An Introduction to the Use of Blockchain Technology in Supply Chains
Main Takeaway
A technology which started out as a ledger for
bitcoin transactions is now finding use in numerous other applications. Here we
look at their applications in Supply Chains and Projects. This blog is a teaser
to the book I’ve co-authored with Suresh Iyer ~ Simplifying Blockchain
Complexities in Projects and Supply Chains.
Blockchain
Technology is over twenty years old. Yet, it continues to be a source of intrigue to
users and potential users in the global business community. Many corporate
honchos I’ve met insist that they’re still unable to find out any revolutionary
feature in the technology. Data managers call it an overhyped fantasy which
they say has no utility which is likely to cause more harm than good. I beg to
differ with all of them. Also, I’m sure and it’s absolutely certain that blockchain
technology is here to stay. No one can stop its march forward. Its will continue its advance in myriads of areas
especially where supply chains and projects are concerned.
Proponents of blockchain
technology state that its basic concept is quite easy to grasp. According to
Luke Conway it is essentially a means of data storage that organizes data
into blocks that are then linked into a chain. [Source: Blockchain Facts:
What Is It, How It Works, and How It Can Be Used (investopedia.com)]. We
shall look here at how it works.
New data that is
received is entered into a new block. It’s never rewritten over the old. Thus, a
permanent, immutable ledger of past events that can be viewed in chronological
order is generated. Blockchain technology has so far been used mainly for storing
financial records. It can, however, be used for several other applications like
projects, supply chains, travel records and legal documentation, across sectors
and industries. Many of them have started experimenting with distributed ledgers, which blockchains are.
Concerns About Security of
Blockchains
A question often asked
by potential and new users is ~ what would stop hackers from altering previous
blocks in a chain? The answer is that unlike most digital ledgers that are
centralized on a single, hardened server, blockchains are decentralized across numerous,
very often thousands, of servers. A lot of users may consider this to be a
security manager’s nightmare. Is it? Let’s examine. The technology is in fact quite
resourceful and innovative. Every time there is an attempt to add a new block
to a chain, all the participating servers will compare theirs and other servers’
records. Any mismatch will result in the chain being put on hold and cancellation
of the transaction, pending further examination. So, for a hacker to illegally
alter a block they would have to break into thousands of servers and make all changes
simultaneously, a well-neigh impossible task. The main advantage of blockchain
technology is that no central authority holds dominion over the ledger, allowing
users to apply it across a wide range of applications.
Before we look at supply
chains and projects, let’s look at a few examples from elsewhere. Imagine a
scenario in which a person wishes to purchase something online but can’t
transfer money because the bank’s network is down. When the private ledger of
the bank is used the buyer can’t make payment. However, if they use blockchain
technology, the customer could use a credit card, a store credit, or some other
mechanism through which they can access the user’s blockchain. This is perhaps the
main reason why blockchain technology has become a favourite for user of
digital currencies like bitcoin. Here, the absence of central control means the
exchange of bitcoins cannot be subverted towards their own ends.
The technology has so
many applications. Why then hasn’t its commercial applications become
universal, despite its introduction close to fifteen years ago? October 2008
was when it was introduced. It should have by now garnered a far larger share
of the digital ledger market. While its use in cryptocurrencies is significant,
many organisations are still cautious about its efficacy. With regard to
players in the supply chain sector most players, especially value-sucking, high-cost
intermediaries like freight forwarders look at the transparency that blockchains
provide as a threat to their very existence. Therefore, its use has been limited
to a handful of pilot projects, with no enthusiasm of welcoming it into core
business applications.
