Blockchain’s distributed ledger technology simplifies supply chain processes

Blockchain, the technology behind cryptocurrencies, is beginning to streamline the paperwork-burdened supply chain. By digitally tracking every transaction in a form that, in theory, cannot be forged or altered, blockchain could eliminate the supply chain’s need for every financial trust system ever established, from banks to corporate accounting departments.

Li & Fung, a Hong Kong-based supply chain manager for a number of global brands, tracks the interactions among thousands of suppliers and customers, generating an enormous paperwork burden. But in 2017, Li & Fung experimented with tracking the intricate choreography of customer orders as they moved through the supply chain with a new technology that dramatically improved visibility and reduced the time and effort required: blockchain.

Blockchain is a database distributed over the computers of all of its members or supply chain participants, so the ledger grows stronger as its user-base grows. When iron ore, an ear of corn or a t-shirt is traded between companies that participate in a blockchain, the system records it.

Each transaction creates a unique numerical identifier, which is recorded in encrypted form in a data block. When the next transaction involving that product happens, such as the item being shipped, the data is entered into another block. That block is chained to the first data block. Hence, blockchain.

The distributed computer ledger technology records detailed supply chain information, securely and permanently. For example, it can verify whether a participating supplier in China has enough purple fabric in stock to fulfill an order for soccer team shirts, record when the order is dispatched to the sewing factory and automatically confirm that the shirts have shipped.

Blockchain enthusiasts say that the technology will irrevocably change the way people and companies move goods and money. It has the potential to disrupt many industries where ensuring the trustworthiness of the various parties is critical, including financial services, trade finance, purchasing systems, manufacturing, utility billing, government registries – and supply chains.

International Data Corporation, a global market intelligence firm, estimates that spending on blockchain software will reach US$2.1 billion (€1.79 billion) in 2018, rising at a compound annual rate of 81% and hitting US$9 (€7.79 billion) in 2021.

“BLOCKCHAIN ALLOWS YOU TO AUTOMATE WORKFLOWS ACROSS COMPANY BOUNDARIES WITH YOUR SUPPLIERS AND CUSTOMERS.”

SHAWN MUMA BLOCKCHAIN RESEARCH LEADER, DIGITAL SUPPLY CHAIN INSTITUTE

“Unlike customer relations management software that sits on a company’s own computers, blockchain allows you to automate workflows across company boundaries with your suppliers and customers,” said Shawn Muma, who leads blockchain research at the Digital Supply Chain Institute. The institute is part of the Center for Global Enterprise in New York, and arranged the pilot study at Li & Fung. “As we move forward, you will see that the supply chain is the biggest and best application of blockchain technology.”

A LEDGER NO ONE CONTROLS

Blockchain technology was the brainchild of Satoshi Nakamoto, the pseudonym of the unknown tech genius who invented the cryptocurrency bitcoin. While bitcoin itself has been mired in controversy, businesses realized that the underlying technology might be an ingenious way to track global movements of goods and real-world currencies.

“BLOCKCHAIN ALLOWS FOR MULTIPLE BUSINESS ORGANIZATIONS TO SHARE DATA IN A WAY THAT IS SAFE, SECURE AND IMMUTABLE.”

DAVID DALTO PARTNER FOR STRATEGY AND OPERATIONS, DELOITTE

To read the encrypted data, users need a translator called a hashkey. In theory, the data can’t be altered because it’s replicated on each participant’s computer system; a change on one system would be immediately apparent on the others. And because the ledger is protected by advanced cryptography, it’s difficult to hack.

By eliminating the trust issues that gave rise to banks, brokerages and accounting departments in the first place, experts say blockchain has the potential to make all of them obsolete.

“In today’s world, most businesses have lots of data and have to spend a lot of time reconciling that data with other organizations,” said David Dalton, a partner for strategy and operations at business consultants Deloitte in Dublin. “Blockchain allows for multiple business organizations to share data in a way that is safe, secure and immutable.”

TRACKING GLOBAL SHIPMENTS

In fact, blockchain is so well suited to supply chain issues that A.P. Moller-Maersk, the world’s largest shipping firm, set up a blockchain joint venture with IBM to track containers as they move through ports and customs worldwide in the US$7 trillion (€6.06 trillion) annual global shipping trade. Walmart, America’s largest brick-and-mortar retailer, has established a blockchain to track food items from its thousands of suppliers, allowing it to resolve questions about the origin of food products in a matter of seconds.

Not surprisingly, financial services companies are watching blockchain’s development warily, because they see it as a possible disruptor of their role as trusted middlemen in transactions. For example, when a company receives an invoice from an overseas supplier, the purchasing department must order a bank to send payment in foreign currency. Blockchain can be set up to automatically make the payment when a certain transaction takes place, such as when items are received at customs.

Despite the threat of disruption, financial firms are the biggest investors in blockchain development, seeing it mainly as a way to streamline their back-office paperwork, said William Mougayar, a Toronto-based entrepreneur who recently published a book entitled The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology.

“The killer app of blockchain is moving financial assets,” Mougayar said.

WILL ACCOUNTANTS BECOME EXTINCT?

Blockchain now comes in several different implementations, including Bitcoin Ethereum and the open-source Hyper-ledger, which is being adopted by a number of businesses for private use. Bitcoin is a public blockchain, but most businesses probably will want to use a private blockchain that carefully polices data access, said Rob Handfield, professor of supply chain management at North Carolina State University in Raleigh.

Handfield said that blockchain can replace today’s inefficient system of procurement and payment based on purchase orders, invoices and payments for products and services.

“BLOCKCHAIN ESSENTIALLY CREATES TRUSTED PEOPLE IN THE NETWORK. THERE’S VISIBILITY TO ALL TRANSACTIONS AND, ANYTIME THERE’S A CHANGE, ANYONE CAN SEE IT.”

ROB HANDFIELD PROFESSOR OF SUPPLY CHAIN MANAGEMENT, NOTH CAROLINA STATE UNIVERSITY

Making payments even easier, blockchain makes possible so-called smart contracts. For example, a shipper sends a spare part from China to a factory in the United States. Instead of submitting an invoice, a smart contract automatically pays the supplier when the blockchain records receipt of the part.

“If you have Walmart and Best Buy stores and both are buying from the same set of suppliers, they all can use a common blockchain that allows participation by Sony and Apple and other manufacturers,” Handfield said. Each participant, he said, can specify who has access to what information.

Almost every day brings a potential new use for blockchain, including activities as diverse as tamper-proof voting or collecting airline loyalty points. As with the World Wide Web a decade ago, a Darwinian-process of survival is likely to produce winners, losers and applications for the technology that haven’t been imagined yet.

Until then, blockchain will track a myriad of complex transactions, allowing companies to reduce their paperwork, make payments and streamline in-house departments such as purchasing and supply chain management. Pretty impressive, especially when it can also provide proof that your crucial shipment from China left the dock on time.

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von Charles Wallace

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