Blockchain In: The Supply Chain Industry
One of the most critical processes for companies, in both time and cost, is the logistics and supply chain management process. When a company decides to ship their products from one country to another, they must apply and obtain the right documentation (most of the time paper-based), buy insurance, hire lawyers to mitigate legal risks, and ensure that the company who is handling the transportation is to be trusted.
First, the process is costly and is a burden on companies’ bottom lines. The costs, as a percentage of sales (revenue), associated with this part of the business range from 1.8% to 10%, according to an analysis conducted by McKinsey (see figure below).11 To put these numbers into perspective, that represents $8,500 million for Nestle.22
Ref: McKinsey, Lean and Mean – how does your supply chain shape up?31
Secondly, the supply chain process is time-consuming and adds additional risks to operations. For instance, a container might stay in a port for days, if not weeks, due to the fact that there is a “bureaucratic problem” which has to be resolved by sending mails back and forth from one side of the world to the other (though generally not email – most contracts and certifications are still in paper format), as every party has to ensure that the documentation is truthful and complies with the law.
Also, if there is a problem with the goods, it is difficult for management to pinpoint where that problem occurred, leading to companies spending time investigating the issues. Many companies of course insure their products, but nonetheless, damages can be more widespread, such as affecting the reputation of the producer, if the delivery cannot be fulfilled (in the case of food spoilage). Last but not least, inventory stock management in-store and in-warehouse also takes time.
Some of these problems can be mitigated, such as pinpointing the source of the issue, paying fewer insurance costs, removing delays in obtaining the correct certificates, and proving the authenticity of the product – using a blockchain solution. Blockchain solutions prove the integrity of data by providing unforgeability, accessibility, automation, transparency, immutability, and a trust-less ecosystem.
Ref: The Economist.45
The simplest example lies in the fake clothing industry, worth $450 billion (2.5% of global import). Fake products damage the image of brands such as Louis Vuitton – leading to a decrease in demand for their products, as people may choose the cheaper, fake options, or avoid the genuine options for fear that they may be faked.5364 Below, we describe two examples of how blockchain technology enables businesses to avoid counterfeit goods but also decrease operating costs. To provide info on who produced the products, where they come from, and to ensure they are genuine, these blockchain solutions provide proof of authenticity.
A final bonus that blockchain technology brings to supply chain management is that those involved in the transportation of goods themselves should find blockchain technology useful to their work. Truckers, for example, may experience delays in picking up goods from a port or warehouse on their route, and this delay could cost them money due to them being late for their own deliveries, when the delays aren’t their own fault. With the use of blockchain technology, it would be transparent to everyone that the trucker wasn’t at fault for the delay, and they may themselves be entitled to compensation for the delays, or will at the very least not have their reputation tarnished due to events outside of their control. This is one logistics issue that Block Array (ARY) is looking to solve (read our analysis here).
Now that the current problems have been shown, from a purely logistics-based point of view, as well as externalities such as counterfeiting, we’ll describe two projects that aim at tackling these problems using blockchain technology – Waltonchain and Modum. However, many more solutions such as VeChain (VEN/VET) exist (read our analysis here).
Example 1) Waltonchain (WTC) and RFID tech
Waltonchain aims at combining Radio Frequency Identification (RFID) technology with the blockchain to assist in supply chain management. The RFID technology enables products and objects to communicate between themselves via frequencies (thus, without the need of physical or optical contact). The use of the blockchain, as described by the Walton team, enables the creation of an authentic, trustworthy, traceable, and fully transparent business ecosystem with fully shared data.
RFID tags (see picture on the left) are often found on books in libraries and book-stores to avoid shop-lifting. We also find this technology being used in the food supply chain and other industries. It is worth noting that the Walton team is not only developing their own blockchain but also their own RFID chips and scanners.
The Waltonchain team decided to target the clothing industry first. Down the line, they aim to reach all supply chain segments across other industries.
How does Waltonchain work?
