A supply chain is the path that transmits goods and services from the producer to the consumer and, in the opposite direction, transmits money from the consumer to the producer.
Supply chains might seem simple, such as a potato farmer selling directly to customers at the local market. They can also be obviously complex such as Apple contracting other firms to collect raw materials and building different parts of a phone, which it then assembles and distributes to retail stores.
However, even the seemingly simple supply chains turn out to be complex when examined carefully, as it is often hard to tell where a supply chain begins.
For example, the farmer selling potatoes from their farm to the consumers at the local market has to buy seeds, fertilizer, farm machinery, fuel, construction material, pesticides, herbicides, etc. Each of these items has its own supply chain that links to the supply chain of the potatoes.
This complexity makes global supply chains difficult to track and comprehend, especially for the consumer, and costly to manage for the other stakeholders.
In general, centralized supply chains have:
These three types of frictions happen in both directions; as goods move to the consumer and money moves to the producer. Blockchain supply chain technology offers solutions in both cases.
The blockchain supply chain can improve transparency and traceability as well as significantly reduce the cost of managing supply chain data.
This new technology, in particular, achieves these goals in the following ways:
Each stakeholder in the expansive interconnected networks of supply chains often knows only the immediate party they transact with. Nevertheless, the actions of other organizations can affect them.
In such networks, sharing data and, even more importantly, ascertaining its credibility is often difficult.
The Blockchain offers a common ledger on which all stakeholders and supply chain partners can share and access data. The credibility of the data is secured through the immutability that is an inherent feature of the blockchain.
Meanwhile, each stakeholder can protect their privacy through cryptography, another feature of the blockchain.
The cost that each stakeholder has to incur to be part of the supply chain is always significant. According to a report by the accounting firm Price Waterhouse Coopers (PWC), supply chain and logistic management forms more than 10% of the overall cost for many companies.
That is because each stakeholder in the supply chain has to acquire, maintain and secure their own system and, at the same time, make it interfaceable with those of others.
Often the interface is not automated, mostly because of security concerns. That means many processes are undertaken manually, with a significant amount of paperwork involved.
Blockchain applications offer a system that costs little to the stakeholders beyond creating a wallet or setting up a node. Meanwhile, that system makes automated communication between stakeholders easy, private, and a lot more secure.
In essence, the stakeholders can share the burden of running an efficient system they can all use. In some cases, they can use a system managed by others who are incentivized to keep it running through other mechanisms other than fees.
For example, if businesses choose to use consortium blockchain, the cost to them could be just to run a node at their office. On the other hand, if they use a public blockchain, those running its nodes could be incentivized through mining or staking rewards.
Meanwhile, the responsibility of maintaining the core software becomes a community project.
Stakeholders can gain many direct and indirect benefits by integrating blockchain technology in their supply chain and logistic systems.
The blockchain offers easier, cheaper, and more secure ways to automate processes and systems. In particular, businesses can use smart contracts, a programming mechanism, to do this.
Smart contracts can be more reliable than centralized protocols in particular because they are more difficult to compromise once activated. Nevertheless, they can also be highly scalable and dynamic, especially when launched on third-generation blockchains like the Casper Network.
More importantly, smart contracts help create transparent systems for all stakeholders at every stage. In other words, every stakeholder can easily audit the code that executes and implements a process before, during, and after.
That means stakeholders in a supply chain can agree on all aspects of their engagement and verify everything at every point of the execution.
In addition, the smart contract creates processes and systems that are immutable, meaning stakeholders can trust that once agreed upon or embraced, steps are not going to change mid-way and, as a result, affect them negatively.
Once activated, a smart contract will execute as designed and only stop or change course in a manner predetermined.
Having data accessible amongst all the stakeholders in and of itself is not helpful. The data must be credible. That can be difficult to achieve in a huge network with numerous stakeholders, each free to generate data in the way that is most convenient to them.
The blockchain supply chain can help improve the credibility of shared data through a supply chain.
First, the fact that it is recorded on a shared public ledger helps a lot. Secondly, there is assurance that once it is recorded, the data becomes immutable. Thirdly, every stakeholder understands that others can easily audit their actions on the ledger and determine when they provide the system with the wrong information (or product).
Smart contracts are an element of Distributed Ledger Technology, otherwise known as the blockchain. The other elements include the shared ledger on which data is recorded and oracles networks that feed the smart contracts real-time data that enable them to make specific decisions.
Over time, consumers have become more interested in knowing the origins and the journey products take to reach them — provenance.
The reasons for this interest include wanting to know their carbon print and therefore determine their own contribution to greenhouse gas emissions. Consumers also want to be sure of how ethical the producers and distributors are, especially in regard to labor and raw material use.
In addition, consumers want to be sure of the quality and authenticity of the products and services they pay for. That includes whether they meet specific standards such as those of vegan and organic farming.
As the primary goals of producers and distributors are to cut costs and increase profit margins, they are often likely to sacrifice what is most important to the end consumer. Giving the consumer the ability to trace and track products is a safeguard.
It is also the case that counterfeiters often cheat their way into the supply chain and trick consumers and other stakeholders into believing they are dealing in genuine products. According to various studies, the global market loses over $600 billion annually to counterfeiters.
To a large extent, the counterfeits reach the market because of the lax supply chain systems.
On the blockchain, products can be assigned identities that everyone can easily search, verify and track from the beginning to where they end up. Moreover, the data added by each stakeholder while they handle the product becomes immutable.
The supply chain on the blockchain can easily be scaled with little cost involved and risk to the integrity of the system. In particular, it is quite easy to have producers, suppliers, and distributors from around the world plug into a single system as the blockchain is accessible anywhere as long as there is an internet connection.
In addition, the blockchain can reduce the friction in the opposite movement of money. For example, it is easy for stakeholders to use a single native medium of exchange on the blockchain in the form of a cryptocurrency or a utility token.
The combination of a utility token and smart contract can improve trade financing. Instead of payment taking up to weeks to settle in international trade as several banks have to process the transaction, it can take seconds on the blockchain.
A huge bottleneck to supply chains, especially across international borders, is the need to verify intellectual property (IP) rights. The blockchain cannot only assign identities to products, which then become easy to track and difficult to interfere with but also the IP associated with them.
Casper has accumulated technical know-how to help our clients build supply chains that empower stakeholders to get the most value at the lowest cost. In particular, the capacity comes from highly secure but dynamic smart contracts.
Businesses do not need to build much of the infrastructure. To a large extent, all they need to do is to plugin and start using a service.
Nevertheless, there is room to customize the blockchain solutions to meet their unique needs, and this is achieved through smart contracts they can write using the programming languages and tools already known to them (see also other blockchain use cases and industries currently using blockchain).
Image courtesy of Pixabay.
