Blockchain in Supply Chain Management

Blockchain Applications & Benefits in Supply Chains

The emerging technology of Blockchain has various applications in a wide range of industries. One of the most promising applications is in supply chain management.

Blockchain is a digital record-keeping system that was initially developed for cryptocurrency networks like Bitcoin.

Blockchain’s application in supply chains can help parties with their challenges by creating a complete, transparent, and tamperproof history of the information and inventory flows, as well as financial flows in transactions. Blockchain technology can enable faster and more cost-efficient product delivery. Also, it can enable higher traceability of products. Moreover, blockchain may streamline the financing process as well as enhance coordination between buyers, suppliers, and banks.

In order to use blockchain in supply chain management, there are some special requirements. Participants must be restricted so that only trusted partners are able to access the distributed ledger. Also, a consensus protocol must be adopted that will guide all actions on the network. Furthermore, steps must be taken to avoid errors and counterfeits from the supply chain. With careful implementation, blockchain technology could bring great profits for companies in a range of industries.

But in order to understand the application in supply chain management let’s first look into blockchain’s features.

In essence, a blockchain is a decentralized or distributed ledger, which is a digital system where transactions between parties can be recorded in a verifiable, tamperproof way. The ledger can also be programmed to trigger transactions automatically. In cryptocurrency networks like Bitcoin, blockchain’s main function is to allow an unlimited number of anonymous parties to transact privately and securely with each other without the need for an intermediary. In the case of supply chains, blockchain’s main function is to enable a limited number of known parties to protect their business operations against malicious actors while supporting better performance. For blockchain to successfully be applied in supply chain management, new permissioned blockchains, new standards for presenting block information, and new protocols to govern the network are necessary and in the process of being developed.

Let’s now dive into how blockchain is applied in supply chain management and the various related advantages. When blockchain record-keeping is applied, assets like inventory orders, loans, and bills are assigned unique identifiers that serve as digital tokens. Participants in the blockchain ecosystem are also assigned unique identifiers or digital signatures, which they can use to sign the blocks they add on the ledger. Each step in a transaction is recorded on the blockchain as a transfer of the corresponding token from one user to another.

The transaction process as recorded on the ledger is considerably more transparent than a financial ledger. For instance, a retailer generates an order and sends it to their supplier. In the financial ledger, no entry would occur as there is no exchange of goods or services. However, in the blockchain ledger, the retailer records the digital token for the order and then, the supplier logs in the order and confirms that the order has been received, actions that would not generate an entry in a financial ledger. The next step involved the supplier requesting a working capital loan from the bank to fund the production of the goods. The bank will verify the order on the shared blockchain, approve the loan, and record the loan’s digital token on the same ledger. Therefore, blockchain technology is valuable because it creates a chronological chain of blocks integrating all three types of flows in the transaction and captures information that is not recorded in a financial-ledger system. Furthermore, all blocks are encrypted and distributed to all participants, who have their own copies of the blockchain.

These features provide an exhaustive, trustworthy, and tamperproof audit trail of the three categories of activities in a supply chain.

Based on the above, blockchain significantly minimizes execution, traceability, and coordination challenges that are abundant in traditional supply chain management systems. With blockchain, parties have their own individual copies of the blockchain and can review the status of a transaction, identify potential errors, and hold their counterparties accountable for their actions. No party can overwrite past data, as such an action would require having to rewrite all subsequent transactions and blocks on all shared copies of the blockchain.

Taking the previous example one step further, banks can also use blockchain to improve supply chain financing. Banks can make better lending decisions, as they are able to view the ledger and verify the transactions happening between suppliers and retailers, without needing to conduct physical audits and financial reviews, which are processes usually prone to errors. By including lending information on the blockchain, as well as invoices, payments, and information about the physical movements of goods, transactions become more cost-effective, simpler and easier to audit, and less risky for all parties involved.

Moreover, many of these functions could be automated through the use of smart contracts. Smart contracts can be programmed to assess the status of a transaction and automatically take actions such as releasing a payment, recording ledger entries, and flagging exceptions in need of manual intervention. Read more about smart contracts here.

Nevertheless, blockchain will not replace the wide range of transaction-processing, accounting, and management-control functions that current ERP systems perform. Instead, the blockchain would interface with legacy systems across participating actors. Specifically, each of the firms would generate blocks of transactions from their own internal ERP systems and then proceed to add them to the blockchain. This will enable the integration of various flows of transactions across parties.

Overview of Blockchain Applications & Benefits.

  • Enhancing traceability

  • Increasing efficiency and speed and reducing disruptions

  • Improving financing, contracting, and international transactions

Closing thoughts

All in all, there is considerable room for improvement in supply chain management in terms of end-to-end traceability, speed of product delivery, coordination, and financing. Blockchain is a powerful technology that can address current challenges. Integrating blockchain technology to transform the traditional way of doing things will require the commitment of resources and time for experimentation, but the return on investment will be undoubtedly considerable.

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