How Blockchain technology can revolutionise the Supply Chain industry
It has been estimated that lack of supply chain visibility costs organizations approximately USD 300 billion annually. A decade of research on the digital transformation of the supply chain has demonstrated one fact: ambition has consistently outpaced progress. The modern supply chain remains replete with blind spots due to information that organisations either don’t have or don’t fully trust that with the assistance of emerging blockchain technology may be a thing of the past.
What is Supply Chain Management?
Supply chain management is an important piece of Enterprise resource planning (ERP). Supply chain management is the oversight of raw materials, components, finished products and funds, as they move from the supplier, to manufacturers, to wholesalers, to retailers and finally to consumers. This movement can occur between one or among several different businesses on the supply chain network.
As internal/ external factors change over time, the supply chain models can be slow to react and there performance can begin to decrease. Good supply chain management will keep product quality consistent, while also preventing either under stocking or overstocking of inventory through the use of lean supply concepts.
Issues with the current SCM process
Stocking the right amount of inventory over time is also known as supply demand synchronisation. It is the key component in lean manufacturing and distribution concepts such as Just in Time. Businesses want to ensure that products are available when needed however overstocking inventory can incur costs such as storage and damages.
Businesses that overstock perishable goods must discard items if not sold. Companies that overstock non-perishable goods are not able to use the capital paid for those goods for other purposes until the inventory is used. Having a lot of capital tied up in stock can affect the ability to react to unforeseen challenges whereas a competitor might have been able to. Furthermore, if the price of goods drops while a business is storing excess inventory, then the company will lose money.
It is well know that there are weak points in current supply chain management systems. These weak points occur where there are multiple enterprise resource planning (ERP) systems in use across different organisations. Data doesn’t flow well through the handshakes or interface points between systems or individual ledgers. These weak points usually happen during transference of ownership, or change in status between two parties. Visibility is limited at the hand-off points of raw materials, components, funds, and finished products.
However it is worth noting this lack of transparency is often intentional, as companies don’t want to expose their competitive advantages (e.g., an inexpensive supplier who always meant time deadlines while delivering high quality products.). Additionally, in more extreme circumstances a company could be cut out of a supply chain if members start going directly to that company’s suppliers. Working with a reliable, competitively priced supplier can make or break businesses especially more now in the digital age where anyone can search Alibaba for products and get multiple suppliers. A business would want to protect this, meaning innovation in this area has been stifled to individual systems/ ledgers controlled by the business themselves.
How Blockchain can resolve these supply chain issues
A new system for accountability
Blockchain technology is currently being used to help solve problems in supply chain management by eliminating the need for trusted third parties to certify raw materials, components, or finished products, as they travel through the supply chain. On a blockchain, data associated with each event or transaction is time-stamped, appended to the record before it and available to authorised participants in real time. Individuals cannot tamper with records after the transaction; records can be amended only by the agreement of all parties involved. This means that the data becomes part of an unbreakable ‘chain’ of trust. Blockchains quickly become single sources or otherwise known as Ledgers of truth that can be shared across every organisation involved in the supply chain process. Organisations are able to instantaneously establish the accuracy of promises made between business partners and verify events as they occur in real-time. They no longer need to rely on third party intermediaries to facilitate the trust involved in the process.
As blockchains introduce both transparency and consensus, network participants are fully accountable for their actions and contracts with each other and with their consumers. As accountability is locked into relationships, it becomes the basis for robust business networks – platforms that span the full value chain and may even include competitors. This means that businesses will have no choice but to act in a certain way as they cannot remove previous history. As business becomes border less this will help to facilitate trust between different parties in different countries that would otherwise not be there.
A more pervasive system of accountability changes who can participate in an ecosystem and what their roles might be. This will make it easier for smaller niche players and entrepreneurs to join more established networks. A sudden shortage caused by one supplier can more easily be fulfilled by another. Networks that aren’t locked into rigid hierarchies in the hopes of keeping out bad actors become more flexible and dynamic and thus increases competiveness and reduces monopoly’s.
The trade finance industry will also be able to leverage information visible in a supply chain blockchain. In a broad sense, trade finance manages capital required for international trade. Trade financing has become the norm for cross border transactions, with the World Trade Organization estimating that “up to 80 percent of global trade is supported by some sort of financing or credit insurance” (2016).
Therefore an exporter needs to mitigate the risk of non-payment, while an importer wants to mitigate the supply risk. The function of trade finance is to act as a third party to remove the payment risk and the supply risk, whilst providing the exporter with accelerated receivables, and the importer with extended credit. The Institutions that provide capital during these trades can leverage the information visible in a supply chain blockchain to better evaluate companies for lending and provide further in-depth information.