Role of Blockchain Technology in Supply Chain Management

Technological innovations and fast-paced manufacturing growth inevitably transform the ways global supply chains are managed. Unification, digitalization, and robotization are the name of the game for modern supply chain management (SCM) systems. 

To optimize the flow of goods and services across the channels and information transfer in the system while minimizing costs and improving efficiency, companies implement artificial intelligence and IoT and gravitate to using robotic systems in manufacturing and warehousing facilities more and more often. 

To survive and succeed, modern organizations should be flexible, dynamic, adaptive, and responsive to change. Only those market players that are driven by innovation in all business aspects can stay on top of the competition.

Given the SCM system's complexity and its importance for company-customer relations and business outcomes, it’s vital to maintain a comprehensible, transparent, and efficient SCM system which is not an easy task. And this is where blockchain technology will come to help. 

Blockchain: What Is It and How It Works

Blockchain is a distributed ledger technology (DLT) allowing for secure, transparent, and tamper-proof digital data exchange and record-keeping. Initially designed for cryptocurrency transactions, the technology applications have quickly embraced other industries and areas such as finance, logistics, transportation, healthcare, manufacturing, etc. 

The main principles DLT relies on are:

• Decentralization: Connecting computers or nodes into an integrated network, DLT doesn’t have any centralized or intermediary controlling unit. Working together to maintain and update the ledger, each node owns a copy of the same ledger, and the transaction gets validated only when verified by all nodes in the system.
• Immutable ledger: Each block in the network is assigned a unique digital code called a hash. Codes of all blocks are interconnected in a way that they cannot be modified unnoticed. Any even minor change would break the chain. As a result, DLT transactions cannot be altered or deleted once added to the system.
• Consensus mechanism: To incorporate a new block into the network, the whole system should “agree” on its validity. This is done through a combination of consensus mechanisms entangling different methods for transaction verifications and block validation.
• Smart contracts: It’s a self-executing contract form embedded into the lines of the code. Smart contracts ensure automated transaction execution eliminating the need for intermediaries.

All in all, distinguished by the ultimate transparency, security, and independence, digital ledger technology is a perfect platform for various applications, especially when it comes to complex, multifaceted, and multifunctional systems such as logistic networks. 

Supply Chain and Its Challenges

A procurement system embraces a number of processes and activities related to the production, distribution, and delivery of goods or services from manufacturers or suppliers to end customers as well as organizations, stakeholders, and resources involved in those processes. 

The range of supply chain activities includes the following:

• Sourcing raw materials,
• Manufacturing,
• Storage and inventory management,
• Transportation,
• Distribution. 

In the meantime, as per an Avenga study, supply chain management (SCM) is aimed at the coordination and integration of all those processes into a single system that is efficient, cost-effective, safe, and functional to best match customer needs. 

Supply Chain Roadblocks

To better understand the role of distributed ledger technology for SCM, you should first consider the main roadblocks that emerge in logistic channels since they will cast a light on how blockchain can help.

1. Globalization: Modern logistic networks are much more complex than they used to be. Covering multiple suppliers, varying compliance systems and issues, and longer lead times, they are more difficult to coordinate and align.

2. Demand fluctuations: Distribution systems are often disorganized by manager inability to leverage demand drops and increases that might cause excess inventory and logistics issues.

3. Non-controllable disruptions: There are force-major events such as natural disasters or geopolitical situations that might negatively impact the whole supply route. Emerging in one area, such events cause shortages and delays throughout the entire system.

4. Poor transparency and lack of control: Supply channel transparency and controllability are critical for efficient management, timely risks identification, and resultative decision-making. Yet, the lack of transparency and control results in delays, high costs, and low efficiency of the system.

5. Cost pressure: Financial tension has a great impact on logistic networks. Inflation and sudden rises in raw material prices, transportation, or labor costs will all impact logistic chain viability and efficiency, especially for companies operating on low margins;

6. Technological advancements: While certainly the progress drivers, technology and innovation are not only about positive aspects for logistic networks. If the related risks are neglected, and the implementation is not thought out, technology can be disruptive.