Each product is given a unique blockchain ID and RFID tag which is not reusable; once the tag is removed from the product, the tag is void and cannot send any new information on the blockchain. The tag contains, uniquely, a signature key to sign the data within the blockchain. Currently, tags cost $0.10 per unit as the data is stored on the tag itself; however, using the blockchain, the cost of RFID tags will drop substantially (below $0.05 according to Walton’s COO) as no data will be stored on the tag itself.
Ref: Waltonchain whitepaper.
Each time the RFID tag is close to a hardware system (i.e. handheld RFID readers or static scanners), the information regarding the product is instantly updated on the blockchain. For example, when goods leave the warehouse, the scanners automatically register and log this event. Once in the truck, another scanner registers this. Finally, when the truck arrives at the destination, the scanners recognise that the goods have reached the shop warehouse and this is written into the blockchain. Companies can log as many events of the supply chain and production process as they want.
Finally, the tags enable retailers to obtain plenty of data – enabling them to improve their efficiency, lower costs, and develop strategies. The tags identify the rate at which an item is tried on, taken off the rack, to calculate stock inventory in real time, and enable a faster checkout as the items will be scanned in bulk rather than separately. All this data enables businesses to better forecast sales which are crucial in strategy making.
Ref: Waltonchain whitepaper.
Example 2) Modum (MOD) in the pharmaceutical industry
The European Union has set strict guidelines regarding the supply chain logistics of pharmaceutical goods. Companies must prove, by providing regulators with data, that medications have not been exposed to conditions that may have altered their quality (i.e. temperature) – companies unable to provide this data may see their licenses revoked.
Currently, temperature stabilised trucks and containers are used by companies to obtain the required data. The problem is that the service is not always needed and is expensive, leading to inefficiencies. For instance, medicines that need to be at an ambient temperature do not require the use of these specialist trucks. However, companies still have to rent them to obtain the data.
Modum Chip, Ref: Modum.io
Modum (MOD) proposes to tackle this problem through a blockchain based solution and the use of Bluetooth and NFC sensors. The sensors (see picture on the left) are put into packages and send information regarding the temperature to the blockchain. The data is verifiable by all parties (clients, suppliers, and regulators) at all times via the use of a dashboard (during and after arrival) or on a blockchain explorer.
Currently, Modum focuses on temperature sensors; however, in its later stages, the company aims at developing other sensors (motion, humidity, etc). Unlike Waltconchain, Modum sensors enable the tracking of the state of the product rather than simply its geographical location.
How does Modum work?
When the company prepares for shipment, sensors are inserted into packages, QR codes are scanned, product data is updated, and alarms are set up via a surveillance dashboard. Once all the data has been finalised, a smart contract is set up and signed by the recipient of the package, and from that moment, the data is on the blockchain and cannot be changed.
During transit, the sensors record environmental conditions that the products are subject to, and data is transmitted to the blockchain – meaning that it cannot be altered or deleted. When a problem occurs regarding, for example, the on-board temperature, an alarm is triggered and notifications are sent to the surveillance dashboards of all parties.
Once the recipient receives the package, and as long as no alarms were triggered, the smart contract is activated and the firm that sent the package is paid. The client can at all times log on to the blockchain and verify that no temperature problem occurred during transportation.
The benefits of using blockchain technology in the pharmaceutical industry are multiple. First and foremost, this solution is very cost-effective as one would need to buy sensors rather than rent truck services to comply with the law. Secondly, fake medication is a problem that many countries encounter, so clients and pharmacist would be able to verify that the medications are genuine. Finally, unlike WTC, the sensors created by Modum enable the account for the state and characteristics of the product.
To have more information regarding MODUM, please refer to their whitepaper.
The benefits of blockchain in the supply chain industry:
The main advantage of the blockchain is its immutability – meaning that when something is written on it, the data is permanently stored and can never be changed. Unlike traditional databases where data can be forged, deleted, or changed, blockchain technology enables you to be sure that what is on it is the genuine article. This is of use for regulators, companies, and consumers, who can be assured of the legitimacy of data or products; for instance, if a product is said to be made in EU, you can be sure that the EU is its true origin.
