In late 2018, the CDC issued a warning about E. coli outbreaks from romaine lettuce resulting in a massive recall. Blockchain made its way into the headlines, with several experts touting it as a silver bullet for the capability to trace and link an item at the retail shelf all the way to the source of supply. These experts felt that blockchain could have prevented the mass recalls associated with such outbreaks by helping identify source-to-shelf linkages quickly.
At the heart of the argument is one of the core virtues of blockchain - a distributed ledger system where each transaction is logged into the blockchain. Validated by a number of participating distributed nodes, this makes the records hacker-proof and trustworthy. The “journey of the romaine lettuce” can be traced back all the way to the specific farms where the lettuce is produced, making recalls surgical and targeted and offers a valid argument that makes perfect sense on the surface level.
A case for blockchain as a trust-based system for “store of value” has already been proven in case of its killer app - the bitcoin. Each bitcoin transaction is validated by several nodes in the blockchain system. As an incentive for participating and ensuring each transaction is authentic, those who operate the authenticating nodes have an opportunity to receive bitcoins as an incentive. One would assume that the use-case could be extended to a physical supply chain to record and authenticate change of custody. This method would create a farm-to-fork chain of transactions that could be logged and retained to track inventory transfers.
But there are a few weak links in the blockchain argument that can limit widespread adoption in physical supply chains:
Organizations’ Desire for Control
Blockchain’s origins were based on principles triggered by lack of trust in the financial institutions backed by the big government. These views were shared in a whitepaper written by the bitcoin’s mysterious inventor Satoshi Nakamoto, who advocated for a peer-to-peer electronic cash system where the big financial institutions exerting control over fiat currencies are disintermediated. However, most organizations that participate in a supply chain operate based on having controls in place. ERP’s big value proposition focuses on standardization of the enterprise data giving control to organizations over their data assets. Many organizations have spent tens to hundreds of millions of dollars implementing these systems so that they can control their data. This thinking is antithetical to the philosophy of the founding fathers of cryptocurrencies and the irony is that now, blockchain is viewed as the means for organizations to gain visibility and control over data that is beyond the four walls of their enterprise.
However, security concerns and questions about who gets access to the data in the blockchain becomes a paramount concern, further reinforcing the desire for control. This gave rise to the notion of a private blockchain, which grants access by invitation only to select parties. This raises the question of who will operate such private blockchain and if the power and control over blockchain will be truly distributed evenly across the nodes in the network.
There are also questions around who will enable these nodes and what the incentive might be for them to authenticate the transactions. For example, if the value chain partners, such as the suppliers and customers of any company, get invited to the blockchain, then the major anchor player, such as a manufacturer or retailer, will want to set the standards and have control over the operational standards for the blockchain. Any time one organization’s desire for control takes over, collaboration efforts will face higher barriers to succeed and face bigger resistance while the anticipated benefits may, at least in perception, be lopsided.
Lack of Interoperability Standards
Given that the “private blockchain” initiatives will be dominant in supply chain, this brings forth the idea that these blockchains will need to operate cohesively in an automated manner.However, supply chains do not consist of one linear chain. Instead, they are a complex web of many supply chains interlinked. Barring the case of a few highly vertically integrated organizations, most companies cannot dictate all of the value chain partners to participate in their private blockchain.
Therefore, multiple private blockchains will need to be integrated to enable a true end-to-end visibility, especially when it comes to highly global and complex supply chains. However, there are no interoperability standards currently in place given the nascency of blockchain in supply chain. At the same time, several of the smaller players in the value chain may be forced to take part in multiple private blockchains, raising concerns about the effort involved and costs to participate with questionable benefits to such parties.
Supply Chains Have Physical Goods Traversing Through Them
Cryptocurrencies involve fully digitized transactions. This lends itself better to a fully digital, distributed authentication mechanism. However, supply chains consist of the movement of physical goods. How will the nodes distributed in the cloud witness and comprehend the physical change of custody? Blockchain cannot do this in isolation and will need to work in tandem with technologies such as the Internet of Things (IoT) to track the movements of goods and possibly computer vision to witness the change of custody as it happens.
Companies also need to consider who will authenticate that the goods are from the sources that the blockchain claims. Tamper-proof packing can help to some extent but cannot control every situation. For example, what if the farmer at the originating point of the supply chain combines lettuce from his own farm with lettuce from other farms prior to packing them? Blockchain cannot account for this. The interplay between the physical supply chain and information chain is far more complex than a fully digital information chain (such as the case for cryptocurrencies) for blockchain enablement.
Humans are the Weakest Link in the Blockchain
If a human employee needs to authenticate any transaction or change of custody and enter it into a system, that link is prone to errors or potential fraud. For example, humans with good intentions can simply forget to log a transaction or change of custody. On the other hand, humans with ill intentions can tamper with the packaging and contents, physically altering the product in transit beyond the eyes of the blockchain. The less involved humans are from the routine change of custody transactions the more reliable these processes become. Over time and with less human interference, the blockchain can become less vulnerable to the human weak links.
Though there are some benefits to using blockchain, supply chain professionals should remain skeptical surrounding the short-term potential. The technology is still in the early stages of the hype cycle and the business value proposition needs further clarity.
The most pragmatic way for organizations interested in blockchain is to test the concept through pilot programs. Pilots should be focused on the areas that offer organizations the most control and companies should take the aforementioned weak links into consideration. Such pilots will mean dedicating internal resources and engaging external consultants to enable a private blockchain and could be costly to test, with questionable payoff. For most organizations, it may make sense to take a “wait and see approach” to understand how other companies use or are impacted by blockchain. Logistics, food, pharma and high-value merchandise industries are leading the way by engaging in pilots. While the blockchain technology in principle offers promise to the world’s supply chains, time will tell when it will reach large scale adoption and addressing the aforementioned challenges will be pivotal to any broader adoption.
Dr. Madhav Durbha is Vice President of Industry Strategy at Llamasoft.
