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Blockchain not a panacea for supply chain traceability, transparency

Many in manufacturing are excited about blockchain's ability to verify goods moving through the supply chain. Unfortunately, the technology's readiness might not be what it seems.

With the requisite media coverage, analyst interest and promise of being the technology answer to all that ails, blockchain hype is reaching a fever pitch. Indeed, across sectors and industries, a plethora of companies are trying to figure out how to use the distributed ledger technology to gain a competitive edge.

Manufacturing is one such sector. Blockchain, the technology underpinning Bitcoin, has the potential to ensure provenance of goods as they move through the global supply chain. Rather than relying on easy-to-forge paper documents, or even some traditional electronic systems, blockchain-based record-keeping produces a chain of ownership and records that is extremely difficult to alter.

This has relevance in almost any industry in which people want to verify that they've gotten what they've paid for, but it is particularly important in fields like medicine and aviation, where products must meet very strict standards, or with precious metals and jewels, which could be used to fund wars and oppressive regimes. In other words, blockchain has great potential in the areas of supply chain traceability and supply chain transparency.

How blockchain works

In a July 18 brief, IDC analyst Robert Westervelt noted that blockchain has the potential to solve some significant and costly challenges in tracking high-value goods and services in the supply chain. With this in mind, IBM has built a "blockchain foundational layer," which other companies can build upon.

"The blockchain approach is built using ledgers, which are replicated and distributed over a peer-to-peer network," Westervelt explained. "The integrity of the transactions, such as the financial data, system logs, or goods and services, are validated through consensus processes. Every transaction is reviewed by various business partners engaged in a market scenario, such as manufacturing and distributing electronic components that provide connectivity for a mobile device."

"While blockchain is no panacea, IDC believes this innovative approach could lower the costs of tracking goods and services by expediting the validation of transactions between multiple parties along supply chain routes," Westervelt concluded.

"Although there are several blockchain startups that are taking aim at this segment," blockchain has yet to be widely implement, said William Mougayar, a blockchain investor and author of the 2016 book, The Business Blockchain.

One company he pointed to was Everledger, a London startup that has taken aim at the diamond supply chain. Everledger is demonstrating blockchain's use in support of supply chain traceability and supply chain transparency. The vendor built its application, which tracks the origin of diamonds, using the underlying blockchain architecture provided by IBM.

Another company Mougayar mentioned was the San Francisco-based Chronicled, which targets forgery and is developing a platform that will aim to ensure 100% authenticity of consumer products.

In general, Mougayar noted, the motivator for using blockchain is usually increased supply chain transparency, particularly in relation to ensuring the authenticity of goods.

"In theory, this all makes sense, but supply chains are very hard to change and adapt," Mougayar said. "Typically, companies spend years putting [supply chains] in place and refining them. It is not very easy to insert [a] new technology inside established supply chain systems because the integration challenges are not to be underestimated."

"There are several necessary tasks before considering blockchain implementation in an industrial context, [including] increased legal department expertise in the area and better understanding of the uncertainty and financial risk of handling a large portfolio of suppliers, among others," said Percy Venegas, a researcher in intelligence, strategy and economics at the Costa Rica-based EconomyMonitor.com.

Venegas explained that there are only a few lawyers with practical experience in the cryptocurrency space (for instance, in niche verticals in finance), and even fewer with broader knowledge of other types of crypto assets. This is true even for large law firms which advise multinationals.

"Given that global manufacturing companies rely heavily on such advice to run their cross-border operations, acquiring blockchain literacy is a must before going into this space," Venegas said.

A new paradigm for supply chain traceability

Distributed systems, blockchain being the best-known today, hold great promise for the supply chain, said Mance Harmon, co-founder and CEO of College Station, Texas-based Swirlds, provider of a development environment for distributed systems. The technology can help address three critical questions that companies have to ensure the integrity of ownership of goods throughout the supply chain. Essentially, everyone involved wants to know if any party can:

  • Change the history of any given transaction.
  • Disrupt the flow of transactions.
  • Unfairly influence the order of transactions.

"Ideally, we want to make sure that no individual can do any of these things, and so the idea of distributed trust in the community is appealing," Harmon explained.

The challenge is that these early generations of distributed ledgers are inherently slow, and cannot necessarily ensure fairness among members. "They can function well to record ownership, but they cannot serve as an actual market to make the supply chain more efficient -- a place where buyers and sellers can come and actually conduct transactions with confidence of fairness in their transactions," Harmon said.

Newer generations of distributed systems will likely address these challenges, he added.

Avoiding blockchain fever

In their report, "The Bitcoin Blockchain: The Magic and the Myths," published in April, Gartner analysts Ray Valdes, David Furlonger and Fabio Chesini suggested that, for the near term "blockchain fever" may be something best resisted. However, they noted, if regarded as part of a spectrum of emerging technologies, it has great potential. Thus, they advised beginning a conversation across the business to assess potential opportunities and impacts.

Similarly, Jim Hurley, research director at Stamford, Conn.-based ISG Insights, a business-computing consultancy, believes blockchain is now in the middle of its hype cycle. "There is lots of speculation and a few trial balloons, but that's about it so far," he said. "It could well be a big paradigm shift, but we won't really know for a few years."

There is still a lack of awareness around [blockchain's] use and, due to its nascent stage, the blockchain ecosystem needs further development.
Pat Bakeypresident of industry cloud, SAP

Finally, noted Martha Bennett, principal analyst at Cambridge, Mass.-based Forrester Research, it seems as if "the technology has been picked up and discussed as if it were more mature than it actually is." Furthermore, echoing comments made by Mougayar, she pointed out that blockchain implementation in a supply chain requires the full cooperation of everyone involved -- and that's a tall order.

"One of blockchain's strengths is that it is accessible to anyone. However, there is still a lack of awareness around the technology's use and, due to its nascent stage, the blockchain ecosystem needs further development," said Pat Bakey, president of industry cloud at SAP, based in the Washington, D.C.-area. If blockchain is "applied right," it can work to support multiparty scenarios in ways that would be difficult or cumbersome to achieve otherwise, he noted. However, expecting blockchain to "patch" or "fix" a flawed relationship might put the wrong expectation on the technology. "End-to-end processes are always multifaceted, and pose challenges beyond technology," he said.

"Even though a solution like blockchain might provide features that foster honesty and trust, [the challenge of] accommodating functions like process design, partnership and business terms should not be underestimated," Bakey added.

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