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The key to supply chain transparency? The pros and cons of blockchain

The key to supply chain transparency? The pros and cons of blockchain

  • Global
  • Technology
  • Consumer
  • Diversified industrials
  • Technology, Media and Telecoms

29-08-2018

Background

In the first article of our blockchain series, we explained how the use of blockchain technology could offer greater transparency to the participants at the various levels of a supply chain. These participants include entities that are concerned with the products and services produced by the supply chain such as:

  • the businesses in the supply chain;
  • the customers;
  • the end-users; f
  • and third parties,such as regulators. 

In this article we look at how this is achieved and the associated risks and benefits.

How?

Users of the supply chain blockchain can digitise the subject of the supply chain – be it materials, foodstuffs, components or compliance certificates, by tagging (in one form or another) the subject with a specific set of information. This information is then recorded on the blockchain and, when paired with the relevant supporting technology, the participants of the blockchain can then follow the movement of the relevant item through the physical supply chain. As the item journeys through the different levels of the supply chain, new information is, in theory, recorded unalterably in real-time on the blockchain.

By way of example, Provenance led a 6-month pilot to track the movement of Indonesian tuna fish using blockchain. The fishermen digitised their catches by sending SMS text messages to register their catch, which became a new subject on the blockchain. Then, accompanied by permanent and unique IDs, the subjects were moved from fisherman to supplier, both physically and on the blockchain providing an audit trail from start to finish.

 

The benefits

Transparency in supply chains has a number of benefits and can make or break your brand reputation. It enables companies to ensure that they have a clear audit trail to help them manage risk and reduce supply chain failures, as well as providing an easier basis for enabling and tracking ethical trading policies and ensuring regulatory requirements are met.

We are seeing more successful proofs of concept for the use of blockchain in a variety of sectors given these benefits, particularly within the Retail and Diversified Industrials space.

This is not surprising given the ability presented by blockchain to easily trace and verify the source and treatment of goods within the supply chain. The benefits are loud and clear, and could eventually allow:

  • consumers to make truly informed decisions before they purchase goods;
  • regulators to easily trace the source and treatments of products;
  • and manufacturers and suppliers to identify with precision faulty, or grey-market/ counterfeit components – a persistent and costly problem to remedy in the Aerospace and Defense Sector.

Limitations

The potential transparency and trust benefits offered by blockchain to the supply chain are clear. However, these benefits need to be balanced against limitations inherent within a relatively new technology. In particular, the cost of implementing blockchain technology is, at present, significant. There are also potential infrastructure limitations which may mean that the exponential growth needed to support global supply chains cannot be maintained or serviced to ensure they are fast enough to meet requisite functionality. We will touch more upon these aspects in later articles.  

Critically, for the purposes of transparency, it must be recognised that to ensure that the benefits we have identified above are realised, the way that data being entered into the blockchain is obtained and/or treated needs to be carefully managed, as does the management of that data after such entry. Buy-in for the use of blockchain technology by all of the supply chain participants will also be essential.

We see the following as key examples of how these factors may play out:

Access to competitor data

Current test cases and proofs of concept envisage that blockchain technology will underpin complex and diverse global supply chains. Inherent within this model is the likelihood that competing manufacturers, suppliers, logistics firms and so on will be party to the same blockchain, and have access to the same central data record, and therefore competitors’ information. Accordingly, whilst greater transparency and trust may be offered by the technology underpinning the supply chain, those connecting digital supply chains will need to consider if and how to manage data access rights for users who are concerned with sharing too much data with competitors. 

A lack of gradable access rights could undermine the integrity of the shared data

Where graded data access rights cannot be accommodated – which will be increasingly challenging as the number of users in the supply chain increases – this cultivates the potential for parties to be less willing to share valuable data with the supply chain, and for other users to question the veracity of data shared.  This of course could damage the wider value of the blockchain supply chain, whose integrity and value is ultimately based on the legitimacy of the data provided by each user.

A lack of technical expertise and infrastructure could cause major issues when integrating smaller suppliers into the blockchain

As is evident from Provenance’s Indonesian tuna test case, integrating smaller upstream suppliers – such as the local fishing community – into the blockchain supply chain is not easy, given the lack of technical expertise and/or infrastructure. This will likely be an issue common to a number of supply chains.  In Provenance’s test case, the wheels of the blockchain supply chain started to move when a text message was sent once fish had been caught.  It follows that this human input – which comes fat a crucial point in the timeline of the supply chain – could be wrong, omitted, or fabricated so additional checks and balances may be needed to ensure that what is inputted into the blockchain is correct.

Where one party holds the control of the entire blockchain, the integrity of the data may come into question

A key aspect of transparency depends not only on the integrity of the data, but also its ability to be unaltered.  Supply chain blockchains are unlikley to be open/public.  On an open/public network (like the bitcoin blockchain) this immutability aspect comes from the reliance on proof of work and the fact you would need a huge amount of computing power to amend a prior block of data within the chain.  On a closed/private network, this mechanism may differ. Depending upon how the blockchain is to operate, the information it contains may not be unalterable.  If the infrastructure of the blockchain (in particular the nodes) is within the control of one party, then this could mean that the ability to alter what is in the blockchain rests with them.

Who is legally responsible?

The limitations noted above bring not only technical and practical challenges, but also a raft of potential legal challenges.  For example, who has responsibility  if data entered into the blockchain is found to be wrong and has a detrimental impact?  Should all parties have an obligation to monitor their staff to ensure data is accurately captured and reflected?  What about GDPR and other data protection/regulatory regimes, and who will be responsible for ensuring these regimes are followed appropriately?

Conclusion

As the saying goes, “garbage in, garbage out”.  A blockchain based supply chain is subject to this limitation, essentially: high integrity but unstable information reliability without some form of independent or impartial system that can manage or check the integrity of data going into the blockchain.  While a blockchain supply chain has the potential to offer trust and transparency to its users, that trust and transparency is only as valuable as the reliability of the raw data fed into the system and the way it is subsequently treated. This is not a new issue, however, as the reliability of data being shared in supply chains at present similarly relies on a level of trust.    

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