In the first paper in this series, we considered some typical supply chain challenges, and the extent to which blockchain technology can address them. In this paper, we will look at one of those challenges in more detail.
The challenge of trust
In a supply chain partnership, trust is usually developed over time between two companies. They learn how the other business does things, and they get used to one another’s paperwork. They also get to know people by name, and if there’s an issue, they know who to call.
Today, however, life is more complicated – and the larger the enterprise at the heart of the supply chain, the more complex things are likely to be. There are more players, and more variables, and not all relationships will be of long standing. As a result, participants often don’t know one another. They lack visibility over each other’s data and activities. All of which means that trust has to be established in another way.
Trust doesn’t just have to be established, either. It also needs to be demonstrable, and this, too, is a challenge. Performing supply chain due diligence can be a time-consuming, paper-based process, with insufficient budget, limited information on product traceability, inconsistent or missing data, and ever greater demands in areas such as modern slavery, working conditions, foreign bribery, conflict finance, and environmental sustainability. For example, it’s not unusual for a shipping container transporting cargo from, say, China to Europe, to need sign-off from dozens of unique organizations, involving hundreds of interactions.
This is why gathering, consolidating, and managing information on the chain of custody or traceability of goods through the supply chain is so crucial.
Consumer needs and their implications
If operational excellence is a regulatory requirement, it’s also being driven by increasingly demanding consumers. People want products to be affordable and immediately available – but there are growing public concerns regarding the origin, quality, and validity of products. Consumers want to know they can trust label certifications and that the environment credential of the product and the companies have substance.
The COVID-19 crisis has reinforced these twin needs. People want to benefit from traceability features and quality, but at the same time, they require them to be very rapidly implemented. For instance, they want facemasks as soon as possible – but they want to know where they’re from, and that they are certified to be fit for purpose.
Companies therefore have to reinvent themselves and rely on new technologies. These include:
- Continuous monitoring – control towers are more important than ever as they allow teams to take strategic, tactical, and real-time operational decisions. They help in improving decision making, shifting supplier allocations, and in ensuring more accurate demand planning
- Flexibility and agility in production and logistics schedules – businesses can adjust their production and logistics schedules to prioritize customer/product segments in line with new constraints or with mismatches in demand and supply
- Full visibility and transparency – building visibility into the operations and vulnerabilities of suppliers and logistics partners enables organizations to respond quickly to potential supply disruption.
Traceability issues – introducing blockchain
As we’ve mentioned, one of the main due diligence challenges is limited information. However, this is just one of the problems with traditional traceability – the product trail can be difficult to replicate, and it isn’t always easy to gather all the required product information at the same time. What’s more, even when all information is available, it isn’t always consistent – different parties in the supply chain may use different notations, and regulatory compliance requirements between sectors can also vary, creating different criteria for the presentation of information. Add to this the fact that the information handling processes may themselves be underperforming, and the scope for traceability challenges is plain to see.
The list of participants in a supply chain includes manufacturers and suppliers, transportation companies, warehousing facilities, intermediaries such as dealers and OEMs, and end-customers or consumers. Blockchain technology sets up a common network that is able to connect all these groups to one another. It also enables events to be traced on the blockchain ledger.
In supply chain terms, blockchain creates two kinds of participant:
- Active – organizations that need to write and validate transactions (such as suppliers, transporters, OEM, and warehouses)
- Passive – external parties, such as those that can have read-only access to the blockchain (including public sector bodies, banks and insurers), and also such as clients.
In recent years, the retail, insurance/financial services and pharmaceutical sectors have taken the lead in implementing blockchain traceability initiatives at scale.
Let’s consider two potential approaches to the implementation of blockchain traceability in a supply chain.
