The Use of Blockchain in Supply Chain for Security and Visibility

Blockchain is a digital ledger technology invented for use in crypto-currency networks. In these networks, anonymous parties perform encrypted transactions based on a predetermined protocol. Blockchain ledger technology is a distributed system that does not need centralized control, allowing users anywhere in the world to transfer digital properties without a contract or a third-party negotiation. Using blockchain technology in the supply chain is one of the emerging applications of this technology.

Supply Chain using Blockchain Diagram

How does Blockchain Technology Work?

The main components of blockchain technology are a digital ledger and a network of computers (nodes). Each node has a copy of the digital ledger that is updated continuously based on the transactions. In blockchain technology, the transaction between any two users goes into this digital, decentralized ledger. All the transactions in blockchain technology are transparent, meaning that every node in the blockchain network is informed about every transaction and updated accordingly.

Assume that person A on the below blockchain network wants to transfer 10 currencies to person B.

Every node in the blockchain network keeps a digital ledger with the list of all transactions performed on that network.

When A sends some currency to B, it creates a new block (or entry) in the digital ledger. Then the copy of the updated ledger is propagated across the network, leading to two questions:

  1. How can A be sure that a rogue node will not tamper with the ledger?
  2. How can a node be sure that a ledger update it receives from a neighboring node is authentic and not injected by a hacker?

Blockchain technology uses a public-private key pair to effectively address both the above questions. When person A performs a transaction, which is essentially taking place in the form of a ledger update, it encrypts the transaction with its secret, unique private key. This essentially creates a digital signature for the transaction. If any node tries to modify the transaction’s data, such as the transaction amount or the recipient name, it tampers with the digital signature. This means that no node can tamper with a transaction without destroying its digital signature, thereby rendering the transaction null.

The second question is addressed by each node having a public key of every other node. When a node receives a ledger update message from another node, it performs verification with the initiating node’s corresponding public key. If the ledger has not been tampered with, verification succeeds, and the node updates its copy of the ledger. In this fashion, a transaction propagates through the blockchain network and becomes part of the ledger stored in each network node.

Using Blockchain in the Supply Chain
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Why do Supply Chains Need Blockchain Technology?

Here are some of the reasons why the Supply Chain needs blockchain technology:

Increasing Complexity of Supply Chains

Supply chains in the past were linear and had only a few parties. Current supply chains are incredibly complex and often non-sequential. Modern supply chains are multi-tiered systems with a large number of suppliers, manufacturers, logistic partners, storage partners, and. When the system becomes very complicated, it is difficult to perform efficient and transparent operations. Supply chains need technology that is inherently transparent, distributed, and immutable--blockchain technology offers all these features.

Increasing Illegal Practices and Counterfeit Products

One of the biggest challenges of a supply chain is to ensure the legality of raw materials and parts. When a supply chain is spread across multiple geographies and includes hundreds of partners, it is a challenge to trace each process. For example, it is difficult to know if a supplier is using unethical methods to obtain raw materials. Another challenge is knowing if products are counterfeit or real. Without a system to trace each product to its root, fake products can enter the supply chain. As a result, supply chains need a technology that will allow networks to trace every product to its root. One of the main features of blockchain ledger technology is its traceability. This feature will help supply chains fight illegal practices and counterfeit products.

What Are the Benefits of Adopting an Intelligent Supply Chain?

As a part of adopting blockchain technology, organizations need to digitize their supply chain operations. This opens up new possibilities in using artificial intelligence (AI) and machine learning (ML) solutions. These technologies create smarter supply chains with many advantages:

Supply Chain Optimization

With smart supply chains, it is easy to identify bottlenecks. Right from the warehouse to the shop floor, these technologies optimize transactions and inventory.

Better Synchronization

AI and ML enable better synchronization of supply chain logistics. They help to co-ordinate the logistical activities across geographical locations and various transportation modes.

Data Unification

With blockchain technology and intelligent supply chains, organizations can unify all their data, including data that is spread across various formats. Intelligent supply chains enable organizations to make data-driven decisions and better supplier collaborations.

What Are the Applications of Blockchain in Supply Chain Networks?

Blockchain technology ensures transparent, traceable, and tamper-proof transactions. Modern supply chains have a large number of transactions between hundreds of different partners. The very nature of blockchain technology naturally fits with the requirements in the supply chain networks; and starting from financial transactions to product tracing, blockchain technology has a multitude of applications for supply chains.

Tracing Products to the Root

Most supply chains start with raw materials and end in finished products. Blockchain technology tracks a product’s journey from raw material suppliers to customers. Take, for example, canned tuna fish. Assume that a supermarket finds a quality issue with their canned tuna. They will immediately contact their suppliers, and the supplier, in turn, contacts the manufacturer. If the manufacturer sources tuna from multiple suppliers and processes it in multiple factories, they may find it difficult to pinpoint the exact location of the damaged goods.

Blockchain technology remedies this issue by ensuring traceability. With blockchain technology, the manufacturer can trace the canned tuna to the precise shipping boat it comes from. Every stage in the product’s movement through the supply chain is added as a transaction to the blockchain. It is immutable and transparent. This is how blockchain helps to ensure product traceability, which will minimize recalls and revenue loss.

Payments Through Cryptocurrency

While not yet widely adopted, financial flow in the supply chain can be managed through blockchain technology. Some businesses have started adopting blockchain-based technologies like bitcoin for the financial exchanges. The blockchain-based financial flow is easy to track, transparent, and does not need a central authority to monitor.

