April 17, 2017    6 minute read

Blockchain, Trust And Risk Minimisation In Supply Chain Management

Power in the Links    April 17, 2017    6 minute read

Blockchain, Trust And Risk Minimisation In Supply Chain Management

The globalised economic environment has impacted the way businesses operate and compete. In this environment, businesses compete not as individual entities, but rather as supply chains. In this context, trust and transparency are of fundamental importance when cooperating with a new supplier and building a good buyer-supplier relationship, especially in a fragmented and geographically dispersed setting.

The newly introduced and promising Blockchain technology is expected, as many commentators have noted, to facilitate and optimise this process.

Defining Blockchain

Created mainly as a tool that facilitated online transactions in bitcoin, without a financial institution or an intermediary authority, the blockchain can be described as an online ledger, where every transaction is recorded so as to track and validate that no fraud has occurred during these transactions.

In essence, it is a vast, global, decentralised and public database. Every transaction is documented and stored in the blockchain, chronologically. In the words of Don and Alex Tapscott:

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

The element that makes it trustworthy is the use of cryptography, as all data regarding transactions are encrypted and cryptographically signed. This guarantees that it is impossible for a malicious user to counterfeit or alter a published transaction, and it is statistically improbable that they delete one. Its reliability is based on the fact that every transaction is recorded, permanently, in every user’s archive, and information can only be added and not removed or altered.

Thus, every user can view the transaction record, but cannot alter or edit it once it has been published, they can only keep a copy of it. Trust in blockchain is based on the agreement among users that all the information included in this database is true and can be valid. There is no higher authority determining what is true and what is not among this plethora of data.

Regaining Trust?

This lack of authority can be seen as an upside or a drawback. Sceptics of governmental authorities have the chance to rely on data provided and validated by other users and not just governments or other official institutions and can establish trust without the use or presence of a third party.

Trust in that case is provided by mathematics. The need to regain trust in everyday transactions (online financial transaction, contracts, titles of ownership, assets, etc.) is easily understandable. Once this data (be it a transaction or a contract) is uploaded onto the blockchain, no one else can alter it, by claiming someone else’s assets for example.

Now imagine blockchain applied in a supply chain context. If every member in the supply chain uses the blockchain, each company will be able to trace back every material its suppliers use, providing transparency and visibility throughout the whole chain, a problem many researchers have been trying to solve for years. The members could participate as pseudonymous users.

Every material or product, having an encrypted code assigned to it, can be traced through the transactions among supply chain members, where each transaction states the change of ownership of a specific amount of products, and blockchain validates those transactions. Blockchain can be a game-changer for companies operating in the manufacturing or the services sector.

Automation, in this case, can be an ally in maintaining this visibility and building trust among partners, as it is more easily incorporated in a blockchain. The more automated a production process is, with quality and specification safeguards and controls along the process, the more the final receiver of the product can be sure of its quality, as production relies to a lesser extent on user interaction and the human factor.

Traceability in an automated production setting is essential, and is already being used in the diamond trade, to ensure that diamonds ending up in the market are not “blood diamonds”. To that goal, a broader use of RFID could be beneficial.

Minimising Risk

One more advantage blockchain can have in how businesses operate and interact with their suppliers concerns risk. The one blamed for some of the recent scandals – regarding horse meat in meatballs, child labour, use of toxic materials, etc. – was the buying company which was not able to gather accurate information for its upstream suppliers.

Blockchain could change all that. Traceability and the recording of transactions can provide visibility in the supply chain, with less cost and much easier than in the past. In that case, when one more scandal occurs, the right member of the supply chain can be held accountable for its actions and policies.

In that sense, blockchain could replace monitoring and accounting procedures, minimising the risks a company faces regarding its internal organisation and partners while securing its brand name. A general minimization of risk (at least of internal factors) could possibly lead to lower insurance costs for companies, as well as a widely used code-of-conduct framework for future of B2B relationships, which will include the use of blockchain.

A Solution to Everything?

Undoubtedly, blockchain can have many applications in almost every aspect of everyday life (financial transactions, customer loyalty programs, crime and corruption fighting, bureaucracy, etc.). Even though its effects on a more automated industry and the supply chains it includes are obvious, the same cannot be said for industries with less automation such as customised and handmade products but also industries that rely on a bigger extend to the human factor.

Even though transactions could be traceable and public, how can someone be sure that the users are not providing false data regarding their production process? An example of a case like that could be a small family-owned chicken farm. The process of feeding the animals is automated, comprising of a tank filled manually with corn, and traceable via chip-id cards, so that it is possible to identify which employee did each task. If somebody would like to tamper with the corn that the chickens are being given it would be possible, while at the same time following every protocol that is in place. Examples like that can be found in many small companies, which are not fully automated, and thus more difficult to trace.

Conclusion

Blockchain has a lot to offer and will probably revolutionise the way transactions are being done, and the information is being shared like the internet did in the past. Its applications are countless; nevertheless, it is still a field of research.

Furthermore, it is a computer science (and particularly cryptography), so cross-departmental collaboration would be a prerequisite if it is to be widely used. Industries such as manufacturing and services are already exploring its potential and ways it can improve daily operations.

The industries in which human interaction is more prominent in the production process might not benefit from blockchain to the same extent.

As much as some would like to believe that it is a panacea to every problem that includes trust, it is not. That is due to its reliability, partially, to individuals and companies being honest, providing true information.

Get articles like this straight to your inbox each morning with our Breakfast Briefing. Sign up by clicking here!

Log in with your details

or    

Forgot your details?

Create Account

Send this to friend