Blockchain is a digital ledger technology invented for use in cryptocurrency networks. Anonymous participants conduct encrypted transactions on these networks using a predefined protocol. Users anywhere in the globe can transfer digital property without a contract or discussion with a third party thanks to the distributed system of blockchain ledger technology. One of the newest uses for this technology is the usage of blockchain in the supply chain.
How does Blockchain technology work?
A network of computers (nodes) and a digital ledger are the two primary elements of blockchain technology. Each node has a copy of the digital ledger that is continually updated based on transactions. In blockchain technology, the transaction between any two users goes into this decentralized digital ledger. All transactions in blockchain technology are transparent, which means that each node in the blockchain network receives information about each transaction and is updated accordingly.
Suppose person A in the following blockchain network wants to transfer 10 coins to person B.
Each node in the blockchain network maintains a digital ledger listing all transactions made on that network.
When A sends some coin to B, it creates a new block (or entry) in the digital ledger. The updated ledger copy is then propagated across the network, which raises two questions:
How can you be sure that a rogue node won’t tamper with the ledger?
How can a node be sure that a ledger update it receives from a neighboring node is authentic and not injected by a hacker?
A public and private key pair is used by blockchain technology to answer the two issues raised above. When person A performs a transaction, which is essentially in the form of an update to the ledger, person A encrypts the transaction with her unique and secret private key. In essence, this serves as the transaction’s digital signature. If any node tries to modify the transaction data, such as the transaction amount or recipient name, it tampers with the digital signature. This means that no node can alter a transaction without destroying its digital signature, thus voiding the transaction.
The second question is addressed when each node has a public key of all other nodes. A node verifies a ledger update message it receives from another node using the associated public key of the initiating node. If the ledger has not been tampered with, the verification succeeds and the node updates its copy of the ledger. In this way, a transaction is propagated through the blockchain network and becomes part of the ledger stored on each node of the network.
Why Do Supply Chains Need Blockchain Technology?
Some of the explanations for why the supply chain needs blockchain technology are as follows:
The increasing complexity of supply chains
Supply chains in the past were linear and had only a few parts. Today’s supply chains are incredibly complex and often non-sequential. Modern supply chains are multi-tiered systems with a large number of suppliers, manufacturers, logistics partners, warehousing partners, and. When the system becomes very complicated, it is difficult to carry out efficient and transparent operations. Supply chains need technology that is inherently transparent, distributed, and immutable—blockchain technology offers all of these features.
Increase in illegal practices and counterfeit products
One of the biggest challenges in a supply chain is ensuring the legality of raw materials and parts. When a supply chain spans multiple geographies and includes hundreds of partners, it is challenging to track every process. For instance, it might be challenging to determine whether a supplier obtains raw materials through unethical practices. Another challenge is knowing if the products are fake or real. Without a system to trace each product back to its root, counterfeit products can enter the supply chain. As a result, supply chains need technology that allows networks to trace each product back to its source. One of the main features of blockchain ledger technology is its traceability.
What are the benefits of adopting a smart supply chain?
As part of the adoption of blockchain technology, organizations need to digitize their supply chain operations. This opens up new possibilities in the use of artificial intelligence (AI) solutions and Machine Learning (ML). These technologies create smarter supply chains with many benefits:
Supply Chain Optimization
With smart supply chains, it’s easy to identify obstacles. From the warehouse to the production floor, these technologies optimize supply chain transactions and inventory.
Better timing
Better supply chain logistics synchronization is made possible by AI and ML. They help coordinate logistics activities between geographic locations and various modes of transportation.
Data unification
Organizations are able to synchronize all of their data, even data that is spread in various forms, using blockchain technology and intelligent supply chains. Intelligent supply chains enable organizations to make data-driven decisions and improve supplier collaborations.
What are Blockchain applications in supply chain networks?
Blockchain technology guarantees transparent, traceable and tamper-proof transactions. A high number of transactions take place between hundreds of different participants in contemporary supply chains. From financial transactions to product monitoring, blockchain technology offers a wide range of uses for supply chains. Its very nature naturally meets the requirements of supply chain networks.
Product Tracing to the Root
Most supply chains start with raw materials and end with finished goods. Blockchain technology tracks the journey of a product from the suppliers of raw materials to the customers. Take, for example, canned tuna. Suppose a supermarket finds a quality problem with its canned tuna. They will immediately contact their suppliers and the supplier, in turn, will contact the manufacturer. If the manufacturer sources tuna from multiple suppliers and processes it in multiple factories, it may be difficult for the manufacturer to identify the exact location of the damaged products.
