Article by David Lukić
David is an information privacy, security and compliance consultant at IDstrong.com. The passion to make cyber security accessible and interesting has led David to share all the knowledge he has.
By definition, supply chain management is the supervision of finances, information, and materials as they move from the producer to the retailer and the consumer. It reduces costs and makes operations efficient which in turn makes industries and manufacturers profitable.
This promotes business expansion into international markets. But, unfortunately, overseeing the supply chain is one of the most immense hardships facing modern global companies.
Forward-thinking companies have begun integrating new technology into supply chain management to stay competitive. One of these technologies is blockchain, and it has made quite an impact on the supply chain as we know it.
Read on to find out all that relates to blockchain in supply chain management.
What is Blockchain Technology?
More often than not, blockchain is equated with cryptocurrency. This technology was invented to support transactions in Bitcoin, a digital currency.
In essence, blockchain provides a platform to create and distribute the record of all bitcoin transactions to thousands of network-linked computers worldwide.
However, blockchain technology has numerous applications besides being a virtual currency platform. If you are someone with no prior knowledge or experience in blockchain, it’s easy to get confused.
So what exactly is blockchain?
Blockchain is an internet-based technology. Its main aim is to make it possible to publicly validate, record, and distribute transactions in inflexible, encoded ledgers. In addition, blockchain ensures that all records of data are secure.
There’s no need for a secure third party, and this ensures a layer of protection. This is why occurrences of cyber-crimes in blockchains aren’t as rampant as they otherwise could be.
At its most basic, blockchain is actually a public record of transactions. It’s distributed, which means that one person doesn’t control everything. Instead, thousands of computers worldwide are connected to a network, and they agree on which transactions are valid.
Whenever a transaction occurs, it is broadcast to the network. To decide if the transaction is justifiable, the computers run complex algorithms. If it is, it’s added to the record of transactions linking it to the previous transaction.
This chain of linked transactions is what is referred to as the blockchain. All the transactions are linked to the preceding one. This makes it possible to determine which came first, thus placing them in order.
Blockchain technology can revolutionize almost any industry, including supply chain management. This is thanks to its ability to track and reference transactions.
Blockchain’s Role in Today’s Supply Chains
- Replacing slow processes - Currently, supply chains are capable of handling large and complex data sets. Despite this, many processes are slow and rely entirely on paper, as is still common in the shipping industry. This is a problem that blockchain can help remedy.
- Enhanced analytics - Blockchain analyzes all data that is uploaded. This helps create forecasts and predictions. With this technology, users can identify and track any unforeseen delays in the supply chain.
These data analytics are helpful to companies that would like to minimize supply chain expenditures and grow their businesses.
- It ensures transparency - The blockchain is a shared database that ensures transparency. Most organizations, particularly multi-national organizations, have complicated supply chains.
Monitoring all the records is a complicated task that can compromise the transparency in an organization. This can have far-reaching effects. Blockchain technology consists of a secure digital collection of accurate data. What this means is that it ensures accountability and trust between every partner.
- It ensures security - Blockchain technology is built using secure blocks. Some experts consider blockchain virtually unhackable. For a hack to succeed, the hacker would have to edit several copies in real-time, which is impractical.
All in all, a data breach in this technology is virtually impossible.
- It streamlines operations - All the logging involved with the blockchain happens digitally. This leads to consistent and speedy data tracking. With blockchain, the middleman is eliminated.
Users have to sign on to the blockchain to download information instantly. However, because everything is in one spot, communication and operations are highly streamlined.
The technology can support global partnerships and communications just as fast as regional partnerships.
Real Use Cases of Blockchain in Supply Chain
Whether blockchain will revolutionize the supply chain is unknown, just like we don’t know with certainty that bitcoin is the world’s next currency. However, despite this, many reputable companies are testing blockchain solutions.
These companies are also investigating blockchain uses in their supply chains. It’s projected that one-third of companies that have a revenue of $5 billion or more in revenue will be using blockchain by 2023.
Today, most supply chains work without blockchain technologies. Even so, the technology has excited most stakeholders, which is why some companies have initiated promising pilot projects like:
- BHP Billiton is introducing blockchain throughout its mining processes. This will help track and record data better to increase efficiency and allow the company to have more effective communication with its partners.
