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Supply Chains and Blockchain Part 2

 

Can blockchain improve your supply chain? Only if you can make practical use of it. Currently, blockchain is still new and shiny, and a bit mysterious. Bitcoin and other cryptocurrencies have been fuelling interest and examples are multiplying of blockchain being used for supply chain. Yet, as often as not, it’s the “wow” factor that is the focus, rather than the “how” factor. For example, did you know that blockchain now helps track diamonds from the mine to the market, and more? It’s true, but how is it done?

Being exotic is not necessary for getting business benefit out of blockchain. On the other hand, alignment with business needs is. Part 1 (“How Blockchain Can Transform the Supply Chain”) of this series looked at everyday supply chain challenges, what blockchain is, and where it might help. Here in Part 2, we look at practical aspects of putting blockchain to work. Don’t worry, there are no code snippets. It’s a business level discussion about choices to be made in implementing the technology to properly support your supply chain operations.

 

What Do You Want for Your Supply Chain?

A typical supply chain has procurement, production, storage, and distribution. It has supplier, partner, subcontractor, and customer relationships. It also has an internal organisation by function or department. In silo mode, each department or partner uses its own systems to track products and services. That means friction goes up and transparency goes down.

Blockchain can help supply chains get out of silo mode. As a digital, distributed ledger, blockchain increases transparency and efficiency. The same information on transactions can be available to all. Smart contracts can then integrate with the blockchain as software programs. As events are recorded, the smart contracts can automatically trigger actions. For example, a delivery recorded on the blockchain can trigger payment.

But how much transparency do you want? It might be good for customers to see that your sourcing is ethical. It might not be so good to expose supplier agreements and customer discounts. Some blockchain networks hide nothing and refuse no one. Bitcoin is a case in point. Anyone can join in and see the complete record of transactions. Supply chains are not obliged to go the bitcoin way. Full public mode is just one option. Blockchain can also be used in a private or semi-private mode.

 

How Much Blockchain Should You Use?

Supply chains usually need holistic management to work well. Actions in one area often have impacts in others. For instance, you might try to lower inventory to save money. That can then cause delays in serving customers. Your efforts to save money end up hurting customer satisfaction. Some technologies, like AI, also need to be applied with the whole supply chain in mind if they are to bring real improvement.

 

Supply Chains usually need holistic management to work well. Click To Tweet

 

By comparison, blockchain can be used piecemeal. True, the most value may still be derived from using blockchain end-to-end, from procurement to customer delivery. However, it can also be used on individual parts of supply chain operations. For example, suppose shipping charges depend on variables like transit time. You can’t calculate the charges before shipment is made. You may need to reconcile data from several systems afterwards to get the final amount. In contrast, blockchain and a smart contract can reduce both the time and effort to work out the payment to be made. Today, certain business activities are being designed around blockchain, because it meets their needs. Future supply chains might be built in this way too.

 

Trust is an Easier Way to Go

When it comes to trust – or lack of it – bitcoin is a marvel. The cryptocurrency is designed to streamline transactions across the globe. Yet it assumes nothing about the honesty of people using it. As a specific use case of blockchain, bitcoin operates in a “permission-less” mode. It has functionality to prevent fraud. It also makes it hard to produce each new block of transactions, before gaining consensus from participants about adding the new block to the chain. This “proof of work” requirement further discourages cheating, but increases the amount of effort to make the system work.

Yet blockchain can also work in a context of trust. Within an enterprise, trust may be assumed between different departments. External partners, if there are not too many of them, can be identified and brought into the blockchain system in a trusted way. Good behaviour (no cheating) can be enforced by signed agreements that specify how participants are to use the blockchain system. The bitcoin “proof of work” consensus method is then not needed.

 

Blockchain Deployment Stages for Supply Chain

 

Blockchain Deployment Stages

 

We can lay out the deployment process for blockchain in a supply chain in six steps.

 

Step 1: Identify the expected benefits

The link should be clear to improved profitability. Or to customer satisfaction. Or to both. For example, using blockchain might let you cut out multiple reconciliation steps after the return of a product. You could then make measurable savings.

 

Step 2: Pick the right blockchain consensus method

All users of the blockchain must agree on the existing blocks in the chain and the new blocks that are added. The “proof of work” method used by bitcoin is just one software mechanism to get consensus. The proof is hard to produce, although checking the result is easy. Other technical options exist. Or you can securely identify participants and trust them to behave, as described above.

 

Step 3: Pick the appropriate platform

Depending on the factors above and possibly others, choose a suitable platform. Many blockchain platforms are open source technologies that are free to use. If there is a cost issue, it is more likely to be in the engineering resources required to make the platform do what you need.

 

Step 4: Configure the platform

As blockchain solutions multiply, ease of use is also improving. The technology inside is still complex. However, it can often be accessed and configured through simple interfaces for administrators and other software applications.

