Why blockchain record-keeping is crucial in supply chain management

Blockchain can enhance trust, efficiency and speed.

Blockchain allows a limited number of known parties to protect their business operations against malicious actors while supporting better performance

Blockchain holds great promise in supply chain management. It can greatly improve supply chains by enabling faster and more cost-efficient delivery, enhancing products’ traceability, improving co-ordination between partners and aiding access to financing.

A blockchain is a distributed, or decentralised, ledger — a digital system for recording transactions among multiple parties in a verifiable, tamper-proof way. For cryptocurrency networks that are designed to replace fiat currencies, the main function of blockchain is to enable an unlimited number of anonymous parties to transact privately and securely with one another, without a central intermediary. For supply chains, it is to allow a limited number of known parties to protect their business operations against malicious actors while supporting better performance. Successful blockchain applications for supply chains will require new permissioned blockchains, new standards for representing transactions on a block and new rules to govern the system.

Led by companies such as Procter & Gamble, considerable advancement in supply chain information sharing has taken place since the 1990s, thanks to the use of enterprise resource planning systems. However, visibility remains a challenge in large supply chains involving complex transactions. Adding to the challenge, execution errors are often impossible to detect in real time. Even when a problem is discovered after the fact, it is difficult and expensive to pinpoint its source or fix it by tracing the sequence of recorded activities.

One common approach to improving supply chain execution is to verify transactions through audits. Another way would be to mark inventory with radio frequency identification tags or electronic product codes that adhere to GS1 standards (globally accepted rules for handling supply chain data), and then to integrate a company’s ERP systems with those of its suppliers to construct a complete record of transactions. However, integrating ERP systems is expensive and time-consuming.

When blockchain record-keeping is used, assets such as units of inventory, orders, loans and bills of lading are given unique identifiers that serve as digital tokens (similar to bitcoins). Additionally, participants in the blockchain are given unique identifiers, or digital signatures, which they use to sign the blocks they add to the blockchain. Every step of the transaction is recorded on the blockchain as a transfer of the corresponding token from one participant to another.

A blockchain is valuable partly because it comprises a chronological string of blocks integrating all three types of flows (information flows, inventory flows and financial flows) in the transaction, and captures details that aren’t recorded in a financial ledger system. Moreover, each block is encrypted and distributed to all participants, who maintain their own copies.

Let’s look at how companies are applying blockchain:

The US Drug Supply Chain Security Act of 2013 requires pharmaceutical companies to identify and trace prescription drugs to protect consumers from counterfeit, stolen or harmful products. Driven by that mandate, a large pharmaceutical company in our study is collaborating with its supply chain partners to use blockchain. Drug inventory is tagged with electronic product codes that adhere to GS1 standards. As each unit of inventory flows from one firm to another, its tag is scanned and recorded on the blockchain, creating a history of each item all the way through the supply chain — from its source to the end consumer. This kind of application requires minimal sharing of information and the benefits are clear. If a company discovers a faulty product, the blockchain enables the firm and its supply chain partners to trace the product and take action. Emerson, a multinational manufacturing and engineering company, has a complex supply chain that has to contend with long, unpredictable lead times and lack of visibility. As a result, a small delay or disruption in any part of the chain can lead to excess inventory and stock-outs.

A practical solution is for participating companies to share their inventory flows on a blockchain and allow each company to make its own decisions, using common, complete information. Companies would use a kanban system to place orders and manage production. Kanban cards would be assigned to the produced items, and the blockchain would record digital tokens representing the kanban cards. This would enhance the visibility of inventory flows across companies and make lead times more predictable.

Supply chains require private blockchains among known parties, not open blockchains among anonymous users. So that members of a supply chain can ascertain the source and quality of their inventory, each unit of it must be firmly coupled with the identity of its particular owner at every step.

Blockchain requires a consensus protocol — some mechanism for maintaining a single version of the history of transactions. Since cryptocurrency networks are peer-to-peer without a central authority, they use a complex method called proof of work. It ensures all transactions on the network are accepted by most participants but, unfortunately, it also limits the speed at which new blocks can be added.

Fortunately, if a blockchain is permissioned and private, simpler methods can be used to determine who has the right to add the next block. One method is a round-robin protocol, where the right to add a block rotates among the participants in a fixed order.

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Vishal Gaur works at Cornell, Abhinav Gaiha at Google.
Copyright Harvard Business Review 2020/Distributed by New York Times Syndicate