Creating an Open Supply Chain

The digital record-keeping system known as blockchain, which powers Bitcoin and other
cryptocurrency networks, has the potential to revolutionise the financial sector. But supply chain
management is another another area where it shows enormous potential. Blockchain may
significantly enhance supply chains by facilitating quicker and more cost-effective product delivery,
strengthening product traceability, enhancing partner coordination, and facilitating access to funding.

We looked at seven significant American companies who are market leaders in supply chain
management and are attempting to determine how blockchain may assist them overcome their
difficulties in order to better comprehend this possibility. These businesses, which include Corning,
Emerson, Hayward, IBM, Mastercard, and two more who choose to remain unnamed, work in a variety
of sectors, including manufacturing, retail, technology, and financial services. Others have gone even
farther and are collaborating with supply chain partners to create applications. Some of them are just
starting to investigate blockchain, while others are running pilots. This essay outlines what we've
learned about the current situation, the benefits that blockchain technology may provide, and how
using it in supply chains will be different from using it for cryptocurrency.

A blockchain is a distributed, or decentralised, ledger—a digital platform for securely storing

transactions between several participants. It is also possible to configure the ledger itself to initiate
transactions automatically. The primary use of blockchain in cryptocurrency networks intended to
replace fiat currencies is to allow an infinite number of anonymous participants to conduct private,
secure transactions with one another without the need for a central middleman. For supply chains,
the goal is to promote higher performance while enabling a small group of well-known stakeholders
to safeguard their business operations against hostile actors. New permissioned blockchains, new
standards for encoding transactions on a block, and new regulations to regulate the system—all of
which are in different stages of development—will be needed for successful blockchain applications
for supply chains.

Those Who Benefit from Blockchain

Since the 1990s, significant progress in supply chain information sharing has been made, spearheaded
by businesses like Walmart and Procter & Gamble, owing to the usage of enterprise resource planning
(ERP) systems. Visibility, nevertheless, continues to be a problem in massive supply chains with
intricate interactions.

Let's outline a fictitious scenario to demonstrate the drawbacks of the present world of financial-
ledger entries and ERP systems as well as the possible advantages of a world of blockchain: a
straightforward transaction in which a bank provides the working capital that a supplier needs to fulfil
an order and a retailer purchases a product from a supplier. Information, inventory, and cash
movements are all part of the transaction. Be aware that not all three parties participating in a flow
will have an entry made to their respective financial ledgers. Furthermore, the three processes cannot
be consistently connected by cutting-edge ERP systems, manual audits, or inspections, making it
difficult to reduce execution mistakes, enhance decision-making, and resolve supply chain disputes.

Comparing Traditional and Blockchain Systems for Recording the Details of a Simple Transaction

The three parties engaged in a straightforward supply-chain transaction can't consistently view all the
relevant information, inventory, and financial flows using the financial ledgers and enterprise resource
planning tools now in use. The blind spots are eliminated via a blockchain technology.

You may download the PDF of this exhibit by clicking the picture below.
A simple supply-chain transaction involves three parties: a retailer who places an order for goods, a
supplier who fills the order, and a bank who lends money to the supplier so they can produce the
goods. The diagram shows two different methods of keeping track of the information, inventory, and
money that are transferred among these parties. There are six stages in the transaction. Conventional
record keeping may not always result in an entry being made in a financial ledger, and two parties
may communicate without the third party being aware of it. However, with blockchain, every activity
is documented on the blockchain and details of every contact between two parties are made public.

Execution problems are sometimes tough to identify in real time, including inaccuracies in inventory
data, missed shipments, and duplicate payments. Even when a problem is found after the fact, it is
difficult and costly to identify its cause or solve it by following the sequence of events documented in
accessible ledger entries and documentation. It may be challenging to determine which journal entries
(accounts receivable, payments, credits for returns, etc.) match to which inventory transaction, even
when ERP systems record all sorts of flows. This is particularly true for businesses that conduct
hundreds of daily transactions with a broad network of supply chain partners and goods.

Even worse, supply chain operations are often quite complex—far more so than the display shows.
Orders, shipments, and payments, for instance, could not match up exactly if an order is divided into
many shipments and associated invoices, or if several orders are consolidated into a single shipment.