- Provenance is a UK start-up that raised $800,000 to introduce blockchain technology to trace food. It previously had a blockchain pilot project to trace Tuna in the Southeast Asian supply chain.
- IBM has a service that allows customers to test blockchains in a secure cloud and track priceless products through complicated supply chains.
This service is already being used by Everledger, a company trying to use blockchain to create transparency in the diamond supply chain.
This is expected to help fix a market infamous for forced labor and funding violence across Africa.
- In the food industry, it’s essential to have solid records to trace every product to its source. Blockchain has proved to be a solution for companies to track food products in their particular supply chains.
These companies include Nestle, Dole, Walmart, and Carrefour. Walmart, for example, utilizes blockchain to help keep track of its pork sources from China, and it records where every piece of meat came from.
- Maersk and IBM are working on cross-border and cross-party transactions that utilize blockchain technology to help improve efficiency.
Data Management as the Biggest Blockchain Barrier
Companies usually have to determine what type of blockchain to build first before introducing blockchain technology for their supply chain. For example, Bitcoin is a blockchain with millions of parties that are unknown and untrusted.
Bitcoin is in the public realm and utilizes consensus verification protocol. This ensures ultimate trust in each block. No central database or central governance exists in such blockchains.
In contrast, in a majority of supply chains, the parties are known and trusted. What’s more, the supply chain world is unlikely to accept open access since its users don’t want to disclose proprietary details like demand, capacities, orders, margins, and prices to unknown users.
Users of the supply chain also wouldn’t want to open themselves up to a data breach. This means that most supply chain blockchains would have to be permissioned.
This also means that access would have to be governed centrally and restricted to known parties limited to specific sections of data.
This method allows public or private verification of each proposed block (in theory). In most cases, supply chains are already working billions of transactions and data in real-time. The systems are in no way perfect.
Despite this, well-managed central databases in collaboration with supply chain visualization and analytical expertise can still be attained today.
These solutions don’t have some of the technical difficulties that blockchain has. For example, if all the parties in an extended supply chain are known and trusted, a blockchain solution isn’t vital.
This is because the known and trusted parties can issue a single and instantaneous record of the truth. In such a condition, centralized solutions such as cloud-portal or decentralized peer-to-peer connections would do.
Benefits of Blockchain in Supply Chain Management
- Increases trust and security - Blockchain in supply chain management allows instant and secure transfer of critical documents in businesses like cash receipts, shipping documents, bills of lading, and cross-border chain transactions.
A slight discrepancy in these documents can lead to huge losses and create distrust among partners.
- Transparency - Blockchain is a shared database. All partners have the responsibility of uploading their information and data about a product.
An accurate collection of data improves trust and answerability between partners. Blockchain technology usually shows updates to the product in minutes. As a result, all partners usually know exactly where a product stands at all times.
- Security - Blockchain technology is constructed using secure “blocks.” These blocks are copies of the document that are stored in order and linked to previous blocks.
This makes them extremely secure and challenging to falsify, even for the best hackers. This also reduces instances of cyber-crimes in blockchains.
- Analytics - Apart from being a storage technology, blockchain offers complex solutions to analyze the uploaded data. This helps create forecasts and predictions based on previous data.
In this way, users can point out lags in the supply chain. These data analytics prove critical to companies that want to minimize supply chain expenditures and grow their enterprises.
- Customer satisfaction - The analytics can also be used to boost customer satisfaction. Distributors can use the blockchain database to see the location of items in production and shipment.
This can be done based on previous data. Users can then pinpoint lags in the supply chain and rectify them.
- Ensuring integral traceability - Blockchains record all transactions made by users. This ensures traceability of digital and physical products. The records are long-lasting and tamper-proof. They guarantee the integrity of information.
Blockchain and Supply Chain Transparency
Supply chain traceability is an important use for blockchain technology. Blockchain makes it possible to track digital or physical products throughout their life cycle.
Distributed ledger technology could potentially expand any commodity’s sustainable and ethical production and consumption globally.
Almost all industries use third-party manufacturers or different products from multiple vendors before creating and labeling the final finished products.
In some instances, white-label products are sold before they are repackaged and relabeled under another company. Transparency in process tracking gives producers an in-depth look into their value chain.
Blockchain can record information, track the progress of assets, and show previous records of assets. As a result, anyone can view the origin and journey of an asset or product in real-time.
