By Robert Huschka, Director of Education Strategies, Association for Advancing Automation
Forget about Bitcoin.
It’s blockchain — the underlying technology behind cryptocurrency – that might be the real revolution with the potential to dramatically alter how businesses manage their supply chains.
Imagine using your phone to find out where every part in a new truck was made. Or to discover what pesticides were used on those tomatoes. What if you add a new supplier to your operation in hours or days instead of weeks or months? Or dump the piles of paperwork needed for typical transactions?
This year, blockchain has rapidly become the latest business buzzword, as big tech companies and industrial leaders look to leverage its unique information management and security capabilities.
The technology – which uses digitally decentralized ledgers to record transactions — has already rolled out in diverse segments of the economy, from food safety and product tracking to banking and property sales. Blockchain is probably best-known for its use as the backbone of Bitcoin and other cryptocurrencies.
But it’s the supply chain where blockchain may have the greatest impact on the way business is done. It has the potential to simplify transactions between companies, while adding an unprecedented level of transparency and security.
“I can see material flowing, manufacturing, logistics, shipping, customers receiving product. … That this visibility isn’t just inside a company. It’s across all the trading partners,” says Joe Francis, director of Digital Supply Chain Transformation at Accenture. “It’s extremely difficult to do this using traditional techniques. Blockchain makes it really easy to do.”
Tech giants — Microsoft, IBM, Oracle, and Intel — are investing heavily in developing blockchain solutions. Google is quietly researching its own cloud-based blockchain technology. Global consulting firm Accenture had more than 500 blockchain-related job openings in 2017.
Companies have already begun blockchain experiments. For example, Walmart has entered into a coalition with Unilever, Dole and Nestle to explore how to apply the technology to their food supply chains.
The blockchain solutions market could grow from $706 million last year to more than $60 billion by 2024, according to WinterGreen Research.
So, how does blockchain work?
At its simplest, blockchain is a rolling log – a digital ledger or database – where each new record, transaction or event is added to the end of the log. Each new record becomes a “block” on the continually expanding “chain” of data.
No one authority has oversight of the ledger. It’s decentralized. A network of independent computer “nodes” shares management of the blockchain. As new data is added, each of the nodes records the transaction and verifies it – creating identical copies of the ledger. Once written, a block can’t be deleted or changed, thus building a unified trail of verified transactions that can be accessed by the parties involved.
The decentralized nature of the system creates trust and transparency. If anyone tried to alter or manipulate previous blocks, the other nodes would spot the change and prevent any tampering. This arrangement has been called “trustless trust” — where partners can conduct business without a middle man or auditor keeping tabs.
“Blockchain can provide a kind of a magnifying glass,” says Michela Menting, digital security research director at ABI Research. “You can see all of that data from end-to end.”
How would this work in my supply chain?
Let’s say Fred wants to buy 10,000 Widgets. Currently, Fred’s purchase might involve a barrage of electronic paperwork or crisscrossing documents with the seller. There might be a purchase order, an exchange of contracts, confirmation notifications, invoices and delivery receipts. If Fred’s Widgets didn’t arrive as expected, it could mean more paperwork – and weeks or months — to settle the dispute.
Using blockchain, both Fred and the Widget seller can get instant, verifiable data on the transaction. Fred places his order into the chain, and it’s acknowledged by the seller with another block. Yet more data is added to the chain as the Widgets rolls through the assembly line. The shipping company adds a block when the Widgets are picked up – and again when they are handed to Fred.
Software at Fred’s company monitors the blockchain, makes note of the delivery and issues an automatic payment to the Widget manufacturer. And that payment is added as another block to the chain.
“So all the reconciliation between all the trading partners goes away,” says Accenture’s Francis. “You don’t have a debate about who’s correct about when the arrival was. There’s only one arrival date. Everyone shares the same information.”
For decades, Electronic Data Interchange (EDI) systems have helped manage these types of business-to-business communications. But those systems can be cumbersome, inefficient and vulnerable — and often require expensive equipment and lengthy onboarding times. That communication is often just one-way or point-to-point exchanges and can leave key stakeholders out of the loop.
Under a blockchain solution, all parties can see exactly how a deal is proceeding — cutting down on the possibility of a dispute or problem later. And because networks can be built to be private, with layers of different permissions, it’s secure. Business partners can only see the details of the transactions that they are allowed to access.
IBM’s Blockchain for Dummies guide explains it this way: “A blockchain for business network can be set up as a members-only club, where every participant has a unique identity, and participants must meet certain criteria to conduct transactions. Participants can conduct transactions confident that the person they’re dealing with is who she claims to be.”
But I already have a bunch of databases, right?
Blockchain won’t necessarily replace old internal methods of tracking products and data. Most blockchain solutions would likely pull in existing data and accounting tools.
“I don’t think there will be a need for any significant investment in new infrastructure,” ABI’s Menting says. “Blockchain is not supposed to really replace everything that’s there.”
Think of it as an additional analytics tool that will give you new insights into your operations. For example, let’s say you are using RFID to track shipments. There’d be no need to change tracking infrastructure. You’d simply tie that data into the blockchain.
So you might be asking: Do we really a blockchain? Menting says you shouldn’t overlook the potential insights and the speed at which you can arrive at them.
