Blockchains for supply chains - Why is adoption taking so long?
Co-authored by Ahmad Ali and Simon Clark (Simon has been involved with/ followed blockchain and cryptocurrencies since 2015)
Financial applications of blockchain technology like Bitcoin or other cryptocurrencies may grab public attention and headlines, however, organisations are now beginning to explore practical applications of the technology.
Blockchains first came onto the scene in 2008 in the form of Bitcoin an online digital currency designed by the mysterious pseudonym of Satoshi Nakamoto.
Other than financial applications, blockchain has the potential to revolutionise how organisations design, engineer, make and scale their products and services. It has only been in the last few years that organisations are taking steps to experiment with uses for blockchain that are beginning to alter how those organisations operate both internally and externally.
The potential applications of blockchain across all industries are vast and include but are not limited to: monitoring the coldchain of pharmaceutical products, counterfeiting of alcoholic beverages, having full traceability of food products and the life history of a vehicle.
In this blog, we explore:
- Blockchain, what it is, benefits and applications
- Use case examples of blockchain
- Julius and Clark observations of barriers for blockchain adoption
Blockchain, what it is, applications and benefits
So what is a blockchain? Simply put, a blockchain is a distributed ledger/register of transactions. Instead of being kept in one centralised location, all users in a network hold a copy of it. These network users are known as network nodes.
With blockchain, a transaction doesn't have to be monetised nor financially motivated. A transaction represents a change in state of any data point of interest that an organisation wants to create, trace and or monitor.
Consensus drives blockchains. Once a network node initiates a transaction, the details are broadcasted to all other nodes within the network. This is checked and, if accepted, consensus across all ledgers is achieved. The now validated transaction is bundled into a block of data and added on to the front of its preceding validated transaction blocks, creating a chain of blocks, hence blockchain.
A cryptographic algorithm known as a hash links each block of data in the chain. Each block is sequentially arranged into a chain linked by the hash of the previous block. This makes tampering extremely difficult, as any change to any data point (block) would result in a different hash value, breaking the consensus across the network nodes which would result in a rejected transaction.
Two main types of blockchain exist. "Permissionless" distributed ledgers, such as bitcoin and other crypto currencies that reside in the public domain. All information within these blocks can be seen by anyone in the network. When an update occurs everyone in that blockchain network will know about it.
A second type known as "Permissioned" ledgers are centralized and governed by "actors," "nodes," or "miners," and are not in the public domain e.g. privately within an organisation. The information in these blockchains can only be seen by certain people in the network. This distinction has important consequences in a supply-chain context.
Here is an example to explain blockchain
Lets imagine the high level process steps in building a car. Painting the body, electrics, suspension and drivetrain, interior and wheels.
Each process step has a folder of information (a block) for it. Each block has an owner who has a key to insert information about what has happened at that process step. So for painting the body step it could be the colour the car was painted. The whole production team gets a copy of the folder and visibility of the information. They can see it but not change it. So, if the chassis/body is painted blue this is recorded in the folder by the paint operator and shared across all process steps (the network). Once the information has been verified by everyone in the network that that car is in fact blue consensus is reached and the block cannot be changed. The first block in the chain is complete.
The next block in the chain would be information on the electrics. The electrical lead would add information about the electrics e.g. wiring loom used into their block and connect their block to the chassis and paint block via a unique hash code and distributed across the production team.
Once the car has been built there is a record of what was carried out with information key to the organisation. In this example the information could be: who worked on it, torque settings of vital components, colour, wheel types etc. If there were to be a last minute change request e.g. add different wheels, because the history cannot be changed a new block would be created with that information and added to the front of the block chain.
Once the car has been completed, another team e.g. logistics would create a logistics block detailing which dealership the car is to be sent to. This all builds a chain of historical information which cannot be changed. This “life history” could prove particularly useful when a car changes ownership or recovered after a theft.
Below is a diagram to visualise the process
Benefits of blockchain
Various benefits from using blockchain exist. The main ones Julius & Clark see are listed below.
Automation of processes - e.g purchases: Smart contracts can remove the need for humans to check certain conditions are met. Once conditions are met smart contacts automatically execute an activity e.g. authorise shipment or payment of an invoice.
Supply chain monitoring - Greater transparency into cross-organisational supply chains minimising delays and potential sourcing constraints.
Provenance and counterfeit detection - with the oversight provided, it will be easy to monitor the source, quality and detect counterfeit materials/components. Every shipped good and material will include a digital record proving its authenticity. These digital records will include data, such as where and when the product was produced, with what materials and what steps it took throughout its journey.
Easily accessible history of component/assembly design - Particularly useful for long-lifecycle products e.g. vehicles when design teams may change due to a refresh or regulation. When upgrading a product everyone will have visibility of the last signed off version of that component. Resulting in benefits such as reduced effort, no rework in updates and shorter lead times.