In the first case, customers want an immutable system-of-record or ledger, in which each change can be easily traced and verified cryptographically, and in which no history can be lost or falsified. Such organizations might include healthcare businesses that need to verify and track hospital equipment inventory, HR, and payroll departments tracking changes to an employee’s profile, or manufacturers tracking the distribution of a product that has been recalled. Because of the nature of their operations, these organizations are happy to have a centralized ledger.
For instance, let’s take a public sector body responsible for motor vehicles. It will have a current record of all the vehicles in its jurisdiction. It will also have the historical data.
For customers such as these, it’s possible to build what has been termed a quantum ledger database (QLDB). This has two components:
- The current state and an indexed history of all transactions, including the current value and historical state of the data
- A journal, which has a cryptographically verifiable and sequenced log of each transaction or change in the system. The changes are chained together as blocks.
This means that, when application data comes in, it gets logged to the journal first, and then gets stored in the database, so it can be queried.
There’s a second set of use cases where you have many complex workflows that span multiple organizations. Often, in these instances, the organizations must collaborate with each other, but none of them can rely on a specific member to manage the shared system of record, either because they don’t want them to have a competitive advantage, or because they don’t want dependencies over which they lack control. Examples include financial institutions conducting peer-to-peer payments, mortgage lenders processing syndicated loans, retailers streamlining customer rewards, and of course, supply chains, transacting with their suppliers and distributors.
Before blockchain, many industries were obliged to pass paper around, because a more elaborate system would still be hampered by these various forms of reluctance to share or to relinquish control. Now, however, a fully managed service such as Amazon Managed Blockchain makes it easy to create and manage scalable blockchain networks using popular open-source frameworks.
Blockchain – traceability benefits
In short, blockchain can help to address traceability challenges. Track and trace functionality solutions implemented with blockchain enable entire supply chain networks to document updates to a single shared ledger, which provides total data visibility and a single source of truth. We have already seen it’s a technology that has been described as “an open, distributed ledger that can record transactions between two parties efficiently, and in a verifiable and permanent way” – and because of this, it can directly address traceability issues by:
- Providing an audit trail for all transactions, right back to a product’s raw materials
- Creating a consistent digital thread
- Enabling automation and smart contracts, so as to streamline processes
- Establishing an immutable ledger, with easily verifiable and tamper-proof data
- Offering a single and shared source of truth.
Traceability in action
Let’s see how blockchain-enabled traceability can work in practice, across a global enterprise serving a fast-moving consumer market. In this case, we’re looking at a major coffee brand.
Consumers take great interest in their coffee. They like to know about attributes associated with its taste, such as its provenance, the type of plantation, how it’s processed, how it’s graded, how fresh it is, how it’s been roasted, and for how long. They also like to know it’s been produced ethically, and with due consideration for the environment.
The business naturally wants to satisfy these interests – but it also has information needs of its own. It wants to know about production methods and quality. It wants to know about availability, and not just in the short term. It wants to know about the commercial transactions at different points in the supply chain. And it wants to know about business practices across the board – from the farm through to the packaging function. What’s more, the business needs to know all this in real time – coffee is best consumed within just six weeks.
What complicates the picture for consumer and business alike is that there are so many participants. Coffee is sourced from dozens of countries, hundreds of regions, and thousands of farms. There are also thousands of grading facilities, wholesalers, brokers, roasting factories, distributors, packaging suppliers, and retailers.
To ensure that the product and every process is best-in-class, the business needs to track not just the coffee but also the bill of materials that makes the finished product.
In a supply chain as long, as global, and as complex as this, blockchain technology meets the traceability needs of the business, its customers, and of key players in the supply chain:
- Transparent – it sets the standard for information sharing between all the partners in the supply chain, with access to and queries of the ledger
- Immutable – it puts in place a disciplined data sharing structure
- Verifiable – supply chain participants can go back in time to audit each other based on certification.
In the next paper in this series, we’ll be considering in more detail how blockchain can enhance transparency and accountability between supply chain participants. In the meantime, watch a video on how blockchain can enable next-generation product traceability.