“You can expedite a lot of things. You can drive a lot more transparency. You can augment your data with a better analytical tool by plugging the relevant information into that blockchain,” Menting says. “Things happen faster. It’s an enabler.”
Consider the recent E. Coli outbreaks in romaine lettuce. The CDC advised everyone in the United States to stop eating romaine lettuce altogether as it worked to track the source of the contamination – an often laborious forensics exercise as investigators work their way back through the supply chain.
Under blockchain, data on the lettuce would have been captured and stored at each stage of its journey from field to grocery store. Conceivably, these solutions could allow you to scan a barcode on a single sandwich and learn within seconds where and when that lettuce was harvested.
What are smart contracts?
Once a blockchain is operating, it can unlock other powerful tools – such as smart contracts.
A smart contract is a transaction or operation that is automatically executed by the blockchain software – once it verifies that agreed-upon criteria have been met.
Let’s use Fred’s Widgets again as a simple example. That agreement might call for bonuses to the manufacturer and shipping company for early delivery. Fred’s software can monitor the blockchain and see that the Widgets did indeed arrived ahead of schedule. The smart contract can then pay out the extra cash – without any human signing off.
A smart contract solution could be programed to only ship products when costs were below a certain threshold. Or one could automatically place new orders for new parts when it determined that existing supplies were low. Smart contract software could estimate freight requirements and reserve space with multiple carriers for the holiday season.
This helps build efficiency – but it might also save costs by cutting out expensive middle men, such as escrow services, banks and billing firms.
Potentially, a blockchain or smart contract could be programed to head off problems. It can learn “to recognize problems or opportunities,” says Francis. “It’s doing performance analysis of cycle times or benchmarking.”
If the blockchain software spots a supply chain issue – such as a small delay at a downstream supplier that will resonate later as a bigger problem – it can trigger a warning, like sending an alert or email. Or it can take automated action – such as ordering parts for another supplier — to alleviate the issue.
What else might blockchain do?
FASTER SUPPLIER ONBOARDING: Today, it can take months to change suppliers or add a new supplier into your production process. Under blockchain, your new supplier could simply plug in their node to your existing blockchain to begin a relationship. “Everyone’s used to how horrible it is to set up (a new partner) and they can’t quite believe that you just set up the channel and start training,” Francis says. “That’s why it’s such a powerful technology.”
SOPHISTICATED BENCHMARKING: With the new transparency, companies should gain new insights into the efficiency of their supply chain. Potentially, companies could use this data to rate suppliers or shipping companies – or to find bottlenecks in their set-ups. Industries could even use opt-in anonymized data to allow companies to truly measure themselves against an industry standard. “Because this data is available, you can rate various players in the supply chain,” Menting says.
TRANSPARENCY ACROSS INDUSTRIES: What if you desperately needed to get products to Frankfurt for Christmas? The problem is 4,000 other industries are shipping stuff that week, too, taking up much of the freight headroom. But there’s no easy way to see that outside your industry. Blockchain technology may allow companies to manage resource consumption across industries, giving you a real-time view of availability of shipping space, key components or other materials.
AN EBAY FOR THE SUPPLY CHAIN? Imagine being able to crowd-source your supply chain. You could use smart contracts that would accept bids from manufacturers based on criteria such as quality or price. The “winner” would be slotted into the production process by the blockchain software.
How quickly will blockchain solutions arrive?
Blockchain is still a developing technology – but one that’s developing quickly. IBM, Microsoft and others are already marketing blockchain solutions to businesses.
However, despite some high profile proof-of-concepts, experts say we might not see mature, widely-used solutions until early in the next decade.
Two major blockchain software platforms have already emerged: Etherum and Hyperledger. Without going deep into the specifics, both are collaborative open-source efforts working to create standards and protocols to run blockchain applications. These frameworks will create the language that blockchains will use to run – similar to how HTML is the language of the web.
“We’re going to see the first commercial solutions probably emerge in the latter part of this year,” says ABI’s Menting. “I think we’re going to have some commercialization, mass-market appeal from 2022. And then by 2025, some more tech maturity for the supply chain.”
Blockchain does bring with it some unique hurdles. As blockchains grow in complexity, they require more and more storage space – and more computational power. And we that computing power comes greater energy consumption.
There are various solutions to these issues, “but it’s definitely something that’s not mature yet, so I think the concerns are valid in terms of energy consumption and data storage. If everyone is going to have a copy of that ledger — and if there’s 1000 people in that supply chain — do we really all need a copy of everything that’s happening?”
As with any new technology, security is a concern, but most blockchain solutions are being built to plug potential vulnerabilities.
“With new technologies, there’s a lot of unknowns,” Menting says. “Some of that can be addressed when you design the application – that it’s designed with security in mind.”
With today’s software, security is thought about only after there’s a breach or an exposed vulnerability, Menting says.
“You can instill some secure design practices early on (with blockchain),” she says.
In any case, the businesses case will need to be clear for companies to jump aboard. And they’ll need to be convinced that the process isn’t too cumbersome.
“Unless block chain is easy as – or easier than –current practice, it’s never going to be adopted,” Francis says, “even though it looks wonderful, and it’s got all these features.”
Robert Huschka writes about emerging technologies for the Association for Advancing Automation. Contact him at firstname.lastname@example.org.