Managing Contracts Between Participants

Blockchain technology can be used to execute smart contracts between supply chain partners. Complex supply chains have hundreds of partners and thousands of contracts. Each of these contracts can be added to a block in the blockchain transaction. Due to the immutable nature of blockchain transactions, each of these contracts remains tamper-proof--no party can rewrite or tamper the contract.

Preserving the Information Flow Immutable

In large supply chains, a lot of information flows from one stakeholder to another. This might be product specification from the manufacturer to the part supplier or quality specifications. In some cases, this information is misplaced or misinterpreted by various partners--especially if paper-based. Even with digital information flow, data can be lost in emails or messages. Adding each information exchange between the partners as a block can solve this issue by increasing the transparency and traceability of information exchanged between partners.

What are the Benefits of Using Blockchain in Supply Chain?

Transparency

All the transactions on a blockchain are visible to all participants. With traditional supply chains, transactions involving two parties like a manufacturer and retailer may not be visible to a third party. Using blockchain technology, each transaction in the supply chain is added as an immutable, tamper-proof block. Each transaction is visible to all the parties involved in the supply chain. With blockchain technology, supply chains become more transparent.

Detecting Execution Errors

For supply chain networks with hundreds of stakeholders and thousands of transactions every day, there is a high chance of execution errors. These errors might include missing shipments, errors in inventory data, and payment issues. With traditional supply chains, it is difficult to detect these execution errors in real-time. It might take a lot of scrutiny and document analysis to verify the root cause of the error. Execution errors might only come to light after a routine audit.

Blockchain technology records every transaction in an immutable manner. With a blockchain-based supply chain, it is faster to detect and find the cause of an execution issue, saving a lot of money and effort for the businesses.

Increased Security

Blockchain transactions are encrypted with the private key (or the user’s digital signature) that initiates the transaction, making the blockchain transactions tamper-proof. In supply chains with a large number of partners, each partner has a unique digital signature. When a transaction is initiated, like a purchase order, it is secured with the user’s digital signature. The transaction is immutable, and the party on the receiving side, like a supplier, can verify that the purchase order has come from a genuine customer. As each transaction in a supply chain is added as a block in the blockchain, so counterfeiting a transaction is impossible. Blockchain leaves a tamper-proof, trustworthy, and sequential audit trail of transactions.

Improved Speed and Responsiveness

Blockchain technology makes supply chain operations fast. It digitilizes manual or paper-based processes. With a streamlined, real-time data transfer between all supply chain participants, blockchain technology enables high-speed operations that are highly responsive to changes in business conditions. With blockchain, all contracts and transactions are saved in the tamper-proof blockchain. This means the business logic is embedded in the supply chain network and not in obscure offline documents.

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What Are the Technical Challenges When Using Blockchain in Supply Chain?

There are some technical challenges to blockchain technology:

Handling Big Data Sets

In traditional blockchain applications, like cryptocurrency, there is a limited amount of data. It is easy to validate this data while performing blockchain transactions. Complex supply chains have thousands of transactions and high data volume. To adapt blockchain into supply chains, it is essential to streamline this massive amount of data accurately.

Managing Transaction Volume

The number of transactions per second in traditional cryptocurrency applications is relatively low compared to supply chain transactions. To completely digitalize complex supply chains, high computation power is required. The speed of the blockchain-based supply chain transaction might be limited by the computation speed of the blockchain network.

Standardizing Blockchain Technology

There is a lack of blockchain standards in supply chains due to its recency. Blockchain technology providers need to standardize their solutions so that they can be easily adapted by multiple companies. Some of these standards include a definition of how two parties can agree on a block before validating it, which encryption method to use, or how to solve disputes in transactions.

Interoperability

Many companies use traditional enterprise resource planning (ERP) systems to manage their transactions. It may not be easy to adapt these systems to use blockchain technology or to completely replace one system before adapting the blockchain-based solution. A certain level of interoperability between the legacy systems and the blockchain-based solution is essential.

How Can Organizations Prepare for Adopting Blockchain in Supply Chain?

Organizations can prepare to adopt blockchain technology in several ways:

Building Trust

Complex supply chains have hundreds of partners and thousands of transactions. Adopting blockchain technology means that each of these partners agrees to transact over a blockchain-based network. The transparency and immutability of blockchain networks might intimidate certain partners. Lack of awareness about the encryption mechanisms and other technical details also might create doubt in the platform. Gaining the trust of all partners is an essential, yet challenging task, for companies that want to adopt blockchain technology.

Ensuring Data Quality

Supply chains perform hundreds of operations and handle enormous amounts of data, so there is a high probability of erroneous data entering the system. With traditional enterprise resource planning systems, it may be easier to roll back the transactions with erroneous data. As the blockchain transactions are immutable, it will be difficult to fix the data errors. Organizations that want to adopt blockchain technology should ensure data quality. Also, correcting the erroneous data on blockchain-based supply chains might be costlier than traditional systems.

Choosing the Right Blockchain Technology

There are two primary varieties of blockchain technology: permissionless and permissioned. Traditional cryptocurrency networks use permissionless ledgers, where every transaction is public, and there is no central governing authority. Most of the supply chain use cases may not be able to use the permissionless model. The permissioned technology has a central governing authority that approves transactions.

Organizations should decide which variant they want to use and to what extent they want to adopt blockchain technology: completely replacing current technology or retaining some of legacy systems. These are the crucial decisions that companies should make when planning to adopt blockchain technology.