How Blockchain Will be Crucial for the Supply Chain Industry and its Ecosystem
Today’s supply chain networks are immensely complicated with a multitude of vendors, logistics providers, warehouses, retailers, financial institutions, insurers etc., often operating across multiple geographies
Historically, conversations on Blockchain focused on their application in the financial domain, primarily centred on cryptocurrencies. Recently though, organizations have started recognizing the potential of Blockchain’s system of Decentralized Ledger Technology (DLT) in other fields. Solutions based on this DLT would significantly improve how organizations operate, regardless of the field they are present in.
Today’s supply chain networks are immensely complicated with a multitude of vendors, logistics providers, warehouses, retailers, financial institutions, insurers etc., often operating across multiple geographies. This makes the task of monitoring and auditing these ecosystems incredibly complex and prone to ‘moral hazards’ such as product duplicates, fraud, theft, and pilferage. The process is also cumbersome and time consuming. In most situations, consignments are held up due to lack of appropriate clearances, which leads to monetary losses.
What Makes Blockchain Ideal for Supply Chain Use Cases?
- Decentralization: By design DLTs have no central or single point of ownership. This makes them resilient to error based faults in the system or attempts at hacking the network. Decentralization also enables simpler and faster reconciliation among multiple ‘actors’ in the network.
- Immutability: Blocks are designed to be ‘internally consistent’ i.e. the data contained in a block should match the hash of the block. This means that no updates can be made to the block once a transaction is entered into the Blockchain. Since the same set of data is available to all parties, changes would also have to be made in all nodes, which is computationally prohibitive.
- Security: All transactions in public Blockchain are authenticated via a Consensus Mechanism. Permissioned or private Blockchain networks have their transactions verified through authenticated nodes. These systems ensure the authenticity of data being stored in the blocks.
These features in a Blockchain network lead to:
- Fewer disputes among network participants due to higher transparency
- Reduced dependence on standalone legacy systems, bringing down overall cost
- Eliminating manual processes involved in integrating multiple systems
Potential Uses in Supply Chain
- Product Traceability and Provenance
- Products move from the manufacturer to the end-consumer through various stakeholders over several days. This makes monitoring product quality, safety and security a crucial aspect
- With multiple stakeholders involved, data silos are created with no reliable information available to all the stakeholders and regulators
- Blockchain can help by documenting events in the supply chain as transactions e.g. temperature excursions, handover status, location, quality checks etc. This information would be available to all authorized stakeholder in real-time for improved visibility into the supply chain
- Managing Documentation and Approval Processes
- Most of the processes in existing supply chain ecosystem are manual and paper based. This leads to lack of traceability, tamper and error prone processes, and multiple stages of validation that increase the overall time and costs
- Blockchain could help digitize this paper driven process. By sharing data with relevant parties for approval in a timely manner, Blockchain delivers an immutable distributed ledger, that improves the efficiency of the entire supply chain process
- Increasing Ease of Financial Transactions
- Traditionally there have been significant delays in order processing and confirmation that hinder payment to vendors. This causes a ripple effect across the entire supply chain
- By creating mutually agreed upon ‘smart contracts’, various parties to the agreement can decide when an automated payment can be triggered, without any manual intervention required. This can be enforced on the basis of quality acceptance criteria, on-time performance or other SLAs/KPIs
Limitations to Blockchain-based Solutions
Any system that has a large number of participants needs to consider multiple factors including latency, diverse transactions, volume of data, security etc. At present, Blockchain technology still faces certain limitations in these regards.
Bitcoin currently processes about 5 transactions per second; Ethereum averages 10-15 transactions per second. In a stark contrast, Visa currently handles around 1,700 transactions per second. Any global supply chain implementation would naturally involve a significantly high volume of transactions. Blockchain currently is not equipped to handle processing such a high number of transactions.
There are also limitations to the block size of a transaction in a public Blockchain (it can be higher in permissioned Blockchain), which restricts the amount and type of data that can be stored on the network. This makes storage of documents such as purchase orders, certificates, necessary approvals, bill of lading etc. a challenge with the existing technology.
Despite these issues, Blockchain, which is still in its growing stages, provides a promising solution for the future. It is expected to have a huge impact on the supply chain system in the coming years, and will find widespread adoption across all key players in the industry.
Authored by Vignesh Radhakrishnan, Data Scientist-Applications and Data Services Practice, Sasken Technologies Limited
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