Blockchain in Supply Chain: Advantages, Challenges, and Applications

Blockchain in supply chain management has emerged as a revolutionary technology for many of the challenges businesses face today. Traditional supply chains face numerous hurdles, from ensuring transparency to mitigating risks of fraud and counterfeiting.

In this article, let's explore how blockchain in supply chain management transforms traditional operations. We'll delve into the key functions and benefits that blockchain brings to the table, address the challenges it faces, and share real-life examples of how it has been successfully implemented in various supply chains.

As supply chains grow in scope, an increasing number of companies worldwide are using blockchain tech, including crypto and digital assets, for operational and transactional purposes. If you’re interested in joining the movement after reading this article, remember to use only secure crypto wallets like Ledger.

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Blockchain Overview

Before understanding the practices of blockchain in supply chain, let's uncover the basic concept of this technology.

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A blockchain is a decentralized digital ledger that records transactions across multiple computers securely and transparently.

Each "block" contains a list of transactions, and each new block is linked to the previous one, forming a "chain." This structure ensures data integrity and makes tampering virtually impossible.

The decentralized nature of blockchain ensures that once data is recorded, it can’t be altered without consensus from the network, ensuring high security and trust.

When talking about blockchain technology in supply chain, you may also encounter the term “smart contracts”. These refer to self-executing contracts with the terms and conditions directly written into code. They automatically execute or enforce actions when predefined conditions are met.

Smart contracts are deployed on blockchain platforms and leverage blockchain's decentralized and immutable characteristics.

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Blockchain Technology for Supply Chain Functions

In cryptocurrency networks, blockchain's role is to allow countless anonymous parties to transact with each other privately without a central intermediary. Meanwhile, the role of blockchain in supply chain is to allow a limited number of known parties to protect their business operations against malicious actors.

To better understand blockchain’s role, here is a general outline of the supply chain:

• Sourcing raw materials from suppliers. These suppliers generally provide raw goods like metals, textiles, or other components required for manufacturing.
• Manufacturing and production. Manufacturers transform raw materials into finished or semi-finished products. This stage includes activities like assembly, fabrication, and quality control.
• Warehousing and inventory management. Once products are manufactured, they're stored in warehouses until they're ready for distribution.
• Logistics and transportation. Products are transported from warehouses to distribution centers, retailers, or directly to customers. This stage involves coordination among logistics providers, such as shipping companies, trucking firms, and freight forwarders.
• Distribution and retail. Products are distributed to retailers or sold directly to customers. Retailers may operate physical stores or online platforms.
• Customer delivery and after-sales service. The final stage involves delivering products to customers and offering after-sales services, such as customer support and warranty management.

In traditional supply chains, coordination among stakeholders can be challenging due to the fragmented nature of data and reliance on intermediaries for information exchange.

The stakeholders also often struggle to track products through every stage of the process, leading to inefficiencies and difficulty pinpointing issues.

Traditional supply chains often struggle with transparency and efficiency, but blockchain and supply chain integration provide a solution through a transparent and automated platform.

Integrating blockchain and supply chain practices allows companies to have a more streamlined and efficient process in a secure environment, overcoming some common hurdles in conventional systems.

Benefits of Using Blockchain in Supply Chain

Blockchain technology in supply chain management offers numerous benefits, from transparency to efficiency. In this section, let’s explore those benefits one by one to better understand how blockchain can revolutionize traditional supply chain processes.

Improved Transparency and Efficiency

Blockchain in supply chain management establishes a transparent and tamper-proof record thanks to several unique characteristics inherent to the technology.

The first blockchain characteristic that supports transparency in the supply chain is a decentralized ledger.

Blockchain operates as a decentralized ledger, meaning it doesn't rely on a central authority. This decentralized setup makes it impossible for one entity to change the data on its own, which boosts transparency and security. The immutability of blockchain data is also crucial in ensuring tamper-proof records.

Once a transaction is recorded on the blockchain and validated by the network, it becomes nearly impossible to change or delete it. This capability is achieved through:

• Cryptographic hashing. Each block contains a unique cryptographic hash derived from its data and the previous block's hash. This hash serves as a digital fingerprint for the block. Any attempt to change the block's data would result in a different hash, indicating tampering.
• Linked blocks. The blocks in a blockchain are linked in sequence, with each block containing the previous block's hash, creating a chain of trust. If one block is altered, it disrupts the entire chain's consistency, signaling a potential attack.

With cryptographic hashing and linked blocks, a blockchain-based platform ensures that each stage of the supply chain is recorded and verifiable. This allows companies to quickly trace the source of issues and enables faster recalls when necessary.

Besides improving traceability, integrating blockchain and supply chain can streamline operations by reducing the need for intermediaries.

In traditional supply chains, intermediaries are often necessary to manage and verify transactions between parties. These intermediaries include brokers, auditors, payment processors, and regulatory agencies. They add complexity, increase costs, and slow down processes due to manual verification.

A blockchain operates on a distributed network of nodes, each maintaining a complete copy of the said network.

Parties involved in the implementation of blockchain in supply chain operations can interact directly to view and verify transactions. This capability removes the need for intermediaries, as each step within the supply chain can be traced and audited immediately.

Smart contracts in the supply chain can also automate many operations, reducing costs and speeding up processes. Here’s how:

• Automated transactions. Smart contracts can automate payments, eliminating the need for intermediaries like banks or payment processors.
• Inventory management. The self-executing contracts can minimize errors due to manual tracking by automatically updating inventory levels as goods move through the supply chain.
• Quality control. Smart contracts can trigger alerts or actions if certain standards are unmet, ensuring consistent product quality without manual inspections.
• Compliance and auditing. The code-based contracts can automatically record compliance-related data and generate audit trails, reducing the need for third-party auditors.

The combination of blockchain and supply chain can facilitate direct interactions between parties, maintain transparent records, and automate tasks, which opens up new possibilities for optimizing supply chain management.

Enhanced Security and Collaboration

The decentralized nature of blockchain makes it resistant to data tampering and cyberattacks because it doesn't rely on a single central authority to maintain the network.

The distributed network of nodes provides several key security advantages, including resistance to data tampering, fraud, and cyberattacks.

For