Verifying transactions via audits is a typical strategy for enhancing supply chain execution. Although
auditing is vital to make sure that contracts are followed, it is not very effective in enhancing decision-
making to solve operational flaws. Think about the issue a food firm has when one of its goods in a
retail setting reaches the end of its shelf life. An audit or examination of the inventory in a shop may
show the amount of expired goods, but it won't explain the reasons, according to a research that one
of us (Vishal) worked on with a significant maker of packaged foods. These may be flaws in any area
of the supply chain, such as ineffective inventory control upstream, ineffective product distribution to
outlets, intermittent or weak demand, and insufficient shelf rotation (failure to put older products in
front of newer ones). All of such actions should be documented to assist prevent expirations.

Another way to improve supply chain operations is to mark inventory with GS1-compliant electronic
product codes or RFID tags (which are globally recognised standards for handling supply chain data),
and then integrate the ERP systems of the company and its suppliers to create a complete record of
transactions. Execution mistakes would be eliminated, and traceability would be enhanced. The
experiences of the businesses we looked at, however, indicated that integrating ERP systems is costly
and time-consuming. Due to organisational changes, mergers, and acquisitions over time, large firms
may have more than 100 legacy ERP systems. These systems often struggle to interact with one
another and may even define data fields differently. One huge corporation revealed to us that it had
17 ledgers in different ERP systems connected to a single activity—trucking—and that its distributors
and suppliers all had their own ledgers and ERP systems.

Assets including units of inventory, orders, loans, and bills of lading are assigned unique IDs, which act
as digital tokens, when blockchain record keeping is implemented (similar to bitcoins). To sign the
blocks they contribute to the blockchain, participants in the blockchain are also given distinctive IDs,
or digital signatures. The blockchain then records each stage of the transaction as a transfer of the
associated token from one participant to another.

Take a look at how the transaction in our example appears on a shared blockchain (refer again to the
exhibit). The store creates an order first, which it then transmits to the supplier. There would be no
entries in a financial ledger at this moment since there hasn't been any exchange of products or
services. The shop registers the digital token for the order using blockchain, nevertheless. After that,
the supplier enters the order and notifies the retailer that it has been received. This activity is once
again recorded on the blockchain but does not result in an entry being made in a financial ledger. The
supplier then asks the bank for a working-capital loan to pay for the manufacture of the products. The
bank authorises the loan, validates the order on a shared blockchain, and stores the loan's digital
token there as well. so on.

A blockchain's value stems in part from the fact that it consists of a chronological string of blocks that
integrates all three kinds of transactional flows and records information not seen in traditional
financial ledger systems. Individually block is also encrypted before being disseminated to all
participants, who each have a copy of the blockchain. These characteristics enable the blockchain to
provide a comprehensive, reliable, and impenetrable audit record of the three types of supply chain
activity.

Thus, the execution, traceability, and coordination issues that we've mentioned are considerably
reduced, if not entirely eliminated, by blockchain. Each party may examine the status of a transaction,
spot mistakes, and hold counterparties accountable since participants each have their own unique
copies of the blockchain. Because doing so would require rewriting all later blocks on all shared copies
of the blockchain, no participant may alter historical data.

Steven Milstein

The bank in our illustration may enhance supply chain finance by using the blockchain. By examining
the blockchain, it can verify the transactions between the supplier and the retailer without having to
do laborious and error-prone physical audits and financial assessments, which allows it to make better
loan choices. Additionally, including loan records into the blockchain together with information on
billing, payments, and the actual movement of commodities may make transactions more affordable,
auditable, and risk-free for all parties.

Smart contracts, which utilise data from the blockchain to verify when contractual obligations have
been satisfied and payments may be made, are another way that many of these processes can be
automated. Smart contracts may be set up to evaluate a transaction's state and execute
predetermined actions including releasing payments, recording ledger entries, and highlighting
exceptions that need operator intervention.

Invoicing, payment, and reporting are only a few of the many transaction-processing, accounting, and
management-control tasks carried out by ERP systems and would not be replaced by a blockchain. In
fact, a blockchain's encrypted linked list or chain-like data structure is not designed for quick storage
and retrieval, much alone efficient storage. Instead, participating organisations' traditional systems
would communicate with the blockchain. From its internal ERP system, each company would produce
blocks of transactions and upload them to the blockchain. This would make it simple to combine
different transaction flows between organisations.