A 2017 article in the
Harvard Business Review by Marco Iansiti & Karim R Lakhani entitled The Truth About Blockchain says in its subtitle “It will take years to transform business, but the journey
begins now.” [see: https://hbr.org/2017/01/the-truth-about-blockchain#:~:text=Blockchain%E2%80%94a%20peer%2Dto%2D,transferring%20ownership%2C%20and%20confirming%20transactions. ] The article states that “Contracts, transactions, and records of them provide critical
structure in our economic system, but they haven’t kept up with the world’s
digital transformation. They’re like rush-hour gridlock trapping a Formula 1
race car. Blockchain promises to solve this.” It then goes on.
The article lists out a
describes the “five basic principles underlying the technology” which I’ve
quoted below. They are as follows:
1.
Distributed Database
Each party on a
blockchain has access to the entire database and its complete history. No
single party controls the data or the information. Every party can verify the
records of its transaction partners directly, without an intermediary.
2.
Peer-to-Peer Transmission
Communication occurs
directly between peers instead of through a central node. Each node stores and
forwards information to all other nodes.
3.
Transparency with Pseudonymity
Every transaction and its
associated value are visible to anyone with access to the system. Each node, or
user, on a blockchain has a unique 30-plus-character alphanumeric address that
identifies it. Users can choose to remain anonymous or provide proof of their
identity to others. Transactions occur between blockchain addresses.
4.
Irreversibility of Records
Once a transaction is
entered in the database and the accounts are updated, the records cannot be altered,
because they’re linked to every transaction record that came before them (hence
the term “chain”). Various computational algorithms and approaches are deployed
to ensure that the recording on the database is permanent, chronologically
ordered, and available to all others on the network.
5.
Computational Logic
The digital nature of the
ledger means that blockchain transactions can be tied to computational logic
and in essence programmed. So users can set up algorithms and rules that
automatically trigger transactions between nodes.
Unquote
Why then does this hesitation
for full-scale adoption even exist? Decision makers in freight forwarding and
customs broking companies, as well as lack of trust, governance, and risk issues. There is also the need for compliance
legislation. Contracts in India come under the India Contract Act 1872, a
legislation that’s over 150 years old. Either a new act is needed or the
existing one should be amended so smart contracts may be made legal. A
blockchain architect may get caught into several compliance situations and concerns.
Another common complaint
against or objection to the technology is that being a centralised ledger, are they
able to create reliable software to repair bugs and launch new services? They
say that with proprietary software, at least one could call someone when things
go wrong. With blockchain technology, no one is in charge. Therefore, it becomes
very difficult for users to fix things when they go wrong. With centralised networks of
computers and programmers, there are centres and people available to set things
right when they go wrong. No so with decentralised networks, where the absence
of an authority not only makes it difficult to say that a flaw needs to be
fixed but also spotting the flaw itself.
Blockchains and the Law
There are two
aspects of the law which need to be sorted out as far as applications of
blockchains and smart contracts are concerned – criminal and civil. Let’s start
with criminal. The law enforcing authorities keep stating that democratization,
which is what blockchains are all about, is proving troublesome for those
involved in policing. Law breakers can easily and effectively be shut out
of any centralised, regulated community. However, it isn’t as easy with the
leaderless blockchain. They insist that it has become a haven for
black-marketers and money launderers and have cited many examples. The dark net
or dark web is an example most cited. [see: What is the dark
web (darknet)? – TechTarget] Since 2014 they state
the dark net has continued to utilise blockchain technology for a wide range of
licit and illicit purposes. [see: What is the Darknet? - Definition
from Techopedia] Not all blockchains are
alike. This is an important aspect of blockchain technology that is often
overlooked. Software packages come in a wide variety of designs and myriad approaches
to implementing them. Also, their applications are numerous. But, breaches have
taken place. Most of them are the result of bugs introduced due to faulty
implementation.
The Future of Blockchain Technology in
Supply Chains & Projects
https://hbr.org/2020/05/building-a-transparent-supply-chain
Players in the supply
chain sector will say that today there just isn’t a clear consensus on where
blockchain technology fits. To some it is the very distant future, to others it
has already been around for decade and a half and therefore is an artifact of
the past. One of the reasons for reluctance in its introduction is the fact that
the world economy itself is in such flux. In my opinion it is because many a
value-sucking intermediary would stand to lose when transparency is introduced.
