ASCM Insights

Prepare Your Supply Chain Organization for Blockchain

By David Medina

Blockchain is garnering a tremendous amount of hype as a potentially world-changing technology in the realm of manufacturing and supply chain. Advocates tout benefits such as increased efficiency, reduced transaction costs, and more control and transparency across all supply chain activities. The technology may well transform manufacturing and supply chain operations, but, before this vision can be realized, learn how to overcome the typical hurdles.

Of course, there are technology maturity, resource requirement and scalability challenges. Three basic elements are essential to making a blockchain a cryptographically secure, trusted network: public key cryptography, a distributed or peer-to-peer network with a shared ledger, and a governing program that contains the controlling blockchain protocol.

In addition, because blockchain technology still is relatively new, there is a general lack of accepted standards and governance models, regulatory oversight, and understanding of when it is a better solution than existing technologies. Effectively addressing these issues will drive the adoption of blockchain solutions.

Commonly accepted blockchain or distributed ledger standards do not exist and are only now being discussed by industry groups. Though more technically related standards like enterprise security and interoperability are needed, the business and regulatory issues such as legal, tax and regulatory compliant accounting standards are equally as important.

For example, a blockchain would likely consist of nodes that are geographically dispersed, each potentially under different legal and tax jurisdictions. How does the blockchain remain compliant with a variety of legal and regulatory schemes for these geographically disparate nodes? Clearly a standard defining the law and jurisdictional compliance would need to be in place to ensure a company has certainty around the laws to be applied in case of disputes.

Appropriate use cases

Satoshi Nakamoto, the person or persons credited with developing Bitcoin, originally discussed blockchain in the context of a very specific use case, that of a peer-to-peer version of electronic cash. Although the original idea was to distribute records and processes without a middleman, there still isn’t a clear understanding of the best-fit use cases for this technology, particularly in manufacturing and supply chain operations.

For example, supply chain traceability often is cited as a potential use case because all supply chain partners would be required to post their transactions to the blockchain, thereby ensuring a secure, highly visible chain of custody. But what happens if a member of the supply chain posts fraudulent activity, such as by labeling a counterfeit product as authentic in the blockchain? How would other members of the supply chain vouch for the validity of the transaction if they weren’t physically there? Clearly, internal processes are needed to ensure that posted transactions, such as a quality inspection, occurred. Does that require a blockchain within a blockchain to validate that inspection? A better question to ask is whether or not this actually is a good use case for blockchain technology.

Use cases may also depend on whether the shared network is public or private. It seems that the best are those that prioritize the characteristics of robustness, chain of custody, decentralization and proof of source instead of speed and scalability. Private or small consortiums may exist that don’t demand full trust among participants. These users may be willing to sacrifice trust for speed, privacy or auditability.

How about cryptographic security? Some blockchains may not require a majority of nodes to complete the complex mathematical algorithm, also known as proof of work in Bitcoin terms, to participate. If this function is not required by a blockchain, is the platform really a blockchain, or is it another type of shared ledger?

Blockchains also face technical questions with respect to resource requirements and scalability. The cryptographic security in a blockchain is met by using a mathematical algorithm that no party controls and is distributed throughout the blockchain. When the algorithm is solved by a majority of the participants, consensus is achieved, and another secure block is added to the blockchain. However, solving these complex algorithms requires large amounts of computing power. For example, the power used in one bitcoin transaction is roughly five times greater than what Visa uses to process 100,000 transactions. This level of computer usage represents a significant energy and environmental cost that cannot be ignored.

Scalability is another significant challenge, as blockchain transactions are very slow to process, especially when you compare them to almost any typical electronic business transaction. For example, a bitcoin transaction can take anywhere from 60 minutes to several hours to process. Because of the distributed nature of blockchains, the time for processing a transaction will only lengthen as more computers are added, resulting in much slower and more cumbersome blockchain transactions. This trait doesn’t fit well with the idea of an agile supply chain.

The application of blockchain technology in supply chain is still in its early stages. The good news is that the technical challenges cited here likely will be solved by advances in engineering and science. The key issue, therefore, will be dealing with the business-process challenges. Once both are addressed, blockchain technology will flourish across the global economy.

David Medina is vice president of solutions and vertical markets at QAD. Previously, he held executive positions in product management, marketing and sales leadership at number of technology companies. Medina may be contacted at d6m@qad.com.