The Programs

Now let's examine in further detail how the businesses we looked at are using blockchain to meet
problems that cannot be satisfied by existing technology and methodologies.

improved traceability

Pharmaceutical firms are required under the U.S. Drug Supply Chain Security Act of 2013 to identify
and track prescription pharmaceuticals in order to safeguard customers against fake, stolen, or
dangerous goods. A significant pharmaceutical business in our research is working with its supply chain
partners to embrace blockchain for this reason because of that obligation. Electronic product IDs that
correspond to GS1 standards are used to identify drug inventories. Each inventory item is scanned and
recorded on the blockchain as it moves from one company to the next, producing a history of each
product from its origin to the final customer. The business has conducted other pilots in other places
and is moving toward widespread adoption in Europe as a result of some early success in testing this
strategy in the United States. In the meanwhile, IBM is engaged in a similar project to build a safer
food supply chain. To leverage blockchain for tracking fresh produce and other food supplies, it
established the IBM Food Trust and partnered with Walmart.

Purchase orders, invoices, and payments do not need to be stored on the same blockchain in order
for these applications to work. As a consequence, businesses that are hesitant to provide information
about their rivals are more open to using the platform.

The advantages are obvious. The blockchain allows a corporation and its supply chain partners to track
a product in the event that it is found to be defective, identify all suppliers involved, identify the
manufacturing and shipping batches connected to it, and recall it quickly. The blockchain enables
participating firms to automatically check product quality if it is perishable, as fresh fruit and certain
pharmaceuticals are: Any dangerous temperature swings may be recorded on the blockchain by a
refrigerator that has an internet of things (IoT) device to monitor the temperature. The blockchain
may also assuage any doubts about the legitimacy of a product that a shop returns since counterfeit
items lack a blockchain verification history. (We'll discuss how businesses are attempting to stop
dishonest actors from putting fake items into both their supply chains and their blockchains later.)
Therefore, businesses from many sectors are looking at this use of blockchain, either because of laws
requiring them to establish the origin of their goods or because downstream clients want the capacity
to track component inventories.

accelerating productivity and decreasing interruptions.

The supply chain of international manufacturing and engineering firm Emerson is intricate. It includes
a large number of suppliers, clients, and locations and thousands of components. According to Michael
Train, president of Emerson, such supply chains often struggle with lengthy, unpredictable lead times
and a lack of visibility. As a consequence, even a little delay or interruption anywhere in the supply
chain may result in overstocking in some areas and shortages in others. He thinks blockchain
technology might aid in overcoming these difficulties.

Steven Milstein

In his images, Jeffrey Milstein captures the vivid hues, intricate patterns, and intricacy of big container
ports as he flies over them and records the massive flow of goods coming and going from America.

Here is a brief explanation of the issue and how blockchain technology could help. Consider the
difference between product A, which utilises C1 and C2, and product B, which uses C1 and C3. The
best course of action is to temporarily allocate inventory of C1 to product A until the disturbance is
rectified if the manufacturing of product B is delayed due to a disruption in the production of
component C3. Even if the manufacturer of product A has a stock-out of C1, it is possible that excess
inventory of C1 may accumulate at the firm creating product B if all products and components are
produced by distinct companies with restricted access to one another's inventories.
The enterprises in issue might decide to concentrate their data on production and inventory-allocation
choices in a shared repository as a possible solution. However, consider the degree of integration it
would require: Regardless of whether they are allies or rivals, all the relevant organisations would
have to accept centralised decisions and trust each other with their data. That is not practical.

The sharing of inventory flows on a blockchain by participating organisations is a more workable

option that enables each company to make independent judgments based on comprehensive, shared
data. A kanban system would be used by businesses to control production and place orders with one
another. The created things would be given kanban cards, and the blockchain would store digital
tokens that represented the kanban cards. This would improve the visibility of inventory transfers
between businesses and increase the predictability of lead times.

