October 2, 2018
Modern-day supply chains have grown so complex that it can be challenging for retailers to make sure their sources are safe and trustworthy.
Chipotle’s E. Coli. crisis of 2015 is a good example of the challenges they face: the company’s stock price plummeted when it couldn’t track where among its stores all the tainted beef ended up.
Meanwhile, a growing cohort of conscientious consumers seeking fair-trade or organic products are putting added pressure on product sourcing.
Scandals like last year’s false labeling of 36 million tons of soybeans as “USDA Organic” have the potential to undermine confidence in or even destroy companies.
A new technology called blockchain could be the solution. Blockchain, the infrastructure underlying bitcoin, is like a digital ledger that keeps an immutable record of transactions between parties.
If you think of a supply chain as a series of transactions between suppliers, processors and brands, you can see how blockchains apply.
(Note: this is not another post detailing what blockchains are or their technical specifications. The uninitiated should read this magnificent overview by The Economist.)
Blockchains track supply chains
Simply put, blockchains are a cheap, easy way to track every step in a supply chain.
Each person or organization along the supply chain can encode the quantity and quality of the item, the date and time and any other relevant information into the blockchain in a few seconds using a mobile phone. That data will then be available to anyone who cares to look.
To understand how blockchains track product provenance, imagine a major tuna brand sourcing from individual Indonesian fisherman. Here we’ll discuss two issues for the brand: environmental impact and cleanliness.
A local NGO can certify a fisherman for environmentally friendly practices like pole-fishing (making sure they’re not using dynamite or dragging the sea floor with nets).
This certification goes onto the blockchain as a digital token of information, which happens to be exactly what a bitcoin is.
The fisherman can then log his catch on the blockchain using a mobile app or SMS. So now we have a record of sustainability for each fish entering the supply chain.
But what’s to stop the fisherman from using a net or dynamite once he gets his initial approval? Well, if the NGO ever catches the fisherman fishing with dynamite or a net, his approval is rescinded and, more important, this information is also logged on the blockchain for all to see.
In other words, blockchains create an open history of every person or organization involved in production. Any actor that misbehaves and gets caught will forever have a black mark on their record.
Now let’s consider what happens if E. Coli. taints a batch of tuna at the processing plant. As we saw with the Chipotle E. Coli. scandal, most companies would have a very hard time figuring out where the outbreak started and what other products might be affected.
But with a blockchain, each step in the supply chain is recorded, so a tuna brand could immediately identify and recall every contaminated can.
Public and private blockchains
Blockchains can be public or private. In our tuna example, the blockchain is public, so everyone—including consumers—can confirm that the tuna is ethically sourced.
Many companies, however, prefer private blockchains. These make product attributes and sourcing clear to people in the company without opening up supply chains to public scrutiny.
Given the prevalence of supply-chain scandals, why would any brand want to subject itself to the transparency of a public blockchain? Well, there are two sides to every bitcoin.
A brand that uses a public blockchain to prove environmental sustainability, fair labor practices, and cleanliness can charge a significant premium for their trustworthy tuna.
Better manage your supply chain with a blockchain
As our tuna example makes abundantly clear, blockchains have the potential to cheaply and accurately track every step of production from supplier to store—all in real time. A boon for industries with complex supply chains like automobile manufacturers.
With a blockchain, an auto manufacturer will have immediate knowledge of any delays, faults, recalls, or other hiccups in the supply chain. Moreover, they can use smart contracts—coded contracts fulfilled and paid all on the blockchain—to automate ordering and payments.
As a result, retailers will be able to plan production schedules more accurately and increase the speed and agility of just-in-time inventory networks.
Real-time supply chain tracking and automated payment will also make accounting much cheaper and simpler. Besides automated bookkeeping, think of automated collections, payments, refunds, and insurance settlements.
It’s time for retailers to get involved in blockchain
Large retail companies have already started to build their own blockchains to track and manage supply chains. Walmart uses a private blockchain to track pork from thousands of small suppliers in China. Unilever, Nestle, Tyson, and Dole use blockchains for similar tracking purposes.
De Beers uses a public blockchain to track its diamonds from their source to ensure against “conflict diamonds.”
IBM and Maersk are working on a blockchain for cross-border shipping that will save billions by digitizing and automating much of what is still a fragmented, paper-based system. Retailers can look forward to faster and lower-cost container shipping as a result.
With numerous startups ready to help retailers learn how to use blockchains to improve their supply chains, the time is right for more retailers to get involved in this space. If blockchains are properly implemented, supply-chain scandals and management costs should decrease drastically.
About the author
Will Freeman is a content expert at Evo.
He is a former economic journalist and part-time entrepreneur.
His interests include economic development, China, India, cryptocurrency and blockchain, and financial technology in general.