The blockchain also enables accessibility and transparency between untrusted parties as all transactions are recorded on a public ledger. Due to the immutability of the blockchain, data, once on it, cannot be changed or interfered with, and additional smart contracts can automate processes which previously may have been based on trust and reliability alone.
The blockchain enables the traceability of products throughout the production process. In recent years, many scandals regarding institutionalised child labour and violations of human rights have hit the developing world. In Uzbekistan, the largest producer of cotton in the world, 1 million people are sent (read: obliged to go) to the cotton fields during every harvest season.71 Despite American and European sanctions over the Uzbek cotton industry, manufacture found a way to bypass them. According to Human Rights Watch and the Cotton Campaign foundation, Uzbeks send their production to Bangladesh, the cotton is then said to be Bengali and is, later, sent to the countries who have sanctioned Uzbekistan.
With the use of the blockchain, we may be sure of ethics and responsibility, simply by scanning a QR code or by accessing the blockchain. This way, the problems of document falsification and a mutual lack of trust are eradicated, and transparency brought to the supply chain process.
Many industries and governments would benefit from incorporating blockchain technology. According to the 2017 Situation Report on Counterfeiting and Piracy in the EU released by Europol 82, 27% of all products seized (by quantity) at border controls were cigarettes, 9% were toys, and 7% food-related products. This poses a threat to society as these products can be harmful to people’s health – being able to ensure the authenticity of products and their origins at all times would make inspections quicker, cheaper, and more efficient, as well as improving safety standards.
China is currently developing its “One Belt One Road” program (also known as the “Silk Road Economic Belt”), linking China to the rest of Asia and Europe through railway systems and maritime transport (through the Indian Ocean). Future developments such as this will make being able to ensure the traceability and authenticity of products in our global market more crucial than ever before, given the fact that most fake low-quality goods are coming from China and countries in the Eastern part of the world.
The bottom line is that blockchain logistics applied to the supply chain industry will increase trust among all parties (consumers, retailers, transport companies, etc), and people will know the provenance of all the components of the products they buy.
Within the bounds of the blockchain, supply chain technology is just one of the many possibilities that we have yet to fully explore. Keep an eye out for our next “Blockchain In..” article, where we will discuss another of the many blockchain use cases!
Also, if you liked this article, you may enjoy our VeChain analysis – another project which is evolving in the supply chain industry.
(1-3): McKinsey, Lean and Mean – how does your supply chain shape up? Retrieved from: https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/operations/pdfs/lean_and_mean-how_does_your_supply_chain_shape_up.ashx
(2) Nestle 2017 Financial report. Retrieved from: https://www.nestle.com/asset-library/documents/library/documents/financial_statements/2017-financial-statements-en.pdf
(3) Europol, Counterfeiting and Piracy in the European Union Report. Retrieved from: https://www.europol.europa.eu/sites/default/files/documents/counterfeiting_and_piracy_in_the_european_union.pdf
(4) The Economist, Makers of expensive bags, clothes and watches are fighting fakery in the courts. But the battle seems to be getting tougher. Retrieved from: https://www.economist.com/news/business/21660111-makers-expensive-bags-clothes-and-watches-are-fighting-fakery-courts-battle
(5) CNN Money. The “fakes” industry is worth $461 billion. Retrieved from: http://money.cnn.com/2016/04/18/news/economy/fake-purses-shoes-economy-counterfeit-trade/index.html
(6): Business of Fashion, Fighting the $450 billion trade in fake fashion. Retrieved from: https://www.businessoffashion.com/articles/intelligence/fighting-the-450-billion-trade-in-fake-fashion
(7) Human Rights Watch (2017, June), Uzbekistan: Forced Labor Linked to World Bank. Retrieved from: https://www.hrw.org/news/2017/06/27/uzbekistan-forced-labor-linked-world-bank