Why Supply Chains Need Blockchain

Ants – yes, ants – can teach us a thing or two about how blockchain could revolutionize supply chains.

In early 2013, a number of grocery stores in the UK were hit with a major incident when horse meat was found in beef burgers.

To compound the problem, many of the grocery chains could not instantly point to the exact source but had to launch lengthy investigations to track back through processing plants and back to farms. This led to increased bad publicity and a very public loss of confidence by the British public.

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Blockchain offers a shared ledger that records all transactions, with trust and transparency built in.

Mapping supply chains in this era of mass global consumption is not an easy task. Complex networks are required to meet ever-growing price compression and ensure enough supply to meet often erratic demand curves.

However, consumers are increasingly demanding transparency in the sourcing of products, and retailers that can build trust in this respect can build competitive advantage.

So why can’t retailers and their suppliers just build a central database with a record of all transactions? Isn’t it that easy?

Huge potential

Beyond the question of scalability and network performance of this central database is the issue of permission: Suppliers may have certain pieces of information they want to withhold such as how much they are paying for a certain raw material. Also, a retailer may not want its competition to know that it has found a great supplier in a new region.

This is exactly the situation where blockchain offers huge potential.

Blockchain offers the solution for a shared ledger recording all transactions, with trust and transparency built in. Every record is permission-based so you can restrict who sees what information.

In the case of the UK horse meat incident, grocers would know the source of the contamination but wouldn’t need to see any other extraneous information like the amount paid to a mid-stream supplier.

So how do blockchains work for supply chains? The principles are the same as those you will find in the wild where ants use pheromones to pass information along a chain, as you’ll see in this informative video:

[Video: IBM Industries]

Bad actors are quickly identified, and information about a threat or contaminant passed along a trusted network helps lead to rapid resolution of problems.

As Kathryn Harrison from IBM’s Blockchain team points out:

You can see why the concept of a shared, immutable ledger would be important for business. But something else is crucial: Business blockchains are permissioned networks with known identities of all parties. This means you and I not only know each other as entities, we can also know all others in our network and are granted permission to transact with each other. In this way, full transparency and trust can replace many of the friction points in business today.

Building off full transparency

Walmart and other major grocers are now making moves in this direction by creating an alliance, which interestingly includes a number of businesses in competitive relationships.

What unites these organizations is the pressure to quickly respond to issues such as product recalls and offer the degree of traceability that provides confidence to the market, especially during a time of crisis.

Right now, the more consumer-focused applications of blockchain like cryptocurrencies dominate the media limelight.

However, applying blockchain to fix problems like transparency in complex supply chains can create huge value for society and spare businesses bad publicity.

This article originally appeared on the IBM THINK blog and was republished with permission.

Larry Gee is a lecturer for Management Information Systems at San Jose State University, College of Business.

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