Not only Emerson believes that blockchain technology might improve the effectiveness and speed of
its supply chain. Likewise does Hayward, a global maker of pool accessories. (Disclosure: Vishal has
provided some consultancy work for Hayward. Additionally, a start-up that is developing blockchain
applications for the palm oil sector has engaged him to provide advice.) Don Smith, senior vice
president of operations at Hayward, asserts that raw materials, work-in-progress inventories,
completed items, and process capacity may all be treated as digital money. If you follow his advice,
machine time and inventory may be dependably allotted to client orders at different stages. By
resolving the double-spend issue, or the mistaken allocation of the same unit of capacity or inventory
to two separate orders, blockchain makes this feasible.

Walmart Canada has already started using blockchain technology with the transportation firms that
move its merchandise. Without making substantial modifications to the internal business procedures
or IT infrastructure of the trucking companies, a shared blockchain enables the synchronisation of
logistical data, the tracking of shipments, and the automation of payments.

The fact that these applications, like those for increasing traceability, only need participating
organisations to exchange minimal data—in this example, only inventory or shipping data—is part of
the attractiveness of utilising blockchain to improve supply chain efficiency and speed. Furthermore,
even in huge firms with several ERP systems, these apps are beneficial.

enhancing international transactions, contracts, and finance.

Significant improvements in supply chain finance, contracting, and conducting business abroad are
feasible when inventory, information, and financial flows are exchanged across businesses over a
blockchain.

Think about the issue of funding. There is a well-known issue with information asymmetry about a
borrower firm's operations, the calibre of its assets, and its obligations that banks who provide
working capital and trade credit to businesses must deal with. For instance, a business may borrow
money from several institutions in exchange for the same asset, or it might apply for a loan for one
thing and then use it for another. Banks construct their procedures to manage these risks, which raises
transaction costs, impedes small businesses' access to finance, and decreases the amount of money
accessible to them. Such conflicts hurt businesses that need inexpensive operating capital as well as
banks.

Accounts payable administration is another function that may be improved. This complex process
includes issuing bills, comparing them to purchase orders, tracking terms and payments, and
approving each step along the way. Even though many of these stages have been automated by ERP
systems, significant manual interaction is still required. Conflicts often occur because none of the
transacting businesses has all the information.

The blockchain trail may be used to identify the origin of a counterfeit.

Cross-border commerce is a third area of potential and is characterised by manual procedures,

tangible papers, many middlemen, and numerous inspections and verifications at ports of entrance
and departure. Transactions are expensive, sluggish, and difficult to track the progress of goods.

In all three domains, the retailing and financial services organisations we analysed are running
blockchain pilot projects or building platforms. A blockchain helps businesses to reconcile purchase
orders, invoices, and payments much more efficiently as well as monitor the status of a transaction
with counterparties by linking inventory, information, and financial flows and sharing them with all
parties involved in the transaction. When a supplier gets an order, a bank with access to the blockchain
may provide the supplier operating money right away, and when the customer receives their
purchase, the bank can quickly be paid. Conflicts between the bank and the borrowing company are
removed since an audit trail is easily accessible and reconciliations may be automated using smart
apps that depend on the blockchain data.

Developing a Useful Technology

As a result of significant differences between supply chains' requirements and cryptocurrency

networks' requirements, the organisations we researched discovered that using blockchain to supply
chain management would need the development of new regulations. The Bitcoin network's blockchain
technology is a fantastic solution that accomplishes several objectives at once. It lowers the double-
spend issue, offers evidence of ownership of a digital token, and offers a remarkable safe, irreversible
record of financial activities. It does this without the need for a central authority and while enabling
individuals to freely join and leave the network while maintaining their anonymity. But in order to do
all of this, the Bitcoin network gives up speed, uses a lot of energy to generate bitcoins, and is rather
hacker-prone.

Because supply chains work differently and have various features, they do not need to make the same
trade-offs. Let's take a closer look at them.

Identified participants.

Instead of open blockchains with anonymous users, supply networks need private blockchains
between well-known partners. Each piece of inventory in a supply chain must be tightly linked with
the identification of its specific owner at every stage of the process so that participants can determine
the origin and quality of their stock. As a result, only known parties may be permitted to take part in
such a blockchain, which implies that organisations need authorization to join the system.