Asset tracking - Monitoring complicated and or expensive products movements to minimise damage, loss and or counterfeiting.
Faster decision making - Validation is based upon digital consensus, validation times for transactions such as contracts, signatures, orders, payments etc are significantly reduced. This results in almost real-time management of process inputs and outputs between business partners.
Quality assurance - oversee a product life cycle to gauge patterns of defect and quality in the production processes.
Further enhancement of Industry 4.0 technologies - This includes topics such as connected sensors, Internet of Things technology, digital twins data analytics and additive manufacturing
Use Case Examples of Blockchain
Whilst blockchain has been in the public eye for a few years the authors are not aware of any fully implemented large scale use cases at present. The majority of use cases sit with early adopters at the pilot/prototype stage.
We take a look at two different use cases. One Automotive prototype/pilot and a blockchain food scenario.
A major German automotive company is looking to blockchain to bring greater efficiency to their supply chain. They have developed a prototype blockchain network that automates transactions as well as tracks vehicles through its supply chain by using smart contracts. The blockchain is accessible by all of their manufacturing plants providing increased transparency on vehicle location and status.
A blockchain-enabled solution enables the german automaker to track every step of the journey across all supply chain tiers. If a component is defective, the blockchain history helps to identify and isolate the root cause of the problem quickly.
The German OEM is also looking to enforce contractual obligations that suppliers need to meet, especially from a sustainability and ethical compliance perspective. This would see interactions between two permissioned (private) blockchain networks between the automotive OEM and supplier to provide evidence that the supplier was meeting their contractual obligations.
Blockchain food scenario
Daisy was born on a UK farm on 23rd May 2017. Her birth weight, size and initial inoculations were all logged on the blockchain. Throughout Daisy’s life her health and other inoculations were also logged and when she was sent for slaughter in 2019 the blockchain record of her life and provided visibility as to the date she was born, which farm she came from.
Once slaughtered, the following steps in the food supply chain were then documented through to the different products the meat was used in and eventually which supermarkets the products were sold at. This blockchain enabled approach has opened up new levels of end to end visibility and traceability from which farm Daisy came from to which supermarket products the meat arrived at.
In the case of Daisy this is all very well but Daisy is not a cow. She is in fact a horse which entered the food chain through error or malicious intent, such as the UK horse meat scandal in the UK in 2013.
Julius & Clark use this story to highlight a major barrier to unlocking true blockchain benefits which Julius & Clark see to be human interactions within supply chains. If real time DNA testing were an available technology to see if meat entering or leaving a production facility labelled as cow meat was actually cow meat, then there could be even less potential for human error/malicious activity.
Julius and Clark’s observations of barriers for blockchain adoption
So what is the hold up in adoption of this technology? Whilst there are a vast number of potential applications and benefits for blockchain technology this can make it difficult to find a starting point and justify a business case. This is especially true when there are existing technology solutions to overcome some challenges of supply chains today.
Some barriers Julius & Clark expect industries and organisations to overcome include:
Lack of standards - To fast track adoption of blockchain, industries must agree on characterizations such as what key information must a specification, delivery note or invoice contain? On top of this, actions need to be defined which are triggered when/if any data is missing or not valid. Without industry agreed standards for a long period of time governments are inclined to step in to regulate activities. Overall this is likely to slow processes, increase costs and bureaucracy all of which has the potential to significantly reduce the major benefits of blockchain technology.
Human interactions - As humans we are prone to errors such as inputting data in incorrectly or malicious intent. Without human interactions in supply chains, blockchains will have an unbiased and “true” representation of the processes and links in the supply chain.
Lack of integration/connectivity between equipment - To unlock the speed and other benefits of blockchain systems need to be connected without the need for extraction, modification and uploading of data into other systems either by humans or Robotic Process Automation (RPA)
Costs - Today, organisations need to hire specialists to develop and maintain the software/hardware required to run a blockchain network which is expensive and often the full costs are not known until you start building the blockchain network making it particularly difficult to quantify the size of the financial benefits for a business case
Existing technological solutions - Technologies such as Enterprise Resource Planning (ERP) and Manufacturing Execution Systems (MES) are becoming more powerful and can already achieve much of what Blockchain promises (although in a less secure way).
At Julius & Clark we foresee a steady and gradual increase in the use of blockchains. As organisations try different things and learn, there may be a sharing of experience between organisations in or across industries or when resources move from one organisation to another.
Once a critical mass of blockchain applications and implementation learnings exist, we foresee a tipping point in the appetite for implementing blockchain technologies as the benefits and costs become clearer and implementation risks and ongoing maintenance costs reduce.
Whilst blockchain may still be in its infancy, this does not mean that organisations should not hold off from explore its potential; you never know until you try!
If you would like to have an exploratory discussion around blockchain and supply chain applications it would be great to hear from you.
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