Blockchain and Tradeability in Supply Chains
Tradeability is a concept that redefines the traditional marketplace. For example, blockchain can allow you to tokenize an asset. This is done by breaking an object into shares that digitally represent ownership.
Like share-holding, where trading is allowed, these tokens are tradeable, and users can transfer ownership.
So, how does blockchain technology bring about tradeability in the supply chain?
Blockchain technology ensures efficient ownership and licensing. However, in most industries, what’s important is the ability to verify past ownership through standardized licensing procedures.
In addition to this, blockchain can be used to license services, products, and software accurately. This is done using automated smart contract payments.
Blockchain Security Issues
Some of the most pressing security issues in blockchain include:
- Routing attacks - Blockchain networks rely on the massive volume of data transfer in real-time. Hackers can simply intercept data during its transmission to internet service providers.
Routing attacks in blockchain are dangerous because of their anonymity. You cannot identify a routing attack because everything seems normal.
Cybercriminals use routing attacks to leak confidential data or extract money without alarming network participants.
- Blockchain endpoint vulnerabilities - While we described blockchain as being virtually unhackable earlier in this article, we should mention that most blockchain transactions have endpoints that are less secure and susceptible to a data breach.
To facilitate blockchain transactions, third-party vendors may be enlisted. Unfortunately, these third-party blockchain vendors usually have weak security on their own apps and websites, which leaves an open door for hackers.
- Scalability - Today’s blockchains are the largest ever built. As the technology gains popularity, blockchains are expected to get bigger. These large-scale blockchains are untested.
The concerns center around the fact that more vulnerabilities may be discovered and exploited as the blockchain ecosystem grows. The tech infrastructure that supports blockchain will become more susceptible to simple mistakes.
- Phishing attacks - Blockchain isn’t immune to phishing attacks. Hackers usually send emails to wallet key owners by posing as an authentic and authoritative source. The aim is to obtain the user’s credentials.
When hackers access this information, the blockchain and its users become susceptible to even more attacks.
The increasing number of phishing attacks in blockchain networks has increased concerns about the security of the technology. Sadly, phishing remains one of the many cyber-crimes in blockchains.
Consensus Protocols in Blockchain
Consensus protocols are the backbone of blockchain. This is because they help all nodes in the network to verify the transactions. They include:
- Proof of Work (PoW) - PoW selects one node to create a new block in every round of consensus by computational power competition.
In this competition, participating nodes solve a cryptographic puzzle, and the node which first solves the puzzle can create a new block.
Solving a PoW puzzle is complex. Nodes have to constantly adjust the value of nonce to get the correct answer, which requires a lot of computational power.
- Proof of Stake (PoS) - In PoS, rather than using computational power, every round of nodes that generates a new block does so depending on the held stake. Nodes also have to solve a complicated SHA256 puzzle.
The difference from PoW is that nodes don’t need to adjust nonce lots of times. Instead, the key to solving the puzzle is the amount of stake/coins. PoS is thus an energy-saving consensus protocol.
Instead of utilizing lots of computational power to attain a consensus, it uses the way of the internal currency incentive.
- Delegated Proof of Stake (DPoS) - DPoS lets nodes that hold a stake vote to elect block verifiers/creators. In this election, the right to create blocks is given by the stakeholders to the delegates they support rather than having the stakeholders create the blocks themselves.
This reduces their computational power consumption to zero. When compared to PoW and PoS, DPoS is a low-cost and highly efficient consensus protocol.
- Practical Byzantine Fault Tolerance (PBFT) - This protocol has a low algorithm complexity and high practicality in distributed systems. It has five stages. These are requests, pre-prepare, prepare, commit, and reply.
The initial node forwards the message sent by the client to the other three nodes. If the third node crashes, one message goes through the five stages to reach a consensus between the nodes, which replies to the client. This makes a complete round of consensus.
- Ripple - This is an open-source payment protocol. Clients initiate the transactions. They are then broadcast throughout the network via tracking/validating nodes.
Blockchain is revolutionizing the world of supply chain management in numerous ways. Forward-thinking companies have realized its benefits.
Blockchain technology, however, still has its vulnerabilities, including speed of product delivery, coordination, financing, and data management. As a result, there is still room for improvement to make blockchain perfect for supply chain management.