Impact of Blockchain Integration on Supply Chain

Today’s supply chains are made up of manufacturers, producers, logistics companies and retailers who all work together to create and deliver products to people like us all over the world.

But as our supply chains have grown over time, they’ve become much more complicated. They often rely on paper-based systems that make tracking products and materials in real-time difficult, time-consuming, and often impossible.

Modern supply chains also lack transparency and end-to-end visibility, which leads to errors, delays, and increased costs.

What suppliers, logistics companies, and producers desperately need is a unified view of their supply chain.

A way to see where different materials and products are in their supply chain in real time; and a way to prove that unethical or illegal materials and ingredients don’t feature anywhere in their supply chain.

What they need is blockchain.

What Is Blockchain?

For those of you who haven’t heard the term before, blockchain is a distributed ledger technology that was first used to create Bitcoin.

Blockchains store new data chronologically in blocks. When a block is full of data, it’s added to the end of the chain, and its data is there forever. Nobody can go back and change a block’s data once it's added to the chain.

A blockchain’s information is accessible to anybody with a copy of the chain. This means there’s no need for a mediator like a bank or a regulator to make sure everything’s above board.

Instead, the people or parties who use the chain ensure that all the transactions are legitimate.

In a way, blockchains work kind of like a shared Google document, where at least half the people who use it have to approve any new entries. And if somebody tries to add something to the document that other people don’t agree with, they can reject the new entry.

Blockchain’s unique characteristics and benefits haven’t gone unnoticed. Recent studies in academia and government have found that blockchains are perfectly suited for use in supply chain management.

But what specific benefits does blockchain provide that the centralized systems we use today cannot? Let’s take a look.

Blockchain Benefit: #1: Increased Transparency

Many centralized solutions often rely on paper records and incompatible systems, which results in different data sets being siloed at different parts of the supply chain.

Whereas blockchains are transparent by design.

Right from the get-go, blockchains can provide every business within a supply chain with up-to-date information simultaneously.

This provides regulators and consumers with a clearer picture of the production steps: from extracting raw materials all the way through the production process to the finished product sold in retail stores.

Consumers can confidently buy the products they want without worrying about whether they came from a reputable source, or whether the supplier used sweatshops to produce them.

And regulators can check that a company’s practices are in line with local and international laws and regulations.

And thanks to blockchains’ end-to-end transparency, businesses can recall faulty products much faster than they could with any centralized system.

They can also see if there are any shortages of important materials anywhere in their supply chain in real-time. This allows them to adjust their operations much faster than they otherwise could.

So as more businesses use blockchain to manage their supply chains, we will gain a much clearer picture of the companies we buy from. Especially about the source of their materials and the labor conditions.

Blockchain Benefit: #2: Improved Efficiency

Blockchains can increase the efficiency of any supply chain by automating repetitive administration tasks and processes.

The administrative processes that are mostly done manually could be carried out by smart contracts instead.

Smart contracts, in case you aren’t aware, are blockchain programs that automatically execute when certain criteria are met and don’t require a sign-off from anyone.

For instance, once a shipment of timber arrives at a furniture production plant, a smart contract could automatically update the blockchain and authorize payment for it. But if the timber never arrives, the payment is not released.

This would drastically reduce the amount of paperwork that administrators need to fill out while ensuring suppliers are paid on time and do not need to chase their buyers for payments quite so much.

However, some administration tasks, like tracking parts or materials, can’t be automated.

But because blockchains are transparent from end to end, businesses don’t need to contact their suppliers for information about where parts or materials are.

It’s all on the blockchain already, so administrators and managers are free from calling all their different suppliers one by one to find out where their materials are.

Blockchain Benefit: #3: Easy Auditing/Accounting

Raw materials and ingredients often pass through numerous countries and stages of production before they arrive at their final destination.

And each country has a different set of rules and regulations on how certain materials and products need to be handled.

So regulating businesses that have complicated global supply chains is usually time-consuming and expensive.

But when every party in a supply chain uploads the relevant data to a shared blockchain, regulators in each country, and accountants working for each respective business, can easily ensure that everybody is playing by the rules – even when the rules change from country to country.

And when there aren’t any regulations in place, businesses can agree on a set of standards and embed them into the blockchain through smart contracts.

Additionally, most governments are stepping up their climate reporting regulations, which require businesses to prove that their products weren’t produced using environmentally harmful methods.

And because blockchains simplify the process of auditing a global supply chain, more businesses will likely begin using them to manage their supply chains in the coming future.

Blockchain Benefit: #4: Reduce Losses From Counterfeit/Grey Markets.

