Blockchain in Supply Chain: Not Replacing 60 Million People Any Time Soon
Many people are completely unaware of the logistical miracle that happens behind the scenes of almost every product they encounter on a daily basis. From food to technology or clothing, consumer products are brought to the user by a long and often complicated supply chain.
In order for an individual to get a shirt on their back, a lengthy process has to take place. It begins with the raw materials – which have their own supply chain for reaching the farms. They are then moved along the chain to producers and creators, then wholesalers and retailers, before finally reaching the individual.
This process is unavoidably complex in a globalised world in which cotton can come from one continent, then be shipped to another to be produced, before it’s transported to yet another to be distributed further. Yet supply chain management and distribution in many sectors is still conducted in an archaic fashion, with pen and paper used even today in a lot of cases. However, given that the distribution network of a supply chain is simply a long list of transactions that need to be stored and maintained, blockchain looks purpose-built for this operation.
As is often the case with blockchain, the issue is whether or not the technology is ready for mass adoption in supply chain systems. The possibility is there, and the disruptive potential is probably at its highest in this sector given that it’s crying out for an improvement. But blockchain is still in its infancy and needs time to be fully tested and integrated, although that testing is beginning to intensify.
Understanding Supply Chain Management and its Shortcomings
To define supply chain management is relatively difficult, as there are so many integral processes. It involves material flow, information flow and financial capital flow across continents, and sometimes different companies and even different sectors. In order to achieve a completed product, businesses, as well as resource and technology providers, need to work together with the supply chain as the common medium.
“An efficient supply chain leads to increased sales and revenues, decreased fraud and overhead costs, an improvement in quality and an acceleration in production and distribution”
Not only are supply chains integral to creating a product, but they can be hugely beneficial if well structured and maintained. An efficient supply chain leads to increased sales, decreased fraud and overhead costs, an improvement in quality and an acceleration in production and distribution.
On the other hand, a bad supply chain can greatly detract from a finished product. Unfortunately, it is much easier to have a bad or broken supply chain than an efficient one. The major issues that lead to a bad supply chain are a lack of transparency, efficiency and uniformity. Considering solely these factors, one can already see how blockchain might intervene.
Built for Blockchain
Blockchain technology could immediately tick the box of uniformity, as it’s a global and standardised system; transparency, because of its immutable and open nature; and efficiency, since, in most cases, it would be a better solution than pieces of paper stuck onto shipments of cargo.
“[Blockchain offers] uniformity,… transparency,… efficiency,… [and] provenance tracking like no other system. The distribution and transportation of goods could be traced and recorded… [at each] new destination, and that ‘transaction’ recorded on the blockchain both for all to see and for none to fraudulently change”
Delving deeper, blockchain would offer provenance tracking like no other system. The distribution and transportation of goods could be traced and recorded every time they reached a new destination, and that ‘transaction’ recorded on blockchain both for all to see and for none to fraudulently change.
This would also give true and unquestionable proof of origin for items such as coffee beans or similar products, the reputation of which relies on where they were sourced. The upshot of this is that fraudulent and underhand dealings along the supply chain would become almost impossibly difficult as shipments could be traced back securely to the point of derivation. This would greatly enhance a company’s trustworthiness and brand reputation, especially when it comes to high-end goods.
Case Study: Wine
Recently, Overstock.com’s blockchain accelerator and subsidiary, Medici Ventures, invested in a company that was looking to create a blockchain-based wine market. The idea behind the creation of the company, VinX, was to put the distribution and supply chain from grapes to bottles on blockchain, as there has long been an issue with fraud and counterfeit wine in the global supply.
Jonathan Johnson, the President of Medici Ventures, explained to Binary District Journal the reasoning for the company investing first in blockchain supply-chain disruption, and second in the wine-distribution business. “Experts conservatively estimate that 20% of all wine in the world has counterfeit labelling, so what a consumer believes is a high-end bottle of wine could have a decidedly more local origin,” he says.
“It’s often difficult for even the most seasoned collector to identify fakes. Consider the experiences explained in the 2016 documentary ‘Sour Grapes’.