In trade, whether
domestic or international, goods and services flow from seller to buyer while
money flows in the other direction. Flowing in both directions is information.
There are several players involved in a movement and transactions, more if it
involves crossing of international borders. While we focus our discussion on
the movement of goods, the same principles apply to movement of services as
well. Besides players involved, there are very clear-cut steps that shipments
have to go through and services to be purchased. In the process, several
documents, many of them contracts, are generated. By looking at the dynamics of
a typical movement let’s see how blockchains can help.
As an example, we’ll
look at an institutional buyer and seller, from two different companies,
transacting business. The two countries have their own set of laws and
regulations but, the companies doing business are also bound by international
law. The buyer may refer to a catalogue to find out what products the seller
has on offer and may then negotiate on the price and terms. A contract for sale
and purchase may be entered into or the buyer may prepare a purchase order. The
buyer could also send out a request for quotations (RFQ) and choose the seller
who offers the best price and terms. The terms of payment could be a
documentary letter of credit (LC). So, what we see are different types of
documents and contracts that need to be an essential part of the transaction.
All necessary
documents according to the requirements of the country of origin, transhipment
and destination must be completed and checked.
Where applicable, the necessary endorsements must be made. The players and service providers need to
have an idea of documentation and policy & procedures. Carriers may have their documentary
requirements, and these have to be complied with. Certain documents are required prior to and certain others subsequent to carriage. Some of the subsequent docs may need to be
prepared prior to carriage and either accompany the AWB or be couriered to the
consignee. Wherever electronic docs are
accepted, the need for paper docs is eliminated. We now know, for a fact, and need to repeat
here, that that international trade and all transactions in connection with it
generate a host of documents, some of them contracts.
A
contract between a buyer and exporter always specifies that various documents
to be submitted by the exporter covering shipment of related goods. Payment for the export is made by the
importer, through banking channels, based on documents presented by the
exporter. Quite often, as already
stated, the export transaction is backed by an irrevocable letter of credit (LC)
issued by the bank on behalf of the importer in favour of the exporter. It’s good for the exporters and importers to
know the dynamics of LCs. In transactions involving LCs, the exporter gets payment
only after submitting documents complying with the terms and conditions of the
LC. Besides the transportation docs,
like air waybills or bills of lading, other docs may be required
which are divided into the following categories:
·
Shipper’s
Instructions for carriage
·
Customs
documents
·
Documents
required due to the nature of goods
·
Documents
certifying quality or quantity
·
Documents
required for payment purposes
·
Documents
that enable the importer to avail of import duty concessions
Let’s look at its
working. We start from the time the buyer places a purchase order or signs a
contract of sale and purchase with the supplier. The purchase order or contract
will state the terms of trade and terms of payment. We will look
at three possible scenarios with regard to terms of payment – advance payment,
open account, and LC. The players involved in this transaction besides the
buyer and seller are the banks in which the two players have their accounts.
When the seller is
preparing for shipment, they need to prepare an invoice and packing list, other
documents like a certificate of origin may be required in certain cases, the
list is endless. In case of LCs, the seller needs to prepare a pro-forma
invoice and send it to the buyer. The latter hands it over to their banker
along with an application. The banker will then, after certain conditions are
met, issue an LC which will be forwarded to the seller’s bank. To complete the
shipment, the seller and/or buyer may use the services of a forwarder and/or
customs broker. At every stage documents and contracts are prepared. During the
paper era, these processes took weeks, with electronic documentation and
payment, this has been reduced to days. Smart contracts using blockchain
technology will reduce the time to minutes, if not seconds. The processes and
costs too will be absolutely transparent. Payments too will be automatic.
I’ve co-authored an
entire book on the subject. Do read it when it’s released.
Prof Archie D'Souza
