By Gaurav Malhotra
The financial implications of blockchain technology are on the radar of corporations and executives in 2018 because of its role as the infrastructure supporting popular cryptocurrencies such as Bitcoin and Ether. However, the technology’s potential to transform the supply chain is less commonly known — and logistics and operations executives should take note.
In its most basic form, blockchain technology is a shared ledger comprising a single chain of code. As new data is added to the chain, a new linked “block” is added to the code, tracking each change over time. The code contains groups of transactions and broadcasts all data detailing the transactions to all participants in the blockchain network. The structure of blockchain technology provides solutions to age-old supply chain challenges related to trust, proof of transactions and digital uniqueness. Blockchain technology provides transactional transparency across the network’s participants and incorporates a robust encryption protocol and architecture to ensure data security.
Blockchain technology allows multi-enterprise ecosystems to work together as one in a supply chain network. The technology enables collaboration, encourages trusts across stakeholders and creates secure networks to streamline the web of enterprises executing the supply chain.
It’s important to explore the long-term potential of the blockchain — global supply chains thrive on innovations in business models and technology stacks in order to drive growth and reduce costs. Creating digital copies of assets and inventory generates significant impact on driving transparency and automation across a supply chain network. A “token” value can be assigned to any asset or inventory in a supply chain and use locations as asset ownerships to drive seamless and transparent business transactions.
For example, the core principles of bitcoin can be applied to the supply chain to create secure, private networks for physical assets. If a physical asset can be represented as a digital token, a blockchain can manage or track the asset. If a physical asset can be assigned a value, financial services can be delivered around the asset. Additionally, contracts can be built across entities, mixing assets and financial services to incorporate inventory, assets, locations and money into a singular blockchain.
It is possible to represent entire complex business and operational networks in a blockchain. Blockchains force reconciliation across the network, preventing the disappearance or double counting of assets. Using tokenization on a blockchain means inventory moving between locations is handled with the same precision as bank transfers.
A cluttered landscape
The high volume of chatter surrounding blockchain has led to real-world application scenarios and pilots that are not well defined or could be otherwise solved by traditional IT technologies. Like any new technology solution, there are unique hurdles associated with blockchain implementation that organizations need to address.
A successful implementation of a blockchain network across a multi-enterprise network requires commitment from all participants of the network. In a supply chain, suppliers, vendors and contract manufacturers must be collectively incentivized to participate in a network and drive the promised value of the blockchain. Finding a mutually agreeable value proposition for all parties continues to be a pressure point when implementing blockchain networks in a supply chain.
As is often the case with any emerging technology, there are several hindrances around scalability and performance. The majority of the current blockchain implementations are on private or consortium based blockchains. As the technology matures, executives should expect to see several of these implementations on public blockchain networks. There is still time for the technology to mature enough for supply chain executives to place complete, production-grade business processes on the blockchain networks.
The current trend in supply chain use cases has focused on logistics and asset tracking. However, the landscape is shifting to show more supply chain finance and procurement based usage, too. Executives should think critically about the future of blockchain and how it can be optimized to meet the specific needs of an individual supply chain.
Shifting to singularity
In the future, blockchains are expected to shift from private to public networks. The current web of private blockchains is unsustainable as large companies seek to build overlapping, parallel networks. It is unreasonable to expect suppliers, vendors and customers to participate in multiple private and consortium-based blockchains.
For example, a supplier would need to join the blockchain of their logistics provider network, a separate blockchain to manage insurance automation and yet another blockchain to automate the procure-to-pay process that links the supplier to the blockchain of bank and payment gateway providers. This scenario, which includes several point-to-point blockchains, inefficiently leaves suppliers overwhelmed and unwilling to participate in a blockchain network.
The future of blockchain lies within a more sustainable approach. By transitioning to a small number of regional or sector-specific public blockchain networks, logistics and operations participants will only need to be part of one blockchain network and effectively streamline supply chain operations.
Gaurav Malhotra is a principal with Ernst & Young LLP. He can be reached at firstname.lastname@example.org.