Furthermore, approval must be given only to certain people. This is so because data privacy is at
danger due to blockchain's open and decentralised nature. Any participant may view the data that
businesses put on a blockchain when they make transactions. As data volume increases, there is a
chance that it may be utilised improperly to spy on rival companies, trade stocks, or forecast market
moves. Therefore, it is necessary to verify and authorise the blockchain participants for security
reasons.

It will be difficult to assemble a reliable network of partners with whom to exchange data on a
blockchain. One is the need for a governance framework to establish the rules of the system, including
who may join the network, what data is exchanged, how it is encrypted, who has access, how
disagreements will be settled, and the extent to which IoT and smart contracts will be used. Finding a
solution for the influence that blockchain could have on pricing and inventory-allocation choices by
increasing transparency on the amount or age of items in the supply chain is another difficulty. Where
throughout the supply chain the costs and advantages of this openness will be felt is difficult to
forecast.

Due to these factors, the organisations we surveyed were concentrating on specific applications like
the administration of accounts payable and the traceability of medications and food products—
applications that are backed by clear use cases or legal requirements. To lessen the danger to data
privacy and increase the likelihood that supply chain partners would embrace the system, businesses
restrict the sorts of information that are stored on the blockchain.

consensus procedures that are easier.

Blockchain needs a consensus protocol—some method for keeping a single, widely accepted version
of the transaction history. Cryptocurrency networks employ a complicated technique called proof of
work since they are peer-to-peer and decentralised. It makes sure that the majority of users on the
network accept all transactions, but regrettably it also slows down the addition of new blocks. As a
result, it cannot manage the number and pace of transactions in supply chains.

Take the pharmaceutical sector as an example, where 4 billion salable units enter the medication
supply chain annually in the US. On average, each unit is handled three to five times. That equals, on
average, 33 million to 55 million transactions every day. In comparison, the Bitcoin network only
permits roughly 360,000 transactions each day.

Fortunately, the proof-of-work approach is not required to reach agreement on a permissioned,

private blockchain. You can find out who has the permission to add the next block to the blockchain
using easier approaches. A round-robin protocol is one such approach, where the authority to add a
block alternates among the participants in a predetermined sequence. Since everyone involved is
known, a malicious actor would be exposed if it utilised its turn to change the chain in a detrimental
or improper manner. Additionally, conflicts may be readily settled by participants authenticating
earlier blocks.

protection of tangible goods.

A tainted or counterfeit goods might still be marked and put into the supply chain, either accidentally
or by a dishonest actor, even if a blockchain record is safe. Inaccurate inventory data brought on by
errors in scanning, tagging, and data input is another risk.

In three different ways, businesses are tackling these threats. To make sure that shipments match
blockchain records, they are rigorously undertaking physical checks when items first enter the supply
chain. Second, to avoid mistakes and deceit, they are developing distributed apps, or dApps, that
follow items across the supply chain, verify data integrity, and interact with the blockchain. The
blockchain transaction history for that asset may be used to track out the source of any suspected
fraud or inaccuracy. Third, businesses are employing IoT devices and sensors to autonomously scan
things and upload data to the blockchain without the need for human interaction, strengthening the
security of the technology.

The trade of assets like as digital books and music is one instance where tokenization is adequate to
ensure trust and security. The existence of counterfeits may be fully eradicated if the ownership of
these assets is connected to a blockchain network. For instance, in collaboration with publishers and
copyright holders, colleges often employ digital reading packs for a variety of courses. The integration
of this digital supply chain into a blockchain platform with smart contracts that may facilitate
participant access to items, ownership verification, and payment handling might result in significant
efficiency improvements.

CONCLUSION

Supply chains may be significantly improved in terms of coordination, end-to-end traceability, speed
of product delivery, and finance. As the businesses we looked at have shown, blockchain may be an
effective solution for fixing the flaws. The moment has come for supply chain managers who have
been watching from the outside to evaluate blockchain's possibilities for their companies. They must
participate in efforts to create new regulations, test out new technology, run trials with multiple
blockchain platforms, and create an ecosystem with other businesses. Yes, resources will need to be
committed, but the investment should pay off handsomely.