Blockchain technology was born in the midst of the financial crisis and proposed as a means of reliably transferring a store of value without using a bank or other financial intermediary. Bitcoin was the first such blockchain token, and multiple cryptocurrencies have followed. But blockchain use cases extend far beyond the financial world, and some of the more creative uses of blockchain technology have emerged in the supply chain.
The numerous benefits of blockchain to monitor supply chain activities includes mitigation of compliance risk. There are features of blockchain technology that are well-suited to address some of the more persistent problems in supply chain management that typically stem from lack of visibility into product origin, product transformation, and product movement. By tracking product in the supply chain, companies can mitigate their risk of legal liability around responsible sourcing, sanctions, customs, and other import regulations – among many others.
Supply chain management has always struggled with the distribution of reliable real time information. As supply chains have become more complex and geographically dispersed in an ever-growing globalized economy, this information gap has grown. While technologies such as enterprise resource planning software have been transformative in making real time decision-making information available to supply chain managers, these solutions are centralized, slow, and expensive.
Beneficial Features of Blockchain Technology in Supply Chain Compliance
The specific features of blockchain technology that provide promise in managing supply chain compliance risk include transparency, validation, automation, and tokenization.
Transparency: Blockchains are, at their core, a shared digital ledger. Deployed on a peer-to-peer network, blockchain based data is replicated to all participants each time verified data is written to the blockchain. Supply chain members can have access to real time data about the location and status of an object each time the information is updated. This eliminates inefficiencies arising from the uneven distribution of information from a centralized database to far-flung supply chain participants.
Validation: Data integrity has long been a concern with respect to supply chain information. Data entry and data replication errors can wreak havoc in the supply chain. For example, if incorrect or unreliable information is disseminated across the supply chain, product sourcing information can be obscured, and product movement or transformation by third parties can go undetected. This lack of information can result in potential liability for companies that rely on the integrity of supply chains to provide quality product when they incorporate and sale the product in their own business. With blockchain technology, information written to the blockchain, once verified, cannot be altered or deleted without causing the altered copy of the blockchain not to match every other copy of that blockchain maintained by the other supply chain members. This immutability of information on the blockchain also allows any member to verify the provenance of the data all the way back to when it was first uploaded to the blockchain. The widespread availability of reliable real time data and its history can also help facilitate sustainable and responsible sourcing initiatives, ensure accuracy in public reporting on initiatives, and help protect the supply chain from infiltration by counterfeit goods.
Automation: Blockchains are also capable of automating certain activities, by embedding applications that execute pre-programmed instructions when certain information is verified on the blockchain. Invoices can be paid when the blockchain verifies that a bill of lading has arrived. These smart contracts can enable smart devices to order spare parts, obtain maintenance services, and alert downstream supply chain participants of delay. Smart contract automation not only reduces bottlenecks in the dissemination of supply chain information, but also mitigates compliance risk by reducing the risk of mistakes in documentation or processes that can lead to urgent situations resulting in bribery or other improprieties in the transport and importation of goods.
Tokenization: Assets and other items in the physical world can be represented by tokens on a blockchain. Virtualizing supply chain assets adds flexibility and capacity utilization to equipment and inventories. Tokens can be employed to track and trace the transfer of supply chain assets, or reserve capacity on supply chain equipment. Supply chain assets can even be collateralized by issuing tokens representing lenders’ claims.
Practical Compliance Use Cases for Blockchain Technology Today
One of the most celebrated supply chain use cases of blockchain technology is from the food industry. Food safety recalls of leafy greens has been a stubborn problem for retailers. With imperfect records and controls over source identification of produce, retailers have had to remove and destroy entire inventories of spinach and romaine lettuces when foodborne pathogens are detected in any batches. Using tokenization of assets and relying on the immutability of blockchain data, retailers have reduced the source identification of leafy greens from one week to a few seconds using the Foodtrust blockchain network. Where customer safety is a factor, this reduction in identification time is the difference between isolating only those goods from suspect origin and having to remove the entire inventory of those goods.
This technology has potential application across a wide range of supply chain compliance areas. These include sourcing of imported lumber and other product in compliance with the Lacey Act, tracking of product to confirm transshipment through sanctioned countries does not take place, and confirmation of product origin in the event of recalls or allegations relating to supplier labor or human rights abuses.
Supply chain documentation – purchase orders, acceptances, shipping documents, bills of lading and more – can be cumbersome to manage and slow to update. Shipping giant Maersk, together with IBM, have developed the Tradelens blockchain solution for shipping. Tradelens allows participants to see real time updates of the physical progress of cargo moving through the supply chain. Taking advantage of the speed and reliability of blockchain based data, this solution provides greater information transparency to supply chain members.
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Blockchain is not a panacea for supply chain inefficiencies and associated compliance risk. The immutability of blockchain data can actually create compliance issues under data privacy laws that mandate correction, deletion, and ‘the right to be forgotten’. In addition, blockchain technology does not address the problem of the quality of uploaded data – the adage of ‘garbage in, garbage out’ still applies. But blockchains can optimize the use of data in the supply chain by exploiting the features of the technology that increase speed of data dissemination and the reliable tracing of data to its origin. New use cases to enhance supply chain management and compliance risk mitigation are being tested and coming to market to improve efficiency and reliability. As a result, the future of this technology as a valuable tool in the fight to ensure compliance with growing supply chain compliance obligations is bright.