 

Step 5: Write your smart contracts

You could limit your use of blockchain to just making payments, for example. But you would be ignoring the potential of smart contracts for enhancing supply chains in many other ways. Remember however, smart contracts live on a blockchain. Once you have written a smart contract to a blockchain, you cannot alter it. Therefore, you cannot correct any bugs that were not discovered before. Writing smart contracts is likely to be the biggest and the most complex step.

 

Step 6: Make a suitable user interface

Your blockchain system users may not be technically minded. A good web interface can make it simple for participants to ask for admission to the system. Via the same interface, they may then enter transaction requests or confirmations to update the ledger and trigger execution of smart contracts.

 

Examples of Platforms and Functionality

Several products now offer blockchain functionality. We won’t try to compare them here. We simply mention two popular examples. Each has functionality that matches typical supply chain needs. In other words, they are not simply platforms with “cool features” that are trying to find a problem to solve.

For example, Hyperledger Fabric is flexible about how users reach consensus. It lets you choose the mechanism that best matches the relationships between the blockchain users. At one end of the scale, things might be very structured. Groups working together in the same company are an example. Elsewhere, the model might be peer-to-peer. Think of third-party supply chain financing. The platform also lets you create subgroups of participants. Each subgroup can then have its own private, separate ledger of transactions. This is handy for managing competitive situations and rival suppliers.

 

Having separate ledger of transactions is handy for managing competitive situations. Click To Tweet

 

Our other example, Ethereum, offers two kinds of functionality over a network of computers. It records cryptocurrency (“Ether”) transactions. It also handles smart contracts. These are basically computer programs. What the bitcoin network does for data, Ethereum does for data and computation. Legalese in a supply or distribution contract can become clear-cut rules in a smart contract. The business rules can be seen by all parties concerned. The authenticity of the smart contract is guaranteed by the multiple, tamperproof, replicated versions spread over the network.

 

A Real-Life Supply Chain Blockchain Deployment

 

IBM

 

IT vendor IBM recently published an article about how it used blockchain for its own supply chain. As a supplier, IBM makes its own IT products. It also sources other IT products to meet its customers’ requirements. Its journey to practical blockchain success maps onto many of the points made above.

 

Identifying the business need and benefits

Small issues were having large impacts on the supply chain. For example, a product might be damaged in transit. The wrong product might be put into an order. Getting the different systems to agree on the status of a product or an order was then difficult. It was also time-consuming. Customer satisfaction went down, and revenues were delayed. By comparison, a blockchain solution could record the transactions and progress of a product from manufacturing to delivery. It could also serve both internal and external actors. Thus, it could preserve customer satisfaction and bring revenues in faster. Blockchain was chosen after reviewing the options available. The company also checked with the different stakeholders to be sure they would see the benefit.

 

Deciding how much blockchain to use

IBM set limits for how much blockchain would be used, in the first instance. It would be applied to a limited set of products. It would also be used for just two critical sub-processes for those products in the supply chain. The first process was “inventory capture and logistics”. The second was “hardware tracking and financial management”. In addition, the solution would be built as a minimum viable product (MVP). In other words, a usable solution with the minimum of features needed to be useful.

 

Consensus and permission

The blockchain ledger was defined as the system of record. Its role would be to capture proof of transactions such as orders and bills of lading. It would become the “one version of the truth” for each product. Changes to a product would also be automatically tracked as it moved through the supply chain stages. Auditability, trustworthiness, and transparency were part of the design criteria. A data model of interest to all participants was defined. It covered the supply chain activities of product serialization, capitalization, receiving, and installation. The participants were all securely identified and given permission to access the blockchain network.

 

Writing the smart contracts

The smart contracts were written to function on the Hyperledger Fabric platform running in the cloud. The platform offered an application programming interface (API). This made it easier to develop the applications (smart contracts) to drive the blockchain ledger. The smart contracts also contained business rules about which participant could act on what kind of supply chain data. For instance, a shipper could not register a product serial number mismatch, but a receiver could.

 

Making the interface

A client interface was built to let users of the blockchain system enter transactions and events, like product shipments and product installations.

Whether your enterprise makes computers, jet engines or lawnmowers, the same ideas can apply. Although Hyperledger Fabric was used here, other platforms such as Ethereum and Multichain could have been chosen too.

 

Conclusion

There is still much to do and to explore in applying blockchain and smart contracts to supply chain. Supply chain managers and teams may need to enhance their understanding of the technology. It helps to know how it works, at least in a top-down way. Then you can make informed decisions about when and how much to invest in blockchain and related products. Likewise, IT engineers who know blockchain can now beef up their basic understanding of supply chain, to make relevant, viable recommendations. But the bottom line is that useful blockchain in supply chain now exists. Now is a good time to check that list of needs and issues, and see if, finally, blockchain can bring you the solution you’ve been waiting for.

 

LINKS:

How Blockchain Can Transform the Supply Chain
How AI Helps Build the Supply Chain that Thinks for Itself
Adopting Blockchain for enterprise asset management (EAM)

 

Contact Rob O'Byrne
Best Regards,
Rob O’Byrne
Email: [email protected]
Phone: +61 417 417 307