Businesses in every industry lose billions of dollars each year from counterfeit goods and fraud. Especially it is bothering the fashion and pharmaceutical sectors.

These unnecessary deaths have led countless communities in the developing world to mistrust Western medicine, including vaccines.

But blockchain-based supply chains allow people to verify whether the product they hold in their hand, be it medicine, clothes, or anything else, is authentic.

Each product’s record can be stored on a blockchain, and so by scanning a barcode or a QR code, people can be sure that the product in their hands is genuine.

This allows second-hand sellers of books, clothes, or practically any other product to prove that whatever they’re selling is authentic, which reduces fraud and saves businesses money.

How Are Companies in Different Industries Using Blockchain?

So we just looked at four key ways that blockchains can benefit businesses with complex supply chains.

But to give you a better idea of exactly how different industries could take advantage of blockchain, we’re going to take a closer look at three areas that are already using it: pharmaceuticals, fashion, and food supply.

Industry #1: Pharmaceuticals

The problem pharma companies face is that tracking the raw ingredients they use in production, and the medicine itself, is notoriously difficult.

Ingredients come from all over the world and there are different rules and regulations on how to handle and sell them in each country.

But by using blockchain, pharmaceutical companies can track their ingredients right from the source, all the way through production and onto the shelves in drug stores.

Ingredient suppliers can be required to upload information about where the ingredients were sourced from, and patients can check if their medicine is valid by scanning a serial number that links to data on the producer’s blockchain.

This permanent and immutable record of production gives patients a reliable source of truth and hinders criminal efforts to produce and sell fake medicine.

Pharma companies could eventually use smart contracts to automate some elements of their quality control process.

For instance, fridges storing temperature-sensitive medications could automatically upload their temperature to the blockchain, which would guarantee that they have been kept at the correct temperature.

And if any medicines are found to be defective, they can be more easily tracked using blockchain.

PharmaLedger’s blockchain-based app allows patients to check that their medicine is authentic by scanning a unique code on the medicines’ outer packaging.

After scanning the code, patients can see whether the drug is authentic and download information about it from the app to their phone.

Not only is this faster and more effective than the processes we use now, but it would also save a lot of paper!

Industry #2: Designer Fashion

Designer fashion brands have incredibly complicated supply chains that often span multiple continents.

As such, it’s almost impossible for them to know exactly where their raw materials come from, especially as some countries – like China – don’t require companies to make this information available.

This lack of transparency has caused countless controversies where one brand or another is found to have used either raw materials or labor from unethical sources like sweatshops.

The accused companies denied the findings, but they don’t have an easy way to prove their innocence, because their Chinese fabric suppliers – which operate independently – can’t prove where their cotton comes from.

Designer fashion firms also have knock-off clothing suppliers to deal with. They flood the market with counterfeit goods which devalue the genuine items and leave gullible buyers out of pocket.

However, as we’ve already discussed, blockchain offers considerably improved traceability compared to the supply chain management systems used by most fashion companies today.

With blockchain, fashion firms can document and share all the necessary data within their supply chains. For instance, they can reveal how their products are manufactured to customers and regulators.

This would help businesses prove their ethics and climate credentials, as well as save buyers from being duped into buying fake goods.

A blockchain designed for tracking the supply chains of luxury brands is being built right now by a group called the Aura Consortium, whose founding members include Louis Vuitton and Prada.

The consortium’s blockchain will enable customers to directly authenticate the products they buy and check the source of the raw materials used to create them. The chain will also allow customers to verify their purchases on the second-hand markets.

Industry #3: The Food Industry

The food production and transportation sector have some of the most complicated – and important – supply chains on earth. But during the COVID-19 crisis, we found that they weren’t as effective or efficient as we had previously thought.

Yet despite the sky-high costs and tonnes of wasted food, people who live in developed countries expect to see their favorite foods on the shelves regardless of which season it is. This forces retailers to source their food from various countries at different times of the year.

As you can imagine, this is a very complicated process, which is affected by dozens of producers within a single supply chain. And more to it, they use dozens of different systems that don’t work together.

Some suppliers still rely on paper records, so tracking down the source of a bad batch of food can take weeks or even months.

However, businesses that implement blockchain technology into their supply chain can track their products accurately and far more easily than they can with any centralized system.

Larger retailers can require their producers to upload data about their products to a shared blockchain, which would help with mass recalls of contaminated items, identify wastage throughout the supply chain, and help them prove their products’ provenance.

Similarly, Nestle is using blockchain to trace the origins of the coffee beans used to make one of its best-selling coffee brands: Zoegas. Customers can scan a QR code on the coffee’s packaging to learn by whom and when the beans were harvested, and for how long they were roasted.