Implementing Blockchain for Supply Chain Traceability

 

ManMohan Sodhi, Professor of Operations and Supply Chain Management at Cass Business School, discusses the possible benefits businesses seek from implementing blockchain, specifically for supply chain traceability, and the factors critical to the success of the implementation.  

Most finished goods emerge after a long series of geographically separated steps of purchasing, moving, manufacturing and distribution, thus forming the supply chain. Companies selling goods to consumers have limited knowledge of the provenance of the components or raw materials for the goods they manufacture or sell. As such, they wish to be able to trace the source regardless of how many tiers away it was purchased in the supply chain. Although companies and IT vendors have proposed different technologies for traceability, blockchain technology has attracted the most attention for this purpose.

A blockchain is a long record shared among all the involved parties. This record is made of a series, or chain, of blocks, each of which contains relevant information on a transacted product. The chain therefore comprises information for each raw material, intermediate product, and final product, as they travel through the supply chain. The blockchain is created collaboratively and is a distributed database.

As managers investigate, evaluate, or even implement blockchain pilots for traceability in their company or industry, they may find it worthwhile to start with a good overview of the business requirements for any implementation and the factors that have been recognized in practice as underlying any successful implementation. Here, I summarize the results of a study carried out at Cass Business School on the experiences reported by researchers and from companies from different industries.[1]

Business Requirements

Focal companies seeking to implement blockchain for supply-chain transparency have diverse business requirements. We first identified what businesses could gain from implementing blockchains, or in other words, the business requirements that could be fulfilled. First, the information in the blockchain could be used to curb illegal activities by providing transparency. This could help, for example, to prevent child labor in cobalt mines or to reduce adulteration of food and medicines. Blockchain technology could also make operations more sustainable in terms of social and environmental issues and help parties demonstrate integrity through compliance. Moreover, blockchain could increase the efficiency of operations by giving visibility and eliminating errors and enhance the supply chain as a whole through cooperation and information sharing.

Business requirements fall under the following categories:

Meeting stakeholders’ needs: Firms have stakeholders who should be engaged with and managed, and these companies need to provide full transparency or, at least some minimal level of traceability to some of these stakeholders. Legislation and increasingly strict food traceability laws may be behind the considerable interest in blockchain within the food and agricultural industry. The need for control is not solely driven by the company internally, but also by trade associations, NGOs, government, and regulators to protect communities and the environment in which the supply chain operates.

Curbing illicit business practices: Blockchain technology can be useful for curbing illegal business practices such as fraud, product tampering, illegal trade and criminal activity. Unlawful business practices are widespread in many sectors. For instance, there is illegal mining for sand extraction, black-market trading in aircraft spare parts, and adulteration in wine production, and the hope is that such practices can be diminished with the use of blockchain technology.

Improving sustainability performance: Companies require traceability systems to tackle (a) social issues, (b) environmental issues, and (c) adoption of sustainability practices. Business requirements include ensuring adherence to legal and ethical procurement and production practices. Many organisations focus on implementing blockchain to facilitate product lifecycle transparency, circular economies, and supply chains, and to better control their environmental footprint.

Increasing operational efficiency: Businesses require that any blockchain system for the supply chain should help them improve operational efficiency through: (a) error elimination, (b) process streamlining, (c) visibility into the supply chain, and (d) improved order fulfilment. The traceability system could help realise supply chain efficiency by way of information sharing. Aside from human error, forecast error and slow processing times, companies also need to tackle fragmented production data and system breakdowns. Companies may also require the use of blockchain-based traceability systems for detailed performance measurement.

Enhancing the supply chain: Businesses require traceability systems to help them enhance their supply chain management by enabling improved working with their supply-chain partners. The requirements for these systems are (a) partner coordination, (b) competitive advantage, (c) supply-chain information flow, and (d) partnership governance. A requirement for a blockchain-based traceability system would thus be use for achieving supply chain coordination.

Sensing market forces and trends: Blockchain technology has the potential to make supply chains more responsive to movements or trends and more resilient against market disruptions. As blockchain connects the partners, the company can access intelligence – whether through picking up patterns on sales on new products or disruptions to supplies upstream – quickly. Moreover, the system can be designed to be autonomous to continue working even if a particular blockchain node were to break down.

