Building Supply Management with Blockchain
ISE Magazine Volume : 50 Number: 7
By Maxwell Sissman and Kashni Sharma
Back to basics
Before discussing integration of blockchain into supply chain management, it may be helpful to explain exactly what supply chain management should be at its core – a process to maximize customer value by streamlining business activities. This form of management works to develop efficiencies within the marketplace by centrally controlling production, shipment and distribution of a product or service. This allows for transparency across all levels of a product or service for a producer and supplier. Supply chains are made up of a network of individuals, organizations, technology, resources and activities that spread from the initial creation of a product to delivery.
Blockchains are a secure digital ledger that records cryptocurrency transactions in a series of blocks. An individual block maintains a timestamp to record the transaction, known as a cryptographic hash. To process these cryptographic hashes, a network of computers works to solve computationally difficult puzzles, and the first participant to solve the problem gets to add their hash to the blockchain and claim credit, or mine cryptocurrency, for processing. Through this process of mining, the collection of timestamped blocks is added together to form the blockchain.
These blocks are maintained across several computers or nodes. Although several timestamps and transactions occur on a block, the information cannot be altered or removed after it has been added to the blockchain, nor can entries be forged. This allows for a level of transparency and permanency in terms of an information trail.
Blockchain beyond the money
Although cryptocurrencies are the most common application, the public and secure digital ledger can be applied to things beyond money.
For instance, if the blockchain records the raw materials input into production processes, thus associating processed goods to the raw materials used to create them, then, in addition to the financial transactions, the materials or goods purchased from a vendor could be accurately tracked and maintained. This would allow for detailed information about a good that creates a product to be recorded from vendor to vendor throughout the supply chain process. Further, this would mean that any defects caught later in the supply chain could be traced back to where the defect occurred.
Supply chain, just like many different management processes, has inherent risks. We have worked to outline several of the benefits of blockchain and how it is the ideal resource to mitigate supply chain risks. It is also beneficial to note that blockchains are highly scalable given the vast access to the technology. We believe that using blockchains as a form of supply chain management allows consumers to integrate better with their suppliers.
Maintainability across products: Supply chain management provides a supposedly seamless flow between a raw product and a produced good. However, if the demand for any product in the chain from raw product to finished product, including the intermediary goods, increases, then this has a direct effect on the good. This creates a risk related to supply chain volatility. By using blockchains, companies gain an awareness of both the production levels of the goods being procured as well as the ability to look at subtier suppliers to avoid potential instability within the market.
Real-time updates to production: If a company changes the supplier of a product, a consumer is not necessarily notified of this change. This issue also arises if the product manufacturer goes out of business. This could have an impact on the price and/or quality of the product. Using blockchains provides greater insight to consumers, as they can view the live digital ledger that provides updates to a product’s suppliers, manufacturers and consumers.
With increasing advances in technology, it is imperative that organizations stay abreast of expertise that could help them gain a competitive advantage over their opponents. By integrating blockchains into supply chain management, companies can increase their quality, efficiency and consumer satisfaction in a competitive market. Industry leaders already have begun taking note of this and are finding ways to implement blockchain as a part of their supply chain management.
To demonstrate the utility of blockchain, we can examine public and private sector examples in the real world.
In the private sector, IBM has begun selling blockchain for supply chain as a service for industries across the world. To further expand this service, Maersk, the world’s largest container shipping company, has partnered with IBM to create a shipping blockchain by developing a shared record of transactions to allow shipping companies to save money while maintaining a competitive edge.
Similar to IBM, and definitely one of the world’s largest public organizations, the U.S. government has also worked to integrate supply chain into its process. The U.S. government is supposed to abide by the United States Code (USC) and, therefore, has steps it can take to help ensure security of supply through priority rating. Furthermore, the Defense Priorities and Allocations System Program (DPAS), part of the Defense Production Act of 1950, supports multiple agencies. The U.S. Department of Commerce states that this program, “is used to prioritize national defense-related contracts/orders throughout the U.S. supply chain in order to support military, energy, homeland security, emergency preparedness and critical infrastructure requirements. The DPAS can also be used to provide military or critical infrastructure assistance to foreign nations.”
Furthermore, according to the Defense Contract Management Agency (DCMA), “all prime contracts, subcontracts or purchase orders in support of an authorized program are given a priority rating.” This supports the notion that the DPAS rating of a program is applied not only to the prime contractor but also down the supply chain, including suppliers several transactions removed from the government. While this can be viewed as a burden on contractors, it is also a benefit in that each customer in an emergency can help ensure their ability to get access to needed resources.
In situations where the U.S. government loses access to desired goods, it works with the contractors that provide those goods to maintain the ability to supply said desired goods. Coordinating with the U.S. Department of Commerce, the U.S. government can step in and enact a Priority Allocation of Industrial Resources (PAIR) to ensure that the needed parts are procured to maintain supply and keep production going.
In the current state of affairs, companies may not even know that they are supplying products that make their way into goods used by the U.S. Department of Defense. In moving forward, however, blockchain transparency will give lower-level suppliers insight about the demand for the goods they produce. This provides companies greater insight than receiving a DPAS rating through the chain of a subcontractor to prime contractor to governing agency, a chain that doesn’t emphasize how important a DPAS rating is and how it benefits companies throughout the supply chain.
The Department of Defense has undergone a large-scale consolidation of defense contractors to a handful of prime contractors. Now, blockchain transparency gives the Department of Defense the ability to track goods and identify when mergers could result in the loss of a defense supplier.
Future chain of events
As technology advances and the use of blockchain becomes more popular, businesses have and will continue to merge the two theories of business together to form a more efficient form of processing. Blockchain provides an increased level of transparency across the production of goods in supply chain management.
Of course, blockchain is not the answer to all our manufacturing, production and financial issues. There are risk concerns associated with utilizing blockchain. We would argue that, at this time, the benefits outweigh the risks. So much so that, as previously discussed, innovators such as IBM and the U.S. government have begun integrating blockchain into supply chain management. Given that such large businesses have seen success in their improved processes, it is only a matter of time before the next level of technology and management merge and become a best practice across businesses globally.