“To combat [wine counterfeiting], VinX plans to use blockchain to connect wine lovers directly with wineries, eliminating fraudulent middlemen within the industry and providing customers with a direct line to the source of the products”
“To combat this growing concern, VinX plans to use blockchain to connect wine lovers directly with wineries, eliminating fraudulent middlemen within the industry and providing customers with a direct line to the source of the products. Medici Ventures has been looking for a good supply chain investment in the blockchain space. With the VinX team’s experience in both the wine industry and in software development, we’ve found an opportunity we really like.”
This is a pertinent example as it reveals a number of developments. First, the benefit of blockchain technology in increasing efficiency in supply chains, especially where a lack of transparency is damaging the market; and, second, that there is a growing interest from investors in blockchain-based supply chain companies as the possibilities of integration are clear to see.
But are we Ready for a Blockchain Supply Chain Revolution?
On paper, it all sounds perfectly possible, and it is a wonder that the entire global supply chain is not already run on blockchain. But, as with any new technology, there is still a teething stage to go through, and blockchain’s adoption is still very new.
According to Christian Lanng, CEO and co-founder of digital-invoicing start-up Tradeshift, it comes down to the maturity of the technology. He also believes supply chains need first to fully digitise before they can be disrupted by something such as blockchain.
“Supply chains often have many different stakeholders touching goods, moving them around. If you want to have authenticity… to know where they are sourced and that it is done in a responsible way, blockchain is a great technology to manage that kind of flow and be sure of the goods’ integrity”
“Supply chains often have many different stakeholders touching goods, moving them around," Lanng told CNBC. “If you want to have authenticity, if you want to know where they are sourced and that it is done in a responsible way, blockchain is a great technology to manage that kind of flow and be sure of the goods’ integrity. The problem is just that it’s not a high-performance technology.”
“Whenever people say blockchain, I think what they’re really saying is they would like to connect things digitally,” he said. “I don’t think blockchain is a mature enough technology yet to carry that – I would want to be a little bit cautious around some of the hype.”
Lanng’s concern is that, though the technology has the potential and the supply chain can be disrupted, both of them are a lot further away from each other than is currently conceived.
We have seen multiple problems with blockchain technology when it comes to scaling. For the global supply chain to run on blockchain, there needs to be a viable and complete scaling solution, as this level of supply-chain management would require thousands of transactions per second. Additionally, the costs for transactions can also change substantially depending on blockchain’s congestion. So, if not scaled correctly, the cost of this sort of supply chain management could become quite expensive.
"When you run a global supply chain, you have thousands of transactions per second. So, I think for identity, for certifications and stuff like that, blockchain is useful,” Lanng added. “For the main transactional scenarios, however, it’s not ready yet. It’s too expensive and it’s very complicated to build and scale.”
“When you run a global supply chain, you have thousands of transactions per second. So, I think for identity, for certifications and stuff like that, blockchain is useful. For the main transactional scenarios, however, it’s not ready yet. It’s too expensive and it’s very complicated to build and scale”
Lanng pointed to Ethereum as an example. It can handle around seven transactions per second, which is slower even than a dial-up connection, but it’s also a blockchain that is in the middle of trying to address its scaling issue.
Not a Global Solution
Blockchain is not sufficiently scaled as it stands to shift the entire global supply chain network onto it, but that does not mean it is a no-go for smaller projects. There are hundreds of companies, such as VinX, which are starting at the bottom when it comes to supply chain solutions and giving a lot of useful insight into how the two can meld. It will still be a long time coming, though.
Many already believe that supply chain is destined for blockchain and, because it can be overlayed so easily, those same people are questioning why it has not already been done.
The technology may be perfectly suited, but it is still far too small for the demands of an industry that, globally, relies on an estimated 60 million people to function. While blockchain may be able to do the work of middlemen, it is not quite ready yet to take on the work of 60 million of them.
Between the development of blockchain and the increasing capabilities of the Internet of Things, there is a lot of scope for supply chains across the world to be made more efficient. The uniform, immutable ledger that is blockchain coupled with the avalanche of data the IoT will give companies to work with, will lead to improvement across supply chain processes.
This could be another area in which blockchain benefits the environment. A lot has been made about the technology’s energy usage but, if it can improve global processes, it could end up being a benefit rather than another contributor. If it can lead to companies using less water and energy in their supply chains, through improvements to efficiency, that’s another win for blockchain.
Illustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]
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