Jan. 23, 2018
Global supply chains are modern marvels, propelling trillions of dollars of commerce through the world economy. Unfortunately, they are also riddled with waste, fraud, inefficiencies, and human rights abuses. Some of the resulting failings have implications for society. For example, many producers (including smallholder farmers) do not receive fair prices for the value they create due to supply chain opacity and the costs imposed by unscrupulous intermediaries. In other cases, supply chain problems take a toll on company profits. Maintaining the bureaucratic paper trails required to manage modern supply chains costs billions of dollars annually. For consumers and retailers, the failings are so obvious that they have long been accepted as inevitable: when goods reach their final destinations, most buyers and sellers do not know the true origins of the manufactured products they have purchased.
Harnessed correctly, transparent supply chain solutions could provide consumers and other downstream participants with leverage to promote higher standards of responsibility and sustainability in sourcing and production. The same solutions could also help reward adherence to best practices among small producers and level the production playing field by providing information on pricing and market conditions. However, data silos, outdated enterprise tools, and a lack of transparency, accountability, and traceability all limit the extent to which current supply chain solutions can improve outcomes for people and the planet.
Blockchain technology and decentralized applications are already taking the financial services sector by storm. The supply chain landscape is a likely target for a building wave of blockchain-based innovation that could address critical challenges affecting the field. A range of technology and supply chain companies such as Maersk, IBM, Oracle, and SAP are already developing blockchain-based supply chain management (SCM) software. Numerous pilot projects launched in 2017. If, as early results suggest, blockchain-based solutions reach scale over the next five years, they could deliver a transformation in global supply chain management.
Why blockchain for sustainable supply chains?
Blockchain is well-suited for use in supply chains in part because the technology has the potential to provide an unprecedented level of transparency. Blockchains are structured as a shared, decentralized database with immutable, encrypted copies of the information stored on every server or “node” in the network. Unlike traditional centralized databases, blockchain systems validate entries or changes in the ledger through a cryptographic consensus mechanism, thereby circumventing the need for intermediaries. This enables otherwise trust-less parties, such as individuals and firms that do not know each other, to engage in near frictionless peer-to-peer transactions. Bitcoin and Ethereum are public permissionless blockchains that anyone with a computer can access. There are also private or layered blockchain structured applications that allow for varying levels of user access depending on how their governing protocols are designed. Companies are testing private blockchains for an array of purposes, including protecting intellectual property and other proprietary information.
Blockchain technology continues to emerge as the right solution to solve core problems in supply chain transparency. Supply chains are complex networks of distant, separate entities that exchange goods, payments, and data across a dynamic, continuously evolving landscape. The underlying architecture of blockchain technology has key structural similarities. Blockchains create decentralized networks that allow participants in the system to exchange data relatively seamlessly from anywhere in the world. The system records all transactions so that auditing can be automated and the cryptography used to validate transactions prevents double spending or confusion around the custody of goods and payment. Information stored in public blockchains cannot be erased, and this permanence incentivizes good behavior by preserving evidence of any wrongdoing. Private sector supply chain startups and established industry players are beginning to utilize blockchain to optimize their value chains and free up working capital. These attributes should deliver dramatic improvements in inefficiency.
Blockchain solutions constitute the rare innovation that could provide both profits and social purpose. Regulators, social enterprises, and civil society organizations are poised to harness the transparency and accountability available through blockchain-based tools to help solve supply chain problems including dangerous labor conditions and environmentally destructive practices.
Blockchain is not a one-size-fits-all solution to the challenges of supply chain transparency, but it provides a key piece of the puzzle. Ethically-minded solutions could lead to greater accountability and responsibility around human rights and environmental impact, such as monitoring factory working conditions for modern day slavery or measuring diesel pollution of trucks at shipping ports.