Blockchain technology solves this problem by ensuring traceability. The maker of the canned tuna can identify the exact cargo ship it came from thanks to blockchain technology. The blockchain records every step of the product’s journey through the supply chain as a transaction. It is immutable and transparent. This is how blockchain helps ensure product traceability, which will minimize withdrawals and lost revenue.
Payments through cryptocurrencies
Although it hasn’t been extensively implemented yet, blockchain technology may be used to control the money flow in the supply chain. Some companies have started to adopt blockchain-based technologies like bitcoin for financial exchanges. The blockchain-based financial flow is easy to trace, transparent, and does not need a central authority to monitor.
Management of contracts between participants
Supply chain partners can carry out smart contracts using blockchain technology. Thousands of contracts and hundreds of partners are involved in complex supply networks. Each of these contracts may be included in a blockchain transaction as a block. Due to the immutable nature of blockchain transactions, each of these contracts remains tamper-proof: neither party can rewrite or alter the contract.
Preserve the flow of information immutable
A lot of information moves from one player in huge supply chains to another. This could be the product specification from the manufacturer to the supplier of the part or the quality specifications. In some cases, multiple partners misplace or misinterpret this information, especially if it is based on paper. Even with the flow of digital information, data can still get lost in emails or messages. Adding each information exchange between the partners as a block can solve this problem by increasing the transparency and traceability of the information exchanged between the partners.
What advantages does blockchain technology provide for supply chains?
Transparency
Every member on a blockchain can see every transaction. Transactions among two parties, such as a manufacturer and a retailer, may not be visible to a third party in typical supply chains. Each transaction in the supply chain is combined into an immutable, tamper-proof block using blockchain technology. All participants in the supply chain may see each transaction. Supply chains are more open with blockchain technology.
Detection of Execution Errors
For supply chain networks with hundreds of stakeholders and thousands of transactions every day, there is a high probability of execution errors. These errors can include missing shipments, inventory data errors, and payment issues. With traditional supply chains, it’s hard to catch these execution errors in real time. A lot of scrutiny and document analysis may be required to verify the root cause of the error. Runtime errors may only surface after a routine audit.
Blockchain technology records each transaction immutably. An execution issue may be quickly identified and resolved with a blockchain-based supply chain, saving businesses a tonne of time and money.
Increased security
Blockchain transactions are tamper-proof because they are encrypted using the user’s private key (or digital signature) that begins the transaction. Each partner in supply chains with several partners has its own digital signature. When a transaction, such as a purchase order, is initiated, it is secured with the user’s digital signature. The transaction is unchangeable, and the person receiving it, such a supplier, may confirm that the purchase order originated from a legitimate consumer. Since each transaction in a supply chain is added as a block on the blockchain, its will be impossible to fake a transaction. Blockchain leaves a tamper-proof, reliable, and sequential audit trail of transactions.
Improved speed and responsiveness
Blockchain technology streamlines supply chain operations. Digitize manual or paper processes. With streamlined, real-time data transfer between all supply chain participants, blockchain technology enables high-speed operations that are highly responsive to changing business conditions. With blockchain, all contracts and transactions are saved on the tamper-proof blockchain. This means that the business logic is embedded in the supply chain network and not in obscure offline documents.
What are the technical challenges when using Blockchain in the supply chain?
There are some technical challenges to blockchain technology:
Handling large data sets
In traditional blockchain applications, such as cryptocurrencies, there is a limited amount of data. It is easy to validate this data while conducting blockchain transactions. Complex supply chains have thousands of transactions and a high volume of data. To adapt blockchain to supply chains, it is essential to accurately optimize this huge amount of data.
Transaction volume management
Compared to supply chain transactions, the number of transactions per second in typical cryptocurrency applications is rather low.To fully digitize complex supply chains, high computing power is required. The speed of the blockchain-based supply chain transaction may be limited by the calculation speed of the blockchain network.
Blockchain technology standardization
Due to its currency, blockchain standards are not widely used in supply chains. Blockchain technology providers need to standardize their solutions so that multiple companies can easily adapt them. Some of these standards include a definition of how two parties can agree on a block before validating it, which encryption method to use, or how to resolve transaction disputes.
interoperability
Traditional enterprise resource planning (ERP) systems are used by many businesses to handle their transactions. It could be difficult to totally replace a system before implementing the blockchain-based solution, or to modify these systems to incorporate blockchain technology. Some level of interoperability between legacy systems and the blockchain-based solution is essential.
