still relies on a massive paper trail of documents, especially when it comes to the customs’ process. This majorly reduces the visibility companies have regarding the status of shipments as they travel along the supply chain. Blockchain can do several things to solve this issue:
- Increase the volume of seamless data exchanges between all stakeholders to achieve greater transparency and predictability of logistics operations;
- Generate cost savings by powering more automated, error-prone and secure processes;
- Help establish more sustainable and responsible supply chains at scale. Pairing blockchain with IoT can help logistics companies gain more insights about the transportation conditions and add additional preventive measures against counterfeiting.
In particular, the ocean freight industry can massively benefit from the adoption of blockchain. Specifically, it can enhance all the trade documentation and administrative processing for ocean freight shipments. At present, a sample of refrigerated goods from East Africa to Europe can pass through nearly 30 people and organizations, with more than 200 different interactions and communications happening between these parties. A blockchain-based system can effectively replace the current means of communication, acting as a “single source of truth”. All entities will be able to seamlessly add the necessary data, resulting in fewer delays and higher visibility.
In 2018, IBM launched TradeLens – a blockchain initiative with 94 participants, such as freight forwarder CEVA Logistics, ocean carrier Pacific International Lines (PIL), and a network of 20 port and terminal operators that span 234 maritime gateways. Together, they are testing how blockchain can be used to reduce delays and minimize freight documentation errors. An early pilot showed that transit time for a product shipped to the US could be reduced by as much as 40%.
Alibaba’s subsidiary logistics company Lynx International is actively exploring another blockchain use case, tackling cross-border logistics processes. The company’s new blockchain-based system now stores and operationalizes all the important information about the imported shipments, including details about production, transport methods, customs, and third-party verification. So far, over 30,000 imported goods have been successfully logged into the system.
IoT and blockchain are arguably the most promising business opportunities in supply chain management as 63% of SAP survey respondents state. The two technologies combined offer several major benefits for the supply chain in the manufacturing industry:
- Improved information continuity. IoT sensors can capture a variety of data at manufacturing facilities and beyond them and transmit all the information to a centralized repository. Managers, in turn, can gain a multitude of new insights about material usage, transportation conditions, etc., and apply them in planning/optimization.
- Robust fraud detection. Blockchain-based systems are impossible to tamper with. Any bait and switch or other mishaps in the factories can be instantly spotted and acted upon. Companies who put their reputation first will be able to reduce reputational and business risks by being fully transparent about their supply and manufacturing processes.
Producers, responsible for transforming the raw materials into final products, can attain greater control over the flows incoming from suppliers, automate compliance to a certain extent and gain better control over production.
Freight forwarders can automatically ensure that the products are being transported under the right conditions, as IoT sensors can be programmed to capture data regarding temperature, moisture levels, etc. during transportation. They can also attain better visibility into the overall logistics.
Besides, supply chain management blockchain use cases further extend into other aspects of manufacturing that we covered in our previous blog post.
Blockchain is gradually proving to be an effective “middleware” solution for enabling seamless interoperability within complex supply chains. Due to its technological nature, blockchain enables secure, transparent and fast data exchanges as well as allowing for the creation of immutable records databases.
If you are ready to explore the potential of blockchain in supply chain management, get in touch with our specialists today. Together, we can build a solid business case for adoption and implement successful pilots.