How exactly can blockchain technology be used to make a supply chain more efficient?

Question

I am a software developer, and have been studying Bitcoin, Ethereum and blockchain technology over the last 8 months or so. I have read a lot on the Internet about how blockchain technology will revolutionize the supply chain. The content I found was either on:

1. websites of tech companies working on this, so I guess they do not want to reveal the details of how exactly their solution works.

OR

2. commerce news sites, written by people not knowledgeable about the technical aspects, describing the benefits of blockchain technology and what it would enable in the supply chain but only at a very high level without any explanation of how those goals would be achieved in the supply chain space.

I want to understand how exactly people in the business / commerce / economics world see blockchain technology being applied to supply chains to achieve the stated benefits of "eliminating inefficiencies, speed up transactions, enable innovative new business models, transparency, trackability,... on and on, including but not limited to "tracking freshness of produce".

I am looking for someone who knows the technology and the domain and can explain how these business goals can be achieved using blockchain technology.

Answer 1

I am an economist and I am skeptical that the value will be large, remember that the planet has a 65 trillion dollar economy and so while a billion dollars is a lot of money to me, it isn't a lot of money in the big scheme of things.

On the surface, blockchain appears to improve accountability and reduce fraud. I said on the surface because very few large scale blockchain frauds have happened yet. Also, the most inefficient components of the world economy usually depend upon graft and those systems are resistant to implementing processes that improve accountability.

I do think that adding blockchain will improve system integrity, but I am wondering how the mafia will get to the outside nodes to degrade the information quality before it enters the process. Consider a WalMart buys a set of goods numbered X0001 through X0050 and they are physically delivered. Imagine that the shipping container is surreptitiously intercepted and a general manifest marking X0001 through X0050 as received goes through the process rather than the time consuming manual process of scanning each good. The blockchain is defeated.

Now let us imagine that the packaging for each good is given a RFID with a unique encryption. This is costly. The mafia hires hackers to break into the system from the source and determine the encryption system itself.

Learning from this, they hire amazing network security, so the mafia hires a janitor to bug the place and steal documents.

Blockchain is nothing more than a distributed information recording system. It is resistant to system destruction, facilitates verification and validation, and improves accountability but we have seen very few large scale failures. Consider this, the Internet is resistant to system destruction, facilitates verification and validation of actors and nearly guarantees signal propagation as long as enough underlying communication systems survive.

The Internet's value has been heavily located in porn and cat videos. Fraud is rampant and it is an open system, largely. So is blockchain. Open systems, like public highways, still depend upon policing and monitoring.

Although blockchain is proposing to replace centralized systems, as the Internet did for the postal service and BBS, it isn't clear that it will be of GREAT value for strong centralized systems. Instead, the gains will probably be in poor centralized systems such as the international wire system. It is aged, outmoded and outdated and hasn't seen real improvements in my lifetime. It hasn't changed greatly since its 19th-century antecedents. The same is true for the ACH system because Congress refuses to allocate the money. On the other hand, the Swedish or British systems are great.

My guess is that its greatest value will be in exposing graft. For example, if you could continuously track a container in a port in Ghana, then you could track what workers actually did what work and you would be able to expose clearly the pattern of bribes which speed up or slow down the harbor. That is, you could if the customs and dock workers use the tools as intended.

Blockchain just decentralizes signal. It is a human system and it will be implemented as part of greater human systems. I think roving bandits like hackers and stationary bandits like customs workers haven't had a real chance to attack it yet.

If I were working in blockchain, I would be working on the inputs to the system and not the system itself. The money is still in preventing GIGO.

Answer 2

Here are some extracts from research (some have paywall):

• NBER article:

A well functioning market (and economy), relies on robust identity verification as well as on the ability to verify the goods and services being exchanged (e.g. in terms of their provenance, how they were changed through the supply chain etc.), and the credentials of the parties involved (e.g. degrees on a curriculum vitae, professional licensing status, bad actor status, driving record etc.). ... Current solutions to the identity and credentials verification problem typically rely on insecure secrets and documents (e.g. social security number, passwords, passports, signatures, university transcripts etc.) or public-key encryption and hardware (e.g. multiple factor authentication, certificates).

Blockchain technology can reduce this risk by allowing for authentication without disclosure of sensitive information. The same way a distributed ledger can track the attributes of financial transactions, it can also track changes to an individual’s status and credentials (or firm, good, service). For example, an individual’s ability to perform (or not) a certain action could be recorded on a blockchain and queried when needed by a third-party (e.g. a bank could verify, after being authorized by a customer, her status in the country or credit history). Similarly, access to medical records (or parts of them) could be granted, revoked or ported between providers as needed.

• Handbook of Digital Transformations article:

In a globalized world, every commodity we consume corresponds to “a journey of people, places and materials” (Steiner, 2015). Yet, the underlying supply chains are often opaque to the end consumer. How do we recreate transparency and new relationships with consumer goods, so as to enable active participation (Williams, 2015), to verify product authenticity and ethical standards? Blockchain technology provides a groundbreaking solution. A shared, consensus - based and immutable ledger helps track the origin an d the transformations undergone in the supply chain. The blockchain will create a formal registry enabling the identification and the tracking of possession of a good throughout the supply chain. One could also resort to connected objects installed in fishing boats, shipping trucks and storage coolers that will keep track of the environmental conditions, such as temperature or location, ensuring that a product was safely handled, complying with health and safety norms. Finally, because the blockchain ensures anonymity; promotions and discounts could be sent to users, without disclosing their personal information.

• Deloitte report (interesting, about preventing illegal items entering the supply chain):

Moving a physical, central property registry onto a distributed ledger has the potential to extend access to property registries into underprivileged areas. By reducing the cost and effort required to access the register in remote locations it could help the people living there secure title to their land. This might not be a problem in mature nations with well develop institutions, but the shift has the potential to bring real benefits to jurisdictions where there is sovereign risk. Distributed ownership registers also bring certainty to the ownership of assets that pass through multiple jurisdictions, such as tracking provenance to prevent ‘blood’ diamonds from entering the supply chain.

• A Finnish research centre report:

Another effect potentially resulting from the digital trust and disintermediation trends is the reconfiguration of the balance of power in supply chain networks. Up until the present day, decisions relating to the supply chain of a product have mainly fallen within the domain of companies. Even if customers were able to have some idea of what kinds of raw materials and labour inputs went into the products, they would seldom have any visibility into the division of costs and profits in those supply chains — not to mention any decisive power over such matters.

Due to the increased visibility into supply chain networks enabled by blockchain technology, customers are able to demand much more detailed information about their products and services. With blockchain applications, consumers could even specify minimum and maximum prices that they are willing to pay for each ingredient and labour input individually and then scan for products that meet their specified criteria.

Alternatively, taking things one step further, consumers could even utilize smart contracts to customize the entire production process to match their own consumer preferences. In other words, instead of choosing a standard product from a vendor’s catalogue, the consumer could transact with the producers and manufacturers directly. By doing so, the customer could arrange each step in the supply chain to their own liking, using specified raw materials and suppliers for a product produced exactly as the customer wants it. Smart contracts could even allow consumers to automate the optimization of all the parameters, so that if a more optimal contract for a certain production phase is offered, it is automatically accepted and incorporated into the chain of production.

There is plenty of more research. Check it here.