Blockchain Benefits for Supply Chain Management

Distributed ledger technology (DLT) can be a game changer for SCM. Blockchain principles and features have the right potential to finetune distribution channel processes and mitigate many existing challenges. Here are the 6 top benefits of using this DLT in SCM. 

• Transparency

The lack of transparency is by far the biggest problem of logistic networks, and DLT can solve it once and for all. The platform allows for complete transparency from raw materials sourcing to final product delivery since records can be neither erased nor changed. 

Every transaction in the system becomes accessible and visible to all parties engaged in the system. The info and records are available in a real-time format. 

All of these work to improve the system’s accountability and minimize the risk of serious errors and fraud. 

• Traceability 

Supply chain planning software has branched structures with multiple elements, components, and units in them. Depending on the industry, the system might embrace a whole number of processes and activities, and tracking each of them across the system is often a daunting task. 

DLT can bring traceability inside the chain to yet another level. Technology will enable all stakeholders to trace the route from the origin of raw materials through production and logistics to the customer getting the end product. 

All organizations involved will be able to determine the source of quality or safety issues and address the situation via immediate actions. 

• Efficiency

More often than not, supply networks involve many manual processes that are effort- and time-consuming, bring added labor costs, and increase the risk of errors due to human touch. Blockchain will introduce automation making SCM much more efficient. 

Tracking inventory, verifying product authenticity, and accounting for costs won’t be a problem. Automated processes will save time, reduce related costs, and greatly improve data accuracy. 

• Security

Designed to be tamper-resistant, DLT offers secure supply chain digitalization. All transaction-associated records in the system will be protected from unauthorized access by the hash-code algorithm applied across the network. 

The more complex the system, the more difficult it will be for fraudsters to access the network and introduce any counterfeit products or financial data. Both separate transactions or records and the whole logistic network integrity will be shielded from hackers and unauthorized use. Automotive software development services often resort to using blockchain for this purpose when creating solutions for their customers. 

• Improved Quality Control

While manufacturers and distributors claim to deliver only quality products and pay close attention to quality control and testing, returns due to poor quality or defects are not that rare. 

By enabling real-time monitoring at every step in the supply chain and tracking products throughout the system, DLT will make it much easier and faster to identify and address quality issues. It will reduce waste and minimize returns due to quality defects.   

• Collaboration

Digital ledger technology will let all stakeholders in the logistic channel communicate and interact in a more effective manner since all parties involved in the process or transaction will have the same records and data at their disposal. 

This will minimize the risk of conflicts and disputes between stakeholders and make communication easier, thus facilitating system management and making it more efficient. 

Blockchain Challenges and Limitations in Supply Chain Management

A highly promising solution for SCM, distributed ledger technology implementation still entails certain challenges you’ll have to address to get the most out of this technology:

• Interoperability: It’s presumably the biggest issue you’ll have to tackle when introducing the blockchain. Organizations might use different systems, and the lack of data standardization will make it difficult to integrate data from varying sources and seamlessly implement DLT algorithms across the whole supply chain.
• Data privacy and security: Though known for its high security, DLT is not impeccable in this concern. When implemented incorrectly, it might expose sensitive and confidential stakeholder data to tamper.
• Scalability: While still relatively new, blockchain infrastructure might have scalability problems when it comes to processing big volumes of data and transactions, which might result in slow transaction times and increased costs.
• Governance: The legal side of the business always matters. The same is true for logistic channels involving multiple parties and legal entities. However, there is still a lack of clear standards and legal rules to regulate the use of digital ledger technology in SCM. This might result in liability and accountability issues.
• Costs: Blockchain integration into existing supply channels might turn out quite expensive, especially for small and mid-size businesses. The investment required to realize DLT solutions might be not worth the benefits it brings, at least at the current stage. 

Conclusion

Blockchain technology has certainly a lot to offer to supply chain management. Accelerating data processing, optimizing transactions, avoiding fraud, and minimizing costs are to name a few. However, there are still a number of challenges that should be handled to implement digital ledger technology in your distribution system successfully. 

That said, blockchain keeps evolving and getting mature, so the existing challenges and limitations will be neutralized over time. Hence, it’s high time to consider the technology potential for upgrading your supply chain system.