September 26, 2016

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Blockchain in supply chain

In the recently published Gartner’s ‘Hype Cycle for Emerging Technologies, 2016’, one of the key technology trends listed is ‘The Platform Revolution’, which is changing the way how platforms are defined and used. It represents a shift from the technical infrastructure to the ecosystem—enabling platforms which form the basis of new digital business models. Blockchain is one of the key platform-enabling technologies that has hit the peak of its hype cycle. Understanding blockchain technology can provide answers to what the hype is all about and what are its implications for supply chains.

Gartner defines blockchain as a "diverse collection" of distributed ledgers based on other foundational technologies. Blockchain ecosystem is basically a decentralized network of distributed and replicated databases. It follows the peer-to-peer model, where each peer has almost all the updated data as opposed to the client-server model, where only the server holds all the data and each client trusts that the data available with the server is correct and conclusive..

 

 

Blockchain ecosystem consists of the business network, where there are multiple participants (peers) involved in transactions across the network (both public and private), and the ledger, which records and shares all the transactions across all the peers of the network. Blockchain is nothing but a simple data structure like a text file, CSV file etc., wherein each block is like a single page of a document containing details of transactions and the information about the block itself such as technical information, information of link to the previous block, and the hash, which is a digital seal so nobody can tamper with the transactions. Any change in content of the block will change the hash.

Blockchain offers a secure way of conducting transactions. Each peer has a copy of the updated ledger and any new transaction will be validated by every peer in the network before getting uploaded in shared ledger. So there is almost zero chance of any fraudulent transactions happening since there is no centralized control unless all the peers collude in forging transactions—which has rare probability. It provides transparency and visibility into the complete chain of transactions as every trusted and authenticated peer in the network can check the transactions. At the same time, it provides confidentiality as the information is encrypted to unauthorized peers. It has the potential to reduce the transaction costs.

Supply chains can potentially benefit from the capabilities offered by blockchain technology. One important use is in supply chain visibility and traceability. The complete trail of goods from the mines to suppliers to manufacturers to the end-consumers can be established, while maintaining the transparency and the reliability of the information. Customers can know more quickly if there is any defective component used in the product delivered to them and companies can trace such products and customers quickly to take proactive actions to avoid any litigation costs. Customers can know whether the final products that are delivered to them were made within the ambit of sustainable and regulatory practices or not. For example, Kimberley Process (KP) is exploring the use of blockchain technology to stem the flow of conflict diamonds in the market though reliable and digital KP certificates, which cannot be tampered with. It is recently piloting a blockchain for tracking the world’s diamonds.

The various supply chain tasks such as the tracking of purchase orders, shipment notifications, receipts, and invoices can be improved by leveraging the blockchain. Supply chain collaboration can be enhanced by sharing information among the supply chain partners about the manufacturing and distribution, planning processes securely and efficiently using blockchain. The management of assets can be made digitally secure without any ownership conflicts by recording the quantity and movement of assets such as inventory and pallets through blockchain.

The other noteworthy application is in implementing smart contracts, which are computer protocols that automatically implement terms of multi-party agreements on completion of certain predefined conditions. Blockchain reduces the risk of error and manipulation. It can reduce or eliminate reliance on third-parties leading to reduced costs. One possible use of smart contracts is in trade finance instruments such as Letter of Credit. Blockchain will advance most quickly in the manufacturing, government, healthcare, and education sectors as predicted by Gartner in the Hype Cycle report

Considering these potential benefits, blockchain can be a game changer for the supply chain. However, Gartner estimates that blockchain is now being used by "less than 1%" of its total audience and according to the hype cycle, it would take 5 to 10 years for its mainstream adoption as there are certain challenges around blockchain such as governance etc. that need to be addressed by the firms looking to invest in the technology.

Reference

  1. Gartner: ‘Hype Cycle for Emerging Technologies, 2016’