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The Future of Supply Chain through Blockchain
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The Future of Supply Chain through Blockchain

 

                In the world of supply chain today, supply chain managers are constantly searching for the next “big idea”.  Many are searching for the next new technology that will take off and shake their supply chain for the better.  New technologies such as 3D printing, augmented reality, big data, Internet of Things (IoT) and many more are being thrown into the mix.  However, one emerging technology that often gets overlooked in regards to supply chain improvement is Blockchain.  When talking about Blockchain, people usually think of Bitcoin and its relation to it.  In the past few years, programmers and supply chain managers are finding ways to apply Blockchain to the supply chain.

                Few outside the technology industry have heard of Blockchain, and even fewer know exactly what it is.  Its roots of existence don’t go far back.  In 2008, in response to the economic downturn, a person by the alias name Satoshi Nakamoto published a paper in which Nakamoto released the programming code for Bitcoin.  The underlying technology that enabled Bitcoin to work was Blockchain.

Bitcoin is a form of online currency.  Its purpose when created by Nakamoto was geared towards eliminating intermediaries and waste that comes from credit card transactions.  As seen in figure 1, whenever a credit card transaction is made, the purchase is not made directly and does not materialize immediately.  During this process is an intermediary such as a bank takes the transaction and validates it.  As can be seen in figure 1, the bank as a result takes a fee and makes money for the value that it adds.  In the case of Bitcoin, there is no intermediary whenever a transaction is made on the digital leger.  Instead, a private key is used between the two parties.  Essentially, for a transaction to be validated on the Blockchain, both parties must confirm the transaction.  The online exchange is then immediately added to the digital leger.

   Figure 1         Figure 2                                                                                                    

                                                           

                What makes Blockchain so amazing is the extremely complex code that makes it incredibly secure.  Powered by a programming technology called Cryptography, the Blockchain is connected by distributed nodes (blocks) that create a digital leger.  This digital leger contains all the transactions within the distributed network and makes it possible to follow the history of the transaction.  In addition to being able to follow the transaction, Cryptography allows Blockchain to work on a distributed network meaning there is no central authority.  In figure 3, we can see the two different types of authorities that exists in databases, companies, and servers.  If an outside source such as a hacker were to attempt to infiltrate a centralized system, all that would be necessary to do it would to get past one node and much of the systems data would be accessible.  However, in the case of Blockchain, a hacker would have to hack all the nodes within the entire distributed system in a matter of seconds in order to gain the desired information.

                    When Blockchain technology first came out, it was often thought of as a technology that would mostly impact the world of finance.  In recent years, companies have began forming with the purpose to apply the new technology to the supply chain.  These companies have seen that Blockchain has the ability to benefit the supply chain through its superior security, enhanced transparency, increased innovation, and finally the opportunity to have unlimited participants in the system.

                To the supply chain world, two new innovations have come forth as a result of Blockchain innovation.  The first innovation being Smart Contracting, and second, the ability to have transparency throughout the whole supply chain.

                Companies such as Etheruem have been working to provide companies Smart Contracts powered through Blockchain technology.  Etheruem created a platform on the Blockchain in which companies can set criteria and negotiation terms for their contracts, and they can self-execute themselves.  They have recently raised over $150 million to experiment with and develop Smart Contracting applications.  Perhaps the most applicable blockchain feature to supply chain, smart contracts are self-executing contractual states, stored on the blockchain, which nobody controls and therefore everyone can trust. With blockchain, not only can no party change the history of the transaction, but no party can bypass the smart contract permissioning logic. So a smart contract enables restrictions to be placed around which accounts can create or update the data.  A recent study by Deloitte showed evidence that Smart Contracting is growing at a rapid rate.  They found that in 2016, first quarter revenues from Smart Contracts were $116 million which was twice as much as the three previous quarters combined.  In addition, five global banks are using Blockchain Smart contracting as a Proof-of-Concept in their finance and supply chain platforms.

                The second Blockchain innovation added to the supply chain is the ability to follow a product throughout the whole supply chain (from raw material to finished good).  Consumers are constantly looking for products in which they can see the origin and how the product was process.  Through Blockchain technology, certifications are made possible throughout the Blockchain creating links between physical and digitals goods.  By certifying different processes within the supply chain, consumers can have totally confidence in the validity of what certified companies are doing.  For example, some consumers are beginning to question the merchandising mark Made in Italy.  In recent years, a few Italian manufacturers have begun to import raw materials and semi-finished goods into the country only to complete a few assembly steps and then add the trademark Made in Italy.  This practice has not only tarnished the brand, but has made it difficult for consumers to know what is and what isn’t authentic.  By having checks and balances throughout the supply chain, consumers can know exactly what they are getting.

                Although Blockchain has been around since 2008, we are just beginning to see the innovations that are being applied to supply chain.  This article has just focused on just a few of the applications that can be applied.  Supply chain managers are continuing to find ways each day to revolutionize their processes to make for more transparency, agile, and efficient supply chains.