Headline: How can Blockchain technology be used to solve supply chain management issues? 

Date: 10/01/2022

Body:   Everybody has become aware of all the supply chain issues due, mainly, to the pandemic.   Plants don’t operate in China, boats move slower, toward docks already crammed with cargoes of all types and trucks backed up for miles within the ports complexes.  Given this context, I was especially intrigued when I read that the blockchain model could solve some of the thornier issues related to supply chain management.   No, this is good, I promise: Stop sneaking off to TikTok.   Because at the end of the day, if this supply chain thing doesn’t work efficiently, you won’t have your phones.  Interested now??

 Accountants have a problem…

Accountants seem to be on a long-lasting mission to match transactions to capital flows to inventory flows etc.   The first basis of accounting was the cash basis and it is fairly simple.   Make an entry into the books each time cash is affected.  Then, some people figured out that this could be used to cheat the investors and the government, by manipulating when jobs were done and when the jobs done were paid for.  So, we went to the accrual system of accounting where the matching was done between doing the work and receiving the right to compensation.   In this way, the company couldn’t play so many games related to timing of receipts.  But, enter the blockchain, and now the cash flows, inventory flows and information flows are \all coordinated.  And now we can fire all the accountants, right?  Not  recommended.

Even within a good ERP system, it is impossible to do this matching, and if a mistake is made, VERY expensive to fix.  But, if this transaction is placed on the blockchain, each flow of inventory and money has a unique identifier given to it, so, all of the flows related to one transaction can easily be seen.  Each person authorizing these transactions signs the blockchain with their own unique ID number, so you can see the progress made by this transaction, and deduce who is currently holding up the transaction.  If financing is necessary to any of these transactions, the bank can easily  review the blockchain, and obtain their level of comfort, authorize credit, and the transaction can be executed.  If necessary, the bank can setup smart contracts to ensure that certain pre-requisites are executed first before financing is enabled.

Drug dealers also have a problem…

No, not those drug dealers.   The pharmaceutical industry has been required (since 2013) to be able to trace all pills to the factory that made them, and batch number.  Right now, compliance with this standard is difficult at best.  But, when that  manufactured drug is “marked” with a tag that ties to an entry on the blockchain, all details related to how, when and by whom that pill was produced are all related to that tag.  IBM is currently piloting a similar approach to tagging food items to substantiate where they were sourced, where they were processed, and other information.  In this manner, if a recall is ever required, it is very easy to precisely target which products need to be recalled.  Similarly, if somebody else is manufacturing illicit copies of these drugs, they will be lacking this data, and the presence of cloned meds will be easy to substantiate.  For instance, if there is an upcoming shortage of one drug component, the company that makes that component could place this on a common blockchain, and all other drug companies that use this component could re-allocate their scarce resources  to produce more of other drugs not requiring the component.

But, this is not pie in the sky.  Walmart of Canada already has such a blockchain shared with the trucking companies it uses to transport its stock.  Using this shared blockchain, logistics can be synchronized, and payments can be automated, leading to an optimal outcome for all parties involved.  While optimizing outcomes, it only requires selective data to be shared.  In the banking field, such a blockchain would allow them to ensure that each asset used to secure a loan is only tapped once, and the velocity of credit can be accelerated, safely.

But, won’t we face the same potential problems as bitcoin?

No, we won’t.   This is for a variety of reasons.   First, as secure as bitcoin blockchain is, it is extremely inefficient, requiring much energy to mine more bitcoins, and it has some hacking vulnerabilities.  In a supply chain blockchain, the users will be particularly permissioned, and this will obviate the need for a proof of work consensus method, thus making it more efficient, by far.  The hacking issue can largely be handled when each party begins building distributed apps (d’apps).   These apps will allow a code number sequence to tie together all aspects of a transaction, so that the data does not travel alone.   Moreover, each participant in this private blockchain has their own digital signature, so, if there is a bad actor the signature will not be the same, and the rogue transaction can be caught immediately.  The efficiency will also allow for less stock loss and waste, so, the participants can make better use of the existent inventory.

Said another way, there are both Pros and Cons of a blockchain approach to supply chain management.

Trust—a blockchain is decentralized and immutable, so, everybody has the same books to share.  There are no shenanigans.Permissioned blockchain—The private blockchain has fewer nodes, and therefore, fewer sets of identical books.
Efficiency—when there is a disruption in the supply chain, it is easily and quickly recognized.The Human Element–  Human error upon initial input of information is possible.   Further, if there is a bad actor, incorrect information can be input, purposefully.
Transparency—all transactions are time and date stamped, and all related transactions share a unique identifier that makes tracing very simple.Scalability—blockchains need miner nodes to substantiate transactions, and these take money and time to establish and maintain.
 Upfront Costs—Planning costs,  and maintenance costs must be considered carefully.

Leading Organizations Are Already Leveraging Blockchain’s Abilities

As an emerging technology, it is likely still too early for most companies to consider implementing. However, there are companies in a variety of industries already putting the blockchain’s capabilities to good use in their own supply chains:

• FedEx has integrated the blockchain into its chain of custody to improve traceability and provide a trustworthy record, helping to address customer disputes. The company has also joined the Blockchain in Transport Alliance (BiTA) and is a vocal advocate for the adoption of a blockchain-based industry standard.

• DeBeers is using the blockchain’s tracking technology to monitor the source and progress of every single natural diamond they mine. In addition to improving efficiency and inventory control, the Tracr app also helps the company address consumer concerns about ethical sourcing of gemstones.

• Walmart has taken a serious interest in the blockchain, piloting multiple programs powered by Hyperledger Fabric. From tracing the origins of mangoes in the U.S. to tracking pork sold in its Chinese markets, the retail giant has embraced leveraging the blockchain to improve supply chain visibility and traceability — and capture more ethical and strategic sourcing opportunities while they’re at it.

Renault has launched its own blockchain to track its individual suppliers and let them know immediately if any parts received are not within specifications.   By 2024, the company hopes to have all 3500 suppliers participating in this blockchain.

The Verdict

Blockchain technology is a game changer, especially within the supply chain management components of business.  It can quickly notify of problems, solve them using creative re-allocation of resources, and ensure that honesty is maintained.  But, for all of these advantages, adopting a blockchain paradigm within an existing industry can be an uphill battle, and the benefits might not justify the costs.  I suspect that industries that are not existing yet, will readily adopt the blockchain, and existing industries will be dragged, kicking and screaming, to a decentralized blockchain solution.  In this manner, the full advantage of the blockchain can be utilized.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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