Abstract
Following the globalization initiated by containerization of logistics, supply chains might be due another revolution by the integration of the disruptive blockchain technology that addresses the current issues with the management of complex global supply chains. Blockchains are distributed digital ledgers that require no central authority to operate while offering a tamper-proof and transparent history of each transaction from the very beginning. Distributed nature of these ledgers ensure that every participant of the supply chain has access to trusted data. The industry has already begun experimenting with blockchain integration into their operations. For the majority of the organizations, however, these experiments stay in proof-of-concept stages or small pilot studies. In this chapter, the authors discuss the supply chain characteristics that make blockchain integration favorable, lay the groundwork for how blockchain can be used for supply chain operations and how it has been used so far.
TopIntroduction
Supply chains are networks of independent organizations that create and deliver a product to a customer. These complex provenance networks often span multiple countries or even continents. Due to the sheer number of actors on a supply chain, organizations concern themselves only with their immediate links; the upstream actor they are buying from and the downstream actor they are selling to. Incidentally, no one organization has overall control of the whole network, but organizations have to manage their resources and capital to fulfill their niche on the supply chain.
Supply Chain Management is the collaboration and cooperation of resources, time, and capital of the organizations on the chain. There is a delicate balance between centralization that leads to efficient use of time and resources, and decentralization to deter opportunistic behavior and fraud (Azzi et al., 2019; Schmidt & Wagner, 2019). As mentioned above, supply chains are not centralized, so it is not feasible to think that organizations have adequate information about the provenance of their inputs below or they are liable to provide information to the parties above them. The lack of information causes wasted inventory space, uncertain delivery times and forces companies to plan with margins of errors that can lead to the bullwhip effect (Ivanov et al., 2018).
Blockchain technology became popular after it was used to power the cryptocurrency Bitcoin in 2008 (Nakamoto, 2008). Since then it has found many uses in other than the finance domain. The primary benefits of blockchain technology in the supply chain management context include: transparency, traceability and decentralization. Blockchain can be used as a tamper-proof, immutable ledger shared between all parties. Once adopted by the organizations on the supply chain, transactions between the participants can be committed to the blockchain with some consensus process verifying the legitimacy of the data. The transparency and traceability of the information go hand-in-hand with a permission system such that the owner of the data can allow access only to concerned parties. All parties along the chain including the customers at the end can verify the provenance of the product they get and confirm that it is not counterfeit, sourced with unethical or questionable labor practices or contaminated in some way.
The industry has been conducting pilot studies for blockchain integration to the supply chain including food (IBM, 2017) and logistics (Moise & Chopping, 2018) industries. The literature has also suggested extensible frameworks (El Maouchi & Ersoy, 2018) and targeted applications such as a counterfeit-proof electronics supply chain (Xu et al., 2019). Internet of Things (IoT) is another field that can highly benefit from the digitization and interoperability that blockchain technology provides. IoT encompasses devices that have network access, collect data and act autonomously. With the developments in big data and machine learning fields, there is apparent value in collecting data to optimize operations and make informed decisions.
This chapter presents supply chain basics and identifies potential issues with the current supply chain management solutions. Then, the usefulness of blockchain for supply chain management is presented. The drawback of blockchain integration is examined alongside common criticisms against the technology and a discussion about when blockchain is not the viable solution. Finally, use cases from real life and literature is given in detail and open questions, as well as future research directions, are reviewed. Preliminary information regarding supply chains and current problems with it are presented for the rest of the section.
Key Terms in this Chapter
Interoperability: Interoperability is the degree of communication between two or more systems. When interoperability between systems is high, then they can communicate, share data, and use each other’s functionalities. When the interoperability is low between systems then additional effort is required to translate one system's data types and communication protocols to the other, if possible.
Blockchain: Blockchain refers to a decentralized history of transactions shared between various participant. The blocks of a blockchain are connected chronologically where each block is linked to the previous block. Changing an arbitrary transaction requires altering every block, while the rest of the network is following the longest chain.
Proof-of-Work (PoW): This is a computationally intensive task used in public open blockchain networks. It requires the participants to increment a nonce value to calculate a hash using the list of waiting transactions. The resulting hash value should be lower than a set limit. This busywork is in place mainly to select the transactions to commit to blockchain while protecting the network from malicious actors, as adversaries cannot bolster enough computational power to divert the blockchain.
Internet of Things (IoT): This refers to inter-connection of processing devices (computers, mobile phones, sensors, smart watches, and other smart devices) via the Internet to communicate, share and process data. Applications include Internet of Vehicles, Industrial IoT, smart cities, etc.
State Zero Problem: Any input to the blockchain is irreversible so the tokenization process is delicate. If any mistakes occur or a malicious actor alters the information, the blockchain moves forwards with the erroneous information. If the tokenization process is secure, then the immutability characteristic of blockchain technology guarantees that the blockchain handles the rest of the security requirements.
Smart Contracts: Smart contracts are computer programs that can be assigned an address on a blockchain. Their code can execute and address transactions to other parties on the blockchain according to the state of the blockchain or according to the transactions they receive based on certain pre-defined terms. Smart contracts are useful to introduce automation to the blockchain.
Tokenization: This is the process of creating a representation of a physical item or asset to be used in the blockchain. This token is exchanged during transactions that match the journey of the asset, from sender to the receiver.
Supply Chain: Supply chains refer to how a product’s raw materials are sourced, constructed, assembled, distributed, and sold to a customer. These consist of multiple organizations that often span across countries.