Blockchain in Supply Chain Management and Logistics
3 May, 2019
Introducing blockchain technology and smart contracts is an important first step to streamlining and increasing the efficiency of the supply chain process
Fueled by the unprecedented success of Bitcoin and Ethereum in recent years, Blockchain engines and distributed consensus networks have brought mainstream attention to Distributed Ledger Technologies (DLT) as an innovative approach to tackling age-old problems across many diverse domains and a wide range of inefficiencies plaguing industries. The transparency and traceability this technology offers have immediate obvious benefits for the supply chain and logistics industries, where distributed ledger technology seems particularly well-suited and applicable.
For an introduction to blockchain technology, the top blockchain development platforms, its application and use cases, check out our article on the topic.
Blockchain technology and smart contracts could streamline the supply chain approval process, allowing for simultaneous co-signatories, auditing of the supply chain trail, and rapid identification of supply chain problems and localization of their corresponding points of failure.
The shared ledger could prove to be a gamechanger for supply chain management similar to the disruption that the assembly line, privatized shipping services and online merchant point-of-sale, payment, and settlement services had on the efficiency and speed of production and delivery processes. Ripple (an enterprise-grade distributed ledger solution) does the same for legacy financial and banking systems.
The Supply Chain Process and its Problems
Supply chain is the streamlined process of producing goods and delivering them to customers. It starts with procuring the raw materials required for production and ends with the customer buying a product.
Like any other complex industry process, supply chain management has its bottlenecks and inefficient methods. These methods could be either time-consuming or increasing the company’s expenses where they could be avoided, using a more optimized set of tools or by approaching the problem from a different perspective.
Below are the main problems having a negative effect on the supply chain industry.
When inventory is misplaced or lost, the entire supply chain process is delayed with production lines shut down, retailers short on inventory, and consumers frustrated. This leads to loss of revenue and hurts the company’s bottom line.
Troubleshooting logistical issues to fix disrupted chains consumes both labor and time while removing labor from revenue-generating activities.
Higher Shipping Costs
Lost and misplaced products need to be replaced and re-shipped. To avoid delays, these shipments must be expedited, which is expensive and has a negative impact on profit margins.
Delayed shipments and lost packages result in angry and frustrated customers left wondering where their packages are and when they will be received. Traditional tracking methods are limited, require constant updating and proper execution. Very often customers aren’t able to track their packages at all. They have also become accustomed to free shipping options, which cuts into profit margins.
Damaged products frustrate distributors, retailers and consumers. Improper packaging, loading, transportation, heat,humidity and other factors contribute as well.
Lack of communication and information sharing across supply chain parties leads to a breakdown of the supply chain process.
Blockchain’s Solution to Supply Chain Management Challenges
While blockchain is not a complete solution to the abovementioned problems, it is a useful tool for creating such infrastructure where the impact of these issues can be minimized. Here’s what blockchain has to offer.
Users running independent nodes remove reliance on central managerial authority and coordinate activity around an appropriately chosen consensus protocol (e.g., “proof of elapsed time”).
Transparent and Public Information
Blockchain technology allows users to track parcels and provide other contextual information about shipments in real-time.
Smart Contract Customization
Specific programs and scripts can be executed in a distributed run-time environment, allowing for a wide range of possible applications to be easily implemented and integrated with other systems as needed, non-reliant on central registries and minimizing the possibility of human error.
Supply Chain Optimization
Through relevant data aggregation, validation and replicated data storage across blockchain network peers, the supply chain can be optimized to eliminate friction and faulty behavior, thus geared to run at maximum efficiency.
Supply Chain Audit, Secure Data Storage and Coordination
Blockchain public ledgers are immutable, providing high-security assurance. The stored data is validated across the entire network, allowing to reliably analyze and audit historical trails and easily detect inefficiencies within the system.
Possible Technical Implementations of Blockchain in Supply Chain
With a huge number of blockchain platforms available today, one needs to consider the perfect fit of a blockchain-based implementation for their supply chain management system.
