How Blockchain Revolutionizes Supply Chain Management

Blog Posts | September 12, 2017

Part 1 in the 3-part series “Blockchain and the Supply Chain“ 

blockchainNearly all of the world’s leading companies run computerized enterprise resource planning (ERP) and supply chain management software. From connected manufacturing equipment to digital shipping notices and RFID scanning, products are tracked on computerized systems from their earliest origins, often all the way to the recycling bin.

Yet despite this huge investment in digital infrastructure, most companies have only limited visibility and insight into where all their products are at any given moment.

The culprit, in most cases, is the analog gaps that exist between systems within enterprises and across enterprise boundaries. Production may be recorded digitally, but the moment it moves to shipping, a PDF document is created for the shipping label that is little more than a software copy of a printout. The shipment may have its own digital number, but that number tells you where the box is and who signed for it, not what is actually in the box. And so on down the road: oceans of digital data but only islands of useful information.

This is not a new problem, and companies using systems like electronic data interchange (EDI) and XML messaging try to maintain information continuity across system and enterprise boundaries. But point-to-point messaging systems have their own issues, as they are often out of sync and move data only one stop down the supply chain. The result: inventory that seems to be in two places at once.

These systems were created for an era of big, vertically integrated companies with large, but mostly static supply chains. They were very relevant 30 years ago, but not so much today.

The advent of huge, dynamic ecosystems

Two big transformations have swept through global supply chains recently. First, supply chains are no longer traditional networks of OEMs and suppliers. Now they are vast ecosystems, with many product variants moving through multiple parties, all trying to coordinate work together. It’s not uncommon for a single company to have multiple contract manufacturers, all drawing upon a similar supplier network and feeding a range of distribution models, from traditional retail stores to online consignment services.

Secondly, supply chains and operations have become increasingly dynamic. Product lifecycles are shorter, and ramp-up and ramp-down periods are more intense.

Even as supply chains have transformed, companies have not updated the underlying technology for managing them in decades. With blockchain technology, companies can rebuild their approach to supply chain management at the ecosystem level and go from islands of insight to an integrated global view.

Trustworthy truth without trusted intermediaries

Everyone loves to hate middlemen, but it turns out they are really useful. Until the advent of bitcoin and blockchain technology, the only way you could get a large number of entities to agree upon a shared, truthful set of data, such as who has what bank balance, was to appoint an impartial intermediary to process and account for all transactions. Blockchains make it possible for ecosystems of business partners to share and agree upon key pieces of information. But they can do it without having to appoint an intermediary and deal with all the complex negotiations and power plays that come with setting the rules before handing over really critical business information. Instead of having a central intermediary, blockchains synchronize all data and transactions across the network, and each participant verifies the work and calculations of others. This enormous amount of redundancy and crosschecking is why financial solutions like bitcoin are so secure and reliable, even as they synchronize hundreds of thousands of transactions across thousands of network nodes every week.

The core logic of blockchain, applied to the supply chain

Apply that same security and redundancy to something like inventory, and substitute supply chain partners for banking nodes, and you have the foundation for a radically new approach to supply chain management.

The use cases for this new way of working are compelling. At its most basic level, the core logic of blockchains means that no piece of inventory can exist in the same place twice. Move a product from finished goods to in-transit, and that transaction status will be updated for everyone, everywhere, within minutes, with full traceability back to the point of origin.

Do you want to negotiate procurement deals based on total ecosystem volume—not just what you buy from a supplier, but what all your partners do as well? With a blockchain-based solution, you can calculate the exact volume discount based on total purchasing. You can mathematically prove the calculation is correct. And you can do so even while preserving the privacy of each company’s individual volumes.

Promising pilots

The added transparency offers proof about how goods were sourced and how they comply with regulations. The physical, financial, and digital information is brought together in one platform to reveal sources of value leakage—from everyday inefficiencies to fraud and abuse—and helps you hone new strategies to combat them.

Blockchains are still new technology, but the early results EY is seeing in pilots with clients suggest big benefits and the opportunity to recast how we approach these problems, from point-to-point integration to ecosystem-level thinking. We expect to see significant strategic transformations and fairly quick tactical returns as these solutions gain traction. I’ll examine both areas in more detail later in this series.

For more insight on advanced technology’s impact on supply chain management, see How Artificial Intelligence Will Transform Tomorrow’s Digital Supply Chain.

Originally published on August 23, 2017 by Paul Brody in The D!gitalist magazine online.