Is blockchain technology necessary or even possible for supply chains?

Blockchain has a reputation for being a miracle cure. Our supply chain specialists assess its actual
potential.

Another new technology to think about on another day. Blockchain, the system designed to facilitate
bitcoin transactions, is to blame this time. Blockchain technology, in the opinion of its proponents,
notably in the financial industry, has the power to drastically increase the productivity and profitability
of the majority of firms, if not all of them—or perhaps to completely transform the way we do
business. These early adopters assert that companies that disregard blockchain technology do so at
their peril.

However, how real are these powerful words? Does the supply chain industry really use blockchain
technology? Can it boost your profitability and resolve your supply-chain issues? Supply-chain
executives have asked us a number of very practical questions. Our objectives are to help you
comprehend the fundamentals of blockchain technology and to save you the time-consuming process
of learning, experimenting, and evaluating its applicability to your business.

Having knowledge about blockchain technologies

Blockchain is an internet-based technology that is coveted for its capacity to disseminate transactions
in immutable, encrypted ledgers and publicly verify, record, and distribute transactions. The system
was developed to allow bitcoin transactions, a digital currency that runs without the help of a central
bank. Fundamentally, blockchain technology offers a platform for building and disseminating the
ledger, or record, of each bitcoin transaction to hundreds, if not millions, of computers connected to
networks throughout the globe.

Blockchain technology provides more security than the banking model since transactions and ledgers
are encrypted, and their instantaneous transmission through the internet removes banks' two- to
three-day clearance procedure and associated fees for moving money from one account to another.
The word "blockchain" comes from the "blocks" of verified and immutable transactions and how they
connect to create a chain through time (exhibit). the word "blockchain" was created.

Exhibit

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In essence, there are two main categories of blockchains. Bitcoin and other "permissionless"
distributed ledgers exist in the public domain, but "permissioned" ledgers are centralised, controlled
by "actors," "nodes," or "miners," and stored privately. In the context of the supply chain, this
divergence has significant ramifications.

Value of blockchain in current supply chains

Most of the time, supply chains now function at scale without the use of blockchain technology.
Nevertheless, the supply-chain and IT industries are buzzing about the technology. It has also sparked
several publications and spurred both well-known IT companies and up-and-coming ones to launch
successful pilot initiatives, including:

To verify transactions and assess the precision and effectiveness of record-keeping, Walmart used an
application that tracks pigs in China and produce in the US.

Working together to increase process efficiency, Maersk and IBM are developing cross-border, cross-
party transactions.

For managing samples both internally and externally from a variety of vendors, BHP is launching a
blockchain system that will take the place of spreadsheets.

A UK startup called Provenance just secured $800,000 to modify blockchain technology for food
tracing. It has already experimented with tracking the source of tuna in Southeast Asia.

The authors have not yet come across any at-scale supply chain applications, which begs the crucial
question: Can blockchain technology improve supply chains?

Let's start with a dose of reality: As most practitioners are aware, many of today's supply networks
feature reliable data that can be sent across supply chain layers very instantly. We examined three
potential areas of value addition for blockchain technology in the supply chain industry:

replacing labor-intensive, manual operations. Although big, complicated data sets may already be
handled by supply chains, many of their procedures, particularly those in the lowest supply tiers, are
sluggish and only depend on paper—such as is still often the case in the shipping sector.

improving traceability Change is already being fueled by rising consumer and regulatory demand for
provenance information. Additionally, increasing traceability offers value by reducing the high costs
of quality issues, such as recalls, reputational harm, or the loss of sales from items sold on the black
or grey markets. A complicated supplier base may be made simpler to increase potential for value
generation (see sidebar, "A complex supply chain of unknown parties").

lowering IT transaction costs in the supply chain. This advantage is currently more theoretical than
practical. In addition to requiring those who propose a new block to include a fee in their request,
Bitcoin pays users to validate each block or transaction. Given the enormous magnitude of supply
networks, such a fee would probably be unaffordable. For instance, simply to its tier-one suppliers, a
single vehicle manufacturer would routinely issue 10 billion call-offs during the course of a 90-day
period. Additionally, the sum of all those transactions would dramatically increase the need for data
storage, a crucial aspect of the distributed-ledger architecture of blockchain. Additionally, many copies
of data sets would be impossible to create and maintain in a supply-chain setting, particularly with
permissionless blockchains.

