Blockchain

Why Supply Chains Need Blockchain

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In early 2013, a number of grocery stores in the UK were hit with a major incident when horse meat was found in beef burgers.

To compound the problem, many of the grocery chains could not instantly point to the exact source, but had to launch lengthy investigations to track back through processing plants and back to farms. This led to increased bad publicity and a very public loss of confidence by the British public.

Mapping supply chains in this era of mass global consumption is not an easy task. Complex networks are required to meet ever-growing price compression and to ensure enough supply to meet the often erratic demand curves that retailers face. However, consumers are increasingly demanding for transparency in the sourcing of products and retailers that can build trust in this respect can build competitive advantage.

So why can’t retailers and their suppliers just build a central database with a record of all transactions? Isn’t it that easy? Beyond the question of scalability and network performance of this central database is the issue of permission: suppliers may have certain pieces of information they want to withhold, such as how much they are paying for a certain raw material. Also, a retailer may not want its competition to know that it has found a great supplier in a new region.

This is exactly the situation where blockchain offers huge potential.

Blockchain offers the solution for a shared ledger recording all transactions, with trust and transparency built in. Every record is permission-based, so you can restrict who sees what information. So in the case of the UK horse meat incident, grocers would know the source of the contamination, but wouldn’t need to see any other extraneous information, like the amount paid to a midstream supplier.

So how do blockchains work for supply chains? The principles are the same as those you will find in the wild where ants use pheromones to pass information along a chain, as you’ll see in this unique, informative video:

As you’ll notice, bad actors are quickly identified and information about a threat or contaminant  passed along a trusted network helps lead to rapid resolution of problems.

As Kathryn Harrison from IBM’s Blockchain team points out,

“You can see why the concept of a shared, immutable ledger would be important for business. But something else is crucial: business blockchains are permissioned networks with known identities of all parties. This means you and I not only know each other as entities, we can also know all others in our network and are granted permission to transact with each other. In this way, full transparency and trust can replace many of the friction points in business today.”

Walmart and other major grocers are now making moves in this direction, by creating an alliance, which interestingly does include a number of businesses that do have a competitive relationship. What unites these organizations is the pressure to be able to quickly respond to issues such as product recalls and offer the degree of traceability that provides confidence to the market, especially during a time of crisis.

Right now, it is the more consumer-focused applications of blockchain, like cryptocurrencies and Bitcoin, steal a lot of the media limelight. However, the application of blockchain technology to fix problems like transparency in complex supply chains can create huge value for society and keeps businesses from being in the media for the wrong reasons.

Related:

See how IBM is using blockchain with its clients to build trust in supply chains

Lecturer, Management Information Systems, San Jose State University, College of Business.

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