Managing Supply Chain Risk with Blockchain

The supply chain industry has long been targeted by technologists looking to solve problems that arise as materials, goods, finance and documentation move through an almost endless network of companies and regions. The source of many challenges is an inefficient flow of data between organisations and stakeholders. This is caused either by a low level of digitalisation (many industries are still predominantly paper based), lack of interoperability between systems and complex supply chain systems, which lack trust in the data received from third parties. At the core of distributed ledger technology is data integrity, with the earliest example of this blockchain principle being the single shared source of truth for Bitcoin balances and transaction histories.

The transformative potential that blockchain technology has on global supply chains is currently estimated to create billions of dollars in value within the next 10 years, by fundamentally improving the reliability of data gathered throughout the supply chain simply because of immutability and trustless data sharing. This improved reliability creates value by lowering audit and capital costs and enables more capital to flow more efficiently through supply chains, fostering widespread growth and development along these complex systems.

The advantages of transparency

In 2015, an E. coli outbreak at Chipotle Mexican Grill restaurants caused a 42% drop in the company’s share price once the ensuing media coverage, restaurant closures, and investigations caused significant damage to Chipotle’s reputation[i].  Having a more robust way of tracing the supply chain could well have made a difference in response time and restoration of consumer confidence in the brand.

Combatting and mitigating the risk to customers and financial impact from poor quality and provenance has become a strategic focus among forward looking organisations with complex and extensive supply chains.  Two companies with a strong focus on this topic are Walmart and Nestle, who have begun pilot initiatives to track selected ingredients and produce. Walmart is currently using blockchain technology to track pork, recording where it came from, where it was processed and stored and it’s sell-by-date[ii]. In the event of a crisis like Chipotle’s, Walmart will have the ability to go directly to the source of the contaminated pork in a fast, auditable manner and respond appropriately. This transparency provides consumer confidence and protection for Walmart’s brand by demonstrating corporate responsibility standards to regulators.

Introduction of zero-knowledge proofs

Despite many efforts led by large organisations such as Maersk and IBM to set industry standards, adoption has been slow. This is because blockchain solutions must be able to easily integrate with the existing structure and seamlessly input old data and key players into the network. A major concern large organisations have with sharing supply chain data is the privacy of that data in a distributed network. For example, companies may be happy to report that 100 containers went from A to B, but they may not want to reveal their proprietary transaction data to other parties and trade partners in their supply chain. The issue of protection of proprietary data within both permissioned and permissionless blockchains can be solved with the use of zero-knowledge proofs (ZKPs). ZKPs allow a buyer and seller to verify a transaction has occurred and is legitimate without revealing any more information in the transaction[iii]. In 2017, the first ZKP transaction was successfully conducted on the Ethereum blockchain[iv].

Trade Finance Applications

As digital assets and blockchain data flows bilaterally to mirror real-world supply chain transactions, managers and financiers can both view the transit status and inventory levels of products, and respond effectively. In knowing the state of their trade finance investments and debts, financial facilitators can manage exposure more effectively with the assurance that A has been delivered to B and nobody has tampered with the data during that time. These debt issuers will be able to offer more capital at a lower cost because of the deleveraged risk and reduced administrative costs involved with each investment or facility draw down. Buyers and sellers now have access to immutable volume data, yielding volume-based discounts faster and creating more efficient deal flow.

The benefits of distributed ledger technology to companies with complex supply chains are numerous and at first glance, blockchain-based solutions appear to open new doors. Because of this, new technology is being built quickly, and as businesses and governments begin exploring these solutions it is imperative to remember that distributed ledger technology does not eradicate the risk of bad actors or bad events occurring in a supply chain network. Appropriately designed and implemented solutions throughout a supply chain network alongside digitalisation can however unlock significant value.

About the author(s):  Gray Bridges is Head of Corporate Solutions at Diginex. Zach Applegate is an Associate in the Strategy team.

Theme: Improving business processes

 

[i]      https://hbr.org/2017/03/global-supply-chains-are-about-to-get-better-thanks-to-blockchain

[ii]     http://fortune.com/2016/10/19/walmart-ibm-blockchain-china-pork/

[iii]   Goldwasser, S. Micali, S.; Rackoff, C. 1989. “The knowledge complexity of interactive proof systems”, SIAM Journal on Computing, Philadelphia: Society for Industrial and Applied Mathematics.

[iv]    https://gist.github.com/chriseth/f9be9d9391efc5beb9704255a8e2989d