Critical Success Factors

At the same time, there is a cautionary view about what must be in place for blockchain implementations for traceability to be successful. Importantly, all parties must be technically and technologically capable of implementing the blockchain. They should also be willing to cooperate and align their goals. This implies that strong leadership will be necessary to lead these changes. Stakeholders should mutually agree on certain practices to ensure appropriate data generation, and these practices should be in line with global and local regulations.

Factors critical to the success of implementation of blockchain for supply-chain transparency are:

Capabilities: Inability to understand the technology is a significant barrier to blockchain adoption for supply-chain traceability. Especially noteworthy is the labor skills gap. The finance domain is more attractive for application than supply chain for technology experts, so there is a shortage of such experts for supply chain implementations. Focal companies have to keep in mind that facilitating blockchain adoption requires leveraging existing company resources, investment strength and knowledge development.

Collaboration: Collaboration is required across supply-chain partners to make blockchain integration work in a complex international supply chain. A supply chain partner’s skepticism partner poses a threat to the adoption of traceability solutions across the supply chain. Moreover, a blockchain implementation can decentralise market power, which may threaten a company seeking to preserve rent. Upstream players are crucial for any traceability solution. These players may resist if they view the system as a threat to their competitive advantage by having to share proprietary information with customers or even competitors. Illegal or unauthorised business practices at a supply chain partner can also be a cause for resistance to traceability. 

Technological readiness: Blockchain technology has limitations as of this writing, including the problem of the speed of recording transactions that degrades with the number of nodes. Besides a cost-benefit analysis of implementation, companies need to evaluate even the feasibility of blockchain being implemented in their industries. We could question how practical blockchain would be for remote suppliers such as small farmers in rural areas with limited technological access or skills. Other limitations, such as slow transaction speed/throughput capacity, scalability issues, and high energy consumption also need to be taken into account. All in all, companies need to consider blockchain technology’s level of technological maturity, including security and user privacy as pertinent to the supply chain. On a positive note, early adopters could set the industry standard and gain a competitive edge.  

Supply chain practices: Practices include, at a high level, those relating to information capture and the operations model. Timely collection of standardised data and storing and processing metrics at different levels are prerequisites for a successful traceability system across the supply chain. However, data collection practices and traceability processes are not standard across the supply chain. Also, data structures may differ from one actor to another for different types of information exchanged between parties. Lack of standards hinders interoperability when attempting to implement a traceability system. The solution is standardising processes and establishing best practices. However, a company would share best practices only after having full records of raw material sources with access to their suppliers' IT infrastructure. Suppliers may not be comfortable sharing such information.

Leadership: Leadership, whether internally within the firm or externally with stakeholders, including those in the supply chain, is an essential enabler for blockchain adoption. Leadership is either within the supply chain motivating supply chain partners or externally in communicating support of the technology. A company may also need to take a leadership role because any initiative would fail if the company cannot engage with the various companies in its supply chain. The company has to bring the supply chain partners together, share challenges and opportunities with others in the supply chain and the industry, and learn from existing blockchain initiatives.

Governance of traceability effort: Governance entails (a) working within the legal framework, and (b) enforcing information stewardship. In a survey of 155 supply chain experts’ regarding their expectations from blockchain technology, 56% of the participants view ‘regulatory uncertainty’ as the foremost barrier to blockchain adoption. For global supply chains, blockchain or any other technology would need to adhere to various laws, regulations, and jurisdictions, to agreement restrictions surrounding data governance and ownership, as well as commercial rules. Existing laws are insufficient to regulate cryptographic activities, and a review of the current legal framework is needed.

Companies wishing to initiate blockchain pilots or full implementations in their supply chains as well as other supply chains in their industry’s supply network as a whole would do well to pay heed to the business requirements and critical successful factors listed above. More details may be found in the report of the study here, with an earlier draft in the public domain here.

About the Author

Professor Sodhi received his Ph.D. in management science from the Anderson Graduate School of Management at UCLA in 1994. Subsequently, he taught operations management at the University of Michigan Business School where his research in the trucking industry was funded by the Sloan Foundation. His research interests lie in supply chain management, in particular in supply chain risk and in supply chain sustainability.

He has published in numerous academic and managerial journals including Operations Research, Production and Operations Management, Journal of Operations Management, Harvard Business Review, Sloan Management Review, Interfaces, and Supply Chain Management Review. He is currently Deputy Editor for Production and Operations Management (POM) and has been Editor of the Annual Edelman Awards issue of Interfaces and Editor-in-Chief of INFORMS Online.

References

 
Daniel Camara