One of the most important questions to be answered is whether to use a public or private (permissioned) blockchain. In order to make the decision, it is best to consider what are the goals of implementation, what problems are aimed to be solved, as well as how much data is required to be made public.
It is worth noting that from a technical perspective most of the functionality required for a supply chain management solution can be implemented with the use of smart contracts, executed on a VM-capable blockchain.
By far the biggest advantage of these implementations is their adaptability and purpose as an easy-to-setup permissioned blockchain, as well as a set of smart contracts, which can be combined and, if needed, modified, to reflect the business processes within an organization. This solution requires the knowledge of general WAVM smart contract logic, as well as experience in Rust, instead of extensive knowledge of C++ blockchain implementations. Therefore, a blockchain-focused development company is the best fit for such project development.
Blockchain Application in Supply Chain Management
There are many ways blockchain implementation can benefit the supply chain management industry. These are just to name a few.
Specialized RFID Tags
RFID tags are fitted with asymmetric encryption and decryption to protect communication between a tag and a reader. Tags consume less power than traditional industrial design solutions. They contain storage space for housing hash values and keys, making them tamper-resistant. Anti-collision mechanisms are integrated into the chips to lower interference and ensure more efficient communication with readers. This new technology that goes into RFID tags is also present in RFID read-write chips, which read tags and supply power to passive tags.
Smart Contracts allow for automatic transfer upon signature collection and help streamline the workflow. Smart contracts operate autonomously upon preset instructions. When their specific parameters are met, they can execute transactions between trustless parties. This is both time-saving and cost-effective for businesses. Many transactions can be set up this way, including the delivery of raw materials or finished goods, payment for services, transfers of copyrights, and more. Smart contracts also allow for cosignatories, which can be executed independently to speed up the approval process.
The chips utilize asymmetric random password pair generation logic and a core asymmetric encryption & decryption algorithm. This makes them highly secure and tamper-proof.
Blockchain Supply Chain Ecosystem and User Roles
Introducing blockchain to supply chain management imposes specific new features in operational processes. Below we describe the general approach to blockchain use and application in the supply chain industry.
A witness (also called a delegate) is an authority that produces, broadcasts and signs blocks as a full node. Witnesses are central to the Delegated Proof of Stake (DPoS) system. Witness nodes are selected via a democratic voting mechanism and are run by the most trusted users on the network. Witness nodes overlay the network, collecting data from the designated child and/or local nodes, and serve as the permanent storage of the ledger’s entire history.
Each child node is equipped with a reader and processes information from each segment of the supply chain: production, warehousing, distribution, logistics, and retailer. Child nodes relay information to each other and the master nodes. Like master nodes, child nodes operate on consensus mechanisms. Child nodes can only receive new blocks.
Each traditional user executes physical actions which provide tracking information and other data for the nodes to be implemented on the blockchain.
Transactions on the Supply Chain
Actions and counteractions are performed as transactions on the blockchain network, allowing for a transparent and widely available log of deliveries.
Blockchain Network Software and Hardware Requirements
The system described above would require the following components (suggested):
– Blockchain nodes belonging to key junctions on each step of the way
– Additional software:
- Client software to provide users with comprehensive GUI;
- Web app;
- Mobile apps;
- Blockchain explorer (to allow users to view blockchain transactions and smart contract code);
- Additional server mechanisms to handle GUI and blockchain connection (if required).
For node handlers:
- A server with sufficient memory and power to handle ever-growing blockchain nodes.
- Smartphones and computers to access the systems via GUI;
- GPS trackers for actual shipments (if required).
We have certainly seen wide adoption of blockchain across numerous domains and business verticals in recent years, along with its acknowledgment by the industry’s biggest market players. As an after-effect of the introduction of permissioned (private) blockchains and smart contracts’ strong capabilities with many possible use cases, it is evident that supply chain is one of the many industries where cutting-edge emerging blockchain technology is most influential.
Businesses should definitely look into and try to take advantage of such an opportunity to streamline their processes, reduce unnecessary expenses and increase revenue.
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