Sidebar

a lengthy supply chain with unidentified stakeholders

The greatest obstacle to a blockchain is: who would provide permission?

A business must first choose the kind of blockchain it will need to develop before using blockchain
technology for its supply chain. Remember that the bitcoin method uses an untrusted and
permissionless blockchain to store data. It exists in the public domain and establishes confidence in
each block via a consensus verification procedure. These blockchains lack a central database and
centralised administration.

favouring privacy

In contrast, the partners in the majority of supply chains are well-known and reliable. Additionally, the
supply-chain industry is unlikely to adopt open access since its users do not want to provide
confidential information to unidentified actors at any step in the value chain, including demand,
capacity, orders, pricing, and margins. Accordingly, the majority of supply-chain blockchains would
have to be permissioned, with access controlled centrally and limited to known parties who may only
be allowed to see certain data subsets.

Theoretically, this method enables private or public verification of each proposed block. However, we
think it is doubtful that proposed blocks in the supply chain would ever be publicly verified after all
the stakeholders are identified. For instance, in the shipping industry, only a small number of well-
known stakeholders, such as haulers, ports, customs, and shipping lines, are in charge of
authenticating each block. The requirement to independently assess consensus procedures used in
the public domain is minimal when there are few trusted parties.

A sufficient answer without blockchain

Supply chains often move billions of transactions and tonnes of data every day, frequently in real time.
Many supply chains struggle with data that is siloed, disparately structured, hard to access, or difficult
to view or analyse in the context of big data because the technologies are not flawless. Nevertheless,
it is now possible to produce well-managed central databases with strong data management, supply-
chain visualisation, and analytical ability.
These solutions don't have to deal with some of the extra technological difficulties that blockchain
might cause (see sidebar, "Getting technical"). Therefore, we contend that a blockchain solution is
likely not required when all stakeholders in extensive supply chains are known and trusted since these
parties can be relied on to give a single, real-time version of the truth. In this case, decentralised peer-
to-peer connections or centralised solutions like a cloud gateway would be enough.

Sidebar

Getting specialised

Think twice before embracing blockchain technology.

Ultimately, according to our analysis, blockchain technology could be a useful answer for specific
supply chains, but it is not yet ready for widespread use. This opinion is supported by the following:

The supply chain sector's unique value has not yet been shown by blockchain experiments that have
been conducted.

Currently, blockchain technology is unable to collect data from a large number of unreliable sources.

There are alternative approaches to provide complete transparency or traceability besides blockchain.

As there are now few standards, it is unclear how much it will cost to create and maintain a blockchain.

There is a huge discrepancy between blockchain's present capabilities and what supply chains will
need.

Blockchain technology may provide trust, transparency, and traceability to supply chains when the
players are unknown or unreliable. These supply chains operate in a regulated environment that
requires a greater degree of traceability, and they are almost by definition complex, multi-tiered,
include several partners, and operate in.

However, a centralised database strategy is often more than suitable for supply chains with well-
known and reliable actors. This does not imply that all of these supply chains now employ an actual
end-to-end methodology; in fact, many of them make use of compartmentalised databases with
scantly traceable data. As a result, many of these supply chains may use current technologies that are
better suited to handling their large number of transactions, either independently or in partnership.

It is still too early to quantify and contrast the running expenses of blockchain technology in the
supply-chain industry. IT businesses will undoubtedly be prepared to provide this information.

The value proposition must be distinct, however. What internal transactional efficiencies are there?
What are the possible costs associated with defective products, recalls, and legal action? Would a
customer spend more money on a product that provides supply chain transparency? When taking into
account the application of blockchain in supply chains, these kinds of queries should be made.

***

Many businesses are investigating the advantages of utilising blockchain technology in related fields,
like the introduction of smart contracts, tightening up the payment process for purchase orders, or
demand chains where "real demand" signals can spread more quickly along the upstream supply
chain. While we applaud the strength and the potential of blockchain technology, we encourage the
supply-chain community to carefully compare it to other, perhaps more suitable and less expensive
solutions.

Regarding the authors: The McKinsey offices in Stuttgart have Knut Alicke as a partner, Houston has
Alan Davies as a senior expert, Vienna has Markus Leopoldseder as a practise director of knowledge,
and Miami has Alex Niemeyer as a senior partner.