Summary Supply Chain Café #12
Supply Chain Café by PICS Belgium 27/04/2023
Authors: Jeroen Beliën, KU Leuven & Stefan Creemers, IESEG
Moderator: Jan De Kimpe, VP PICS Belgium
8
May 2023
Blockchain in the supply chain: hype or hit?
Supply Chain Café by PICS Belgium 27/04/2023
Authors: Jeroen Beliën, KU Leuven & Stefan Creemers, IESEG
Moderator: Jan De Kimpe, VP PICS Belgium
As a consumer, would you be willing to pay extra for cannabis if there were a reliable way to track where and under what conditions the plant was grown and what steps it underwent until it was sold? Would the producer want to pay to simplify the paperwork and report to the government? Wouldn’t the government benefit from a complete and reliable view of the cannabis supply chain?
IBM, developer of blockchain technology, has submitted a proposal for the use of blockchain in the cannabis supply chain to the Canadian province of British Columbia [1]. If this seems too farfetched, what if we replace cannabis with medicine? Or with food? Blockchain has already been used in the supply chains of pork, fish, and coffee, among others [3]. It has also been used in non-food supply chains where verifiable origin, processing, transportation are important for several reasons: quality (e.g., high-tech parts), sustainability and fair trade. Similarly, blockchain has already been applied in the supply chain of diamonds [3]. After all, consumers are only willing to pay more if the sustainability, quality, and fairness of a product can also be undeniably shown.
A family of technologies
Blockchain is a family of technologies for the development and maintenance of distributed ledgers, or decentralized, replicated databases. Important here is the distinction between using blockchain for supply chains and for crypto currencies, the best known of which is bitcoin. Indeed, blockchain for bitcoin is not sustainable at all, because of the high energy consumption for handling transactions (“bitcoin mining”) based on a proof-of-work consensus mechanism, necessary because bitcoin uses a public network in which participants are free to participate. For blockchain in a supply chain context, however, we use private networks in which participants need permission and the consensus mechanism is based on the much simpler proof-of-stake concept, with low energy consumption.
We can therefore argue that use of blockchain will lead to more sustainable supply chains, because blockchain will make the supply chain more transparent to the customer, allowing suppliers to better “sell” the added value of their sustainable supply chain as well.
Blockchains allow smart contracts to automate earlier “paperwork” without human intervention
Increased visibility on the entire supply chain
In addition to improved traceability, blockchain also offers increased visibility on the entire supply chain, resulting in a variety of benefits. Indeed, a major cause of the bullwhip effect in supply chains is the lack of complete info on supply and demand across the entire supply chain. Another important benefit is the simplification of administrative handling. Blockchains allow smart contracts to automate earlier “paperwork” without human intervention, e.g. if a delivery occurs and meets certain conditions (e.g., temperature measured by smart sensors), payment automatically follows.
Finally, blockchains also allow the creation of virtual markets for supply chain capacity, as an alternative to the direct sale of goods. The virtual rights to capacity can be sold to other buyers when demand is unexpectedly low or purchased during peaks.Blockchain allows to create this virtual market in a reliable way with no middleman, and is particularly useful in situations where sensitive information needed for placing bids (expected demand, willingness to pay of each buyer) is not shared with the supplier and other buyers.
Risks and drawbacks
While blockchain has great potential, we must point out some risks and drawbacks. First, there is the blockchain bubble, propelled by the bitcoin hype. There are many similarities to the dot.com bubble of the early 2000s. For example, of the 26000 blockchain projects started in 2016, only 8% were still in service one year later [2]. From a study in 2021 [4] on the knowledge and use of blockchain in the supply chains of the Fast Moving Consumer Goods (FCMG) sector, in which 40 European FMCG companies participated, we concluded that the knowledge about blockchain among these companies was very low, only 3 of the 40 companies were currently using blockchain, and most companies had little interest in using blockchain. Main reasons were the high cost (estimated at 100K for a medium-sized company) and the lack of added value compared to existing alternatives such as EDI and a central database. For example, it was repeatedly mentioned that the increased reliability of blockchain offered little added value since many FMCG companies only work on the basis of long-term relationships with reliable suppliers.
This added value and cost also came up at the PICS Blockchain Café, where a participant brought up that the pure technical cost of blockchain technology is much lower than 100K for a medium-sized company, but the consultancy cost can drive up the price. However, the latter depends on the specific situation and needs of each company. It was also suggested that automation – the smooth running of transactions without human intervention (a.k.a. smart contracting) – may be the biggest advantage of blockchain over existing alternatives.