Build trust
Complex supply networks involve thousands of interactions and hundreds of partners. The adoption of blockchain technology means that each of these partners agrees to transact over a blockchain-based network. Certain partners may be intimidated by the transparency and immutability of blockchain networks. A lack of knowledge about encryption mechanisms and other technical details could also raise doubts about the platform. Earning the trust of all partners is an essential but challenging task for companies that want to adopt blockchain technology.
Ensure data quality
Supply chains perform hundreds of operations and handle huge amounts of data, so there is a high probability that bad data will enter the system. With traditional ERP systems, it can be easier to roll back transactions with bad data. Since blockchain transactions are immutable, it will be difficult to correct data errors. Organizations wishing to adopt blockchain technology must ensure data quality. Also, correcting bad data in blockchain-based supply chains can be more expensive than traditional systems.
Choosing the right blockchain technology
There are two main varieties of blockchain technology: permissionless and permissioned. Traditional Bitcoin networks use permissionless ledgers, where every transaction is public and there is no central authority. Most supply chain use cases may not be able to use the model
without permission. Licensed technology has a central government authority that approves transactions.
Organizations must choose which blockchain technology to employ and how much of it, whether they want to entirely replace their present technology or maintain certain old systems. These are the important choices that businesses must make if they intend to utilize blockchain technology.
What are the technical challenges when using Blockchain in the supply chain?
There are some technical challenges to blockchain technology:
Handling large data sets
In traditional blockchain applications, such as cryptocurrencies, there is a limited amount of data. It is easy to validate this data while conducting blockchain transactions. Complex supply chains have thousands of transactions and a high volume of data. To adapt blockchain to supply chains, it is essential to accurately optimize this huge amount of data.
Transaction Volume Management
Compared to supply chain transactions, the number of transactions per second in typical cryptocurrency applications is rather low.To fully digitize complex supply chains, high computing power is required. The speed of the blockchain-based supply chain transaction may be limited by the calculation speed of the blockchain network.
Blockchain Technology Standardization
Due to its currency, blockchain standards are not widely used in supply chains. Blockchain technology providers need to standardize their solutions so that multiple companies can easily adapt them. Some of these standards include a definition of how two parties can agree on a block before validating it, which encryption method to use, or how to resolve transaction disputes.
Traditional enterprise resource planning (ERP) systems are used by many businesses to handle their transactions. It could be difficult to totally replace a system before implementing the blockchain-based solution, or to modify these systems to incorporate blockchain technology.Some level of interoperability between legacy systems and the blockchain-based solution is essential.
How can organizations prepare to adopt Blockchain in the supply chain?
There are various ways that businesses may become ready to utilize blockchain technology:
Build trust
Thousands of transactions and hundreds of partners are involved in complex supply chains. Adopting blockchain technology means that each of these partners agrees to transact over a blockchain-based network. Certain partners may be intimidated by the transparency and immutability of blockchain networks. A lack of knowledge about encryption mechanisms and other technical details could also raise doubts about the platform. Earning the trust of all partners is an essential but challenging task for companies that want to adopt blockchain technology.
Ensure data Quality
Supply chains perform hundreds of operations and handle huge amounts of data, so there is a high probability that bad data will enter the system. With traditional ERP systems, it can be easier to roll back transactions with bad data. Since blockchain transactions are immutable, it will be difficult to correct data errors. Organizations wishing to adopt blockchain technology must ensure data quality. Also, correcting bad data in blockchain-based supply chains can be more expensive than traditional systems.
Choosing the Right Blockchain Technology
There are two main varieties of blockchain technology: permissionless and permissioned. Traditional cryptocurrency networks employ permissionless ledgers, in which every transaction is visible to the public and there is no one controlling party. Most supply chain use cases may not be able to use the model without permission. Licensed technology has a central government authority that approves transactions.
Organizations must choose which blockchain technology to employ and how much of it, whether they want to entirely replace their present technology or maintain certain old systems. These are the important choices that businesses must make if they intend to utilize blockchain technology.
In conclusion,
The application of blockchain technology in the supply chain offers significant advantages in terms of security and visibility. By utilizing a decentralized and immutable ledger, blockchain enhances the integrity and transparency of supply chain data, reducing the risks of fraud, counterfeiting, and unauthorized modifications.
