Cryptocurrencies scaled up quickly – why blockchain in SCM still lacks success

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Blockchain technology yielded an impressive entry into the field of cryptocurrencies.

Until now, this success story could not be continued in the field of supply chain management (SCM). The major reason for the lack of success is the far more complex linkage between physical and digital processes in supply chain networks. The implementation of blockchain technology only becomes realistic, if the network reaches a mature level of connectivity and digitization. Once it reaches that level, blockchain offers the potential to securely store and exchange supply chain data within the network as a distributed ledger.

Expected values that make you consider using blockchain

Blockchain technology has, by now, sparked interest across almost every industry. Especially in SCM, many decision-makers believe that this technology has the potential to disrupt the way supply chains currently work. To efficiently manage the exchange of goods within supply chains, the exchange of correct supply chain information is essential. Blockchain promises to make this possible, ensuring that each physical transaction is recorded correctly in a digital ledger. Once an entry is written into the ledger, it cannot be altered by any stakeholder in the respective data base. In this way, the authenticity of a product’s transaction history is ensured across the whole stakeholder network, which leads to more transparency and increases security. Based on this single source of truth, smart contracts can be set up to enable automation of processes, such as payments and claims. By increasing the degree of automation, business processes will be executed faster and transaction costs will be reduced.

So, why does blockchain in SCM lack success?

Leading research company Gartner lists blockchain as one of the top ten technology trends for 2018. The expectations placed on blockchain as a disruptive lever in the logistics area couldn’t be higher. In reality however, discussions still circle around scheduled proofs of concept and beta tests. Currently, blockchain in SCM is far from being adopted in general use, raising the question: why are blockchain solutions in SCM not be implemented on a broader scale? We conducted a reality check and found four reasons why blockchain in SCM still lacks success:

  1. Emerging technology with a limited maturity level
    Across most industries, blockchain use cases are still in the proof-of-concept stage. The hype around blockchain technology leads to people misinterpreting niche use cases as widespread implementations. Both companies who want to use a blockchain solution and solution providers have little to no standards that facilitate implementation on a broader scale.
  1. Technological limitations
    Today’s blockchain architectures are not prepared to process larger amounts of transactions. This is one of the main challenges for cryptocurrencies. Synchronization and validation processes are time and energy consuming and must still be further optimized.
  1. Alternative solutions providing the same benefits
    There are other technological concepts which address the same issues or create similar benefits as blockchain. Centralized logistics platforms, standards for supply chain information exchange like EDI and EPCIS might serve as suitable solutions to create an efficient digital ledger without the need of blockchain.
  1. Diverse types of implementation
    There are several types of blockchain technology such as public, private or permission blockchains. The initial design choice is crucial and influences significantly the future functionalities of the targeted implemented solution. The lack of experts who can advise on such decisions complicates the implementation.

To better understand why blockchain in the field of SCM has little success, it is worth comparing their use cases with the successful use cases in the field of cryptocurrencies. Cryptocurrencies are created, exchanged and stored electronically in a blockchain. By using encryption techniques and network validation methods, funds (e.g., bitcoin) are being transferred in a completely digitized manner, having almost no touchpoint with the physical world.

In contrast to cryptocurrencies, a supply chain is first and foremost part of the physical world – by moving materials across the globe. To secure supply chain processes with blockchain, physical events are transformed into digital transactions – by the IoT. In a hypothetical SCM use case, three layers are affected. Goods equipped with sensors are moved in the physical layer. In the IoT layer, these sensors transform the physical movements into digital transactions. The data generated needs to be stored securely in a ledger and exchanged within the supply chain. This happens in the digital layer.

The following example illustrates the challenges that arise when operating across all three layers: A freight forwarder offers secured tracking of temperature and humidity conditions of perishable goods during transport. The condition data is captured via sensors and stored in a blockchain secured ledger that is accessible to the forwarder’s clients. As one of the sensors breaks down, wrong temperature data is captured and stored in the blockchain. As a result, information about the physical world is not correctly represented in the digital layer. A blockchain only makes sense if a correct representation of the physical world can be guaranteed. The challenging integration of supply chain processes across the different layers is the main reason why blockchain in SCM lacks in broader application.

Start small: Optimize physical processes and define a digital ledger strategy

The idea that companies can optimize their supply chains at the click of a button by simply implementing blockchain is unrealistic. Right now, blockchain technology represents just one possible means for improving your supply chain. Recognizing this, we recommend following a strategy of exploiting and exploring: Exploit existing processes and solutions by applying reliable and proven technologies. Explore new technologies, such as blockchain, in order to offer innovative digital services and to boost the efficiency of your supply chain. The mentioned three-layer approach gives guidance about the several fields of actions on the way to operational excellence – blockchain being one element of it:

The physical layer – Achieve operational excellence

A supply chain consists of the movement and storage of physical goods from their point of origin to the client. Before thinking about the implementation of digital technologies, the physical process steps within a supply chain should be assessed and improved. Via consistent performance measurement and through the application of lean principles, material flows inside and outside the company must be improved. Defined and optimized physical processes form the basis for applying innovative digital technologies.

IoT layer – Digitize your devices, connect material flows, and leverage the captured data

To further improve supply chain processes, it is necessary to capture information about the goods transferred within the network. By equipping physical goods with sensors, information about the goods’ current condition can be transmitted. This data, together with data from, for example, meteorological or geographical sources, must be collected via IoT platforms. Precise and real-time information about goods being moved along the supply chain offers the possibility to proactively manage supply chain processes. By applying data analytics, potential process improvements and bottlenecks can be identified. As a last step, supply chain data needs to be exchanged to provide relevant information to all the stakeholders involved in the network.

Digital layer – Define your ledger strategy

Thanks to IoT, detailed information about physical processes that were unknown in the past now become available. To leverage this data, it has to be shared in the network as an information basis for certain automated actions such as alerts, clearances, payments, or penalties. In general, supply chain data can be shared via two possible ways of storage: centralized or decentralized data storage. Centralized storage is, for example, a logistics platform that is run by an OEM. In this case, transactions are recorded in a ledger maintained by the OEM that has full authority about the transaction data. Central logistics platforms can alternatively be managed by distributors, wholesalers, or logistics service providers. Sometimes however, it is not possible to establish such a central ledger, either because no one in the network has the potential to implement such a network or because the partners want to avoid one-sided data authorities. Data can also be shared in a decentralized way, for which several standards exist (e.g. EDI or EPCIS). Blockchain represents just one possible solution that allows a decentralized exchange of supply chain data. The different ways of supply chain data exchange have to be assessed. Characteristics such as interoperability, security against manipulation, data processing performance, and degree of standardization must be considered when defining the ledger strategy.

Blockchain will increase supply chain performance in the future – what you can do right now  

Due to a varying degree of digitization and connectivity across industries, the implementation of blockchain in SCM on a broader scale remains challenging. In the future however, the difficulties we are facing right now will be reduced and successful blockchain use cases will be realized. So what can you do right now?

Prior to implementing a sophisticated blockchain solution, start by assessing the digital maturity of your supply chain. By defining fields of actions within the three layers (physical, IoT, and digital), supply chains can be improved in a sustainable and effective manner – without blockchain. From our experience, it is important to focus on the added business value instead of seeking for blockchain applications. When it comes to the implementation of new technologies, such as blockchain, it is important to have a clear vision about the value add of the technology accompanied by a defined roadmap to realize the desired solution. Exploit your current potential by optimizing supply chain processes and explore new technologies, such as blockchain, to secure future competitive advantages.

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