Why use the blockchain in the supply chain domain?
The reason for a widespread adaptation of a technology in a particular domain is simple: It solves specific problems or creates new values. In this blogpost, we look at why blockchain is a good candidate for transforming supply chain IT and why it might gradually change supply chain practices. Though we mainly speak of blockchain, we mean different implementations of it. A lot of the aspects shown can be found in Ethereum. https://ethereum.org
Below we outline various aspects of the supply chain domain which are directly addressed by blockchain properties.
Supply chain is about a lot of assets and a lot of money
A supply chain consists of many different participants exchanging goods, services, and payments. It is often desirable to track the physical assets digitally to be informed about the whereabouts, to trigger processes, certify the ownership, and perform corresponding payments.
The mapping of mirror assets in the blockchain is a recent development that has already been implemented in concrete use cases. An example is the start-up Everledger, which tracks objects of value by means of the blockchain. https://www.everledger.io
Regarding financial transactions, Bitcoin, the most popular cryptocurrency, has shown that payments for simple transactions are feasible. Today, it is also possible to implement complex transactions, e.g. commission fees or multi-party transactions and many more.
Many participants, little trust.
The supply chain is comprised of a network of many parties with complex relationships. Even though it is often stated that the parties are in trusted partnerships, they are ultimately different organizations, each of which is pursuing its own interests. Thus, there is only limited trust. Let us assume that the information about the flow of goods is managed by a central authority. In this case it has the ability to manipulate or withhold the data. In a decentralized architecture, each party retains the data itself, resulting in high local costs, limited access, and low trust in the data you receive.
This is where the blockchain comes into play: It stores the data equivalent to a central authority, but thanks to its decentralized nature and inherent characteristics, it prevents any unwanted change of information and transactions.
Where there is little trust, there are many contracts.
The parties in a supply chain maintain contractual relationships with each other. In the simplest case: you give me x pieces of y at time t and a price p. The delivery of the goods will be tested against contracts that have been negotiated. Purchase conditions are calculated, though often rather poorly tracked, because it’s difficult to monitor the plethora of goods purchases and contracts on a global scale. Today, this information is stored, distributed, and used over many different systems that probably reside in different countries.
In the blockchain, contracts and programs to perform actions and payments are the same thing. This is also called a Smart Contract. For example, if the goods are scanned upon receipt, the digital mirror asset will not only be transferred to the new owner, but it can also be tested directly against the Smart Contract trade terms. Furthermore, the payment will be performed immediately within the blockchain or by using a third party payment service. This is an inherent property of the Ethereum blockchain: contract and payments can be created and programmatically executed in the same system. This makes it possible to implement complex contracts, such as decoupling the tracking, ownership, and payment, as you would do in a commission type of business setup. In Smart Contracts you can define at what time the digital mirror asset changes hands – for example, not before the asset has been delivered to the end customer, at which point the payment is made to the producers, and possible fees to intermediaries are delivered.
Brokers of the supply chain may lose their jobs.
Within the supply chain, there are several brokers who make money out of transactions. This can happen at different levels: aggregation and distribution of digital product information, wholesale platforms for components, or product representatives doing product marketing.
Consequently, as we can already see in banking and finance by the example of cryptocurrencies, a direct connection between a supplier and an end customer is a threat to all intermediaries. There is no reason why manufacturers shouldn’t think about depositing their product data unchangeably in the blockchain, where every retailer has access to them instead of delivering them to intermediaries that re-distribute them for a service fee.
Tracking and tracing, a key challenge in the supply chain.
Transparency and traceability are a well-known problem area that has been worked on for many years in the supply chain. In food production, for example, lots of the ingredients must be tracked end-to-end in case of recalls. Ideally, these records are stored in a revision-safe and audit-compliant way – a mammoth task for the supply chain. An inherent property of the blockchain is that all data is accessible on the blockchain for all participants and cannot be changed, except with traceable transactions. This is a good basis for tracking cases of all kinds. One challenge is the trusted link between the blockchain and events in the physical world. This is possible through the use of a so-called Oracle. Oracles translate events in the physical world into transactions on the blockchain. By using them, movements in the physical world could be tracked. To understand how Oracles work, you can have a look at the startup Reality Keys https://www.realitykeys.com. In their case, a trustworthy source deposits facts from the real world in the blockchain. In our supply chain case, this would translate, for example, into IoT devices that scan goods upon arrival and set as a trusted external device a state within the blockchain.
Value adding services as an opportunity in the supply chain.
Value adding services are increasingly becoming part of the supply chain, be it compiling kits from single products (such as adding a USB cable to a printer) or product customization (such as an engraving your name on your new iPad).
These services can be mapped onto Smart Contracts in the supply chain and immediately billed on delivery. The concept of Decentralized Autonomous Organization (DAO) even goes one step further. A DAO is instantiated in the Blockchain as a virtual, independently operating organization. A DAO is a program that has money and pursues goals based on its design.
For the supply chain, imagine, for example, a Value Adding Services DAO that owns an engraving robot. The DAO is programmed to optimize various parameters for: revenue, utilization, prestige, … and operates the business around the engraving robot.
Possible sub-tasks of the DAO that could be covered in the program are:
- offering the services on a website and process orders
- employing an operator who inserts the workpieces
- commissioning shipping services
- ordering repair services and replacement of worn parts in the robot
- hiring a recruiting service for new employees…
The combination of Smart Contracts, payment, and business logic enables a new type of entity in the supply chain. The services described are still very complex and might be too difficult to implement, but parts of it are quite viable – for example, billing the rental machine time and the binding of the profits to a particular purpose, e.g. for charity.
many functions of the blockchain can contribute to solving problems in the supply chain, and even new business models are possible. The adoption of blockchain technology in the supply chain domain will not happen overnight. But over time, we might see more and more applications in different areas and maybe some disruptive change at one point or another.
Our experience in this area is drawn from implementations of some of these use cases based on Etherium. We will keep you posted about our findings in this blog. Links to other articles can be found in the appendix. Currently we are back in our lab in order to test additional use cases and business models to let you know more soon.
More blockchain articles:
Blockchain, the next big thing? – https://blog.codecentric.de/2017/07/was-ist-blockchain/
Decentralized Autonomous Organizations – https://blog.codecentric.de/en/2017/09/decentralized-autonomous-organization-blockchain/