Difficulties in aligning supply chains with blockchain
By Saurabh Asthana
The new technology of blockchain is revolutionizing industries and processes. Blockchain is a sophisticated database mechanism that enables the transparent exchange of information in a business network. Therefore, it brings accuracy and intelligence to a business.
Procurement, as a business function, is also embracing blockchain technology to increase supply chain transparency, which is essential for today’s businesses. A growing number of businesses are disclosing information about their procurement methods, raw material sources and other supply chain data to external stakeholders. There are several reasons for this. The first is the growing environmental awareness and regulatory pressure to green supply chains. Another reason is the modern consumer, who wants to know in detail how and where a product was made.
However, vendors and suppliers may be wary of revealing too much information. They may lose their competitive edge or come under fire as a result. Sometimes the suppliers themselves may not have full details of the chain beyond the first levels.
Blockchain as a solution
Blockchain can be used to create smart supply chains that provide complete information at multiple levels and yet keep the data safe. Blockchain-based systems combine public key infrastructure, economic modeling and cryptography to achieve database synchronization through peer-to-peer networks and decentralized consensus. It can act as a deterrent against fraud and establish a seamless procurement process.
Blockchain is to some extent adapted for the following processes:
- Automation of transaction processes
- Monetary use cases
- Vehicle network
- E-contracts
- Traceability of the land registry
However, despite its benefits, there are challenges to blockchain’s full adoption and use. For example, many warehouses still operate with paper and traditional processes. If a company tries to integrate blockchain into a system of unreliable record keeping, it could prove to be more harmful than beneficial.
Successful blockchain implementation
To use blockchain technology successfully in the supply chain, a company must do the following:
- Decentralize the procurement process: Most supply chains are managed from the center, but to establish blockchain on a supplier basis, the procurement division will be required to operate at a regional level to capture the nuances of regional dynamics before creating the model.
- Monitor data: While blockchain can ensure the authenticity of a transaction, additional technologies such as RFID-based identification, cryptographically secure transactions, and automated record generation can ensure that the transaction is also done systematically. Arrangements must be made for data monitoring at the supplier’s end. Another option would be to have trusted third parties verify the transaction.
- Cooperation from suppliers: Some suppliers may not be willing to integrate their systems and processes with the blockchain technology. This may be due to the high initial costs of implementation or resistance to change. In such cases, it is advisable for an organization to work with more progressive suppliers, use new technologies and work on a smart contract basis.
- Initial investments: Blockchain is a complex technology, and its use requires significant investments of resources, time and effort. Furthermore, the regulatory standards for the technology are still uncertain and vary from country to country. Therefore, organizations will need an overhaul of their technical infrastructure to integrate blockchain technology into their processes.
Agricultural raw materials
There are restrictions on the implementation of blockchain in the industries that use agricultural raw materials, especially the food and beverage industry. At the most granular level, the base raw material for these industries comes from farmers working in rural areas who have limited access to the internet, and very few use it for agricultural purposes. Therefore, there exists an availability gap in receiving information.
Conclusion
Blockchain is still emerging and there are only a few people who are well versed in this complex technology. Thus, it presents the issues of scalability and performance. Another major challenge facing the technology is the fragmented nature of supply chain processes. For any organization to incorporate blockchain into its procurement process, a comprehensive backend is required to get the systems in place. Finally, managing change, aligning incentives, and achieving consensus among organizations that want to collaborate are other major obstacles.
However, this change is necessary and organizations must implement it gradually but surely.
The author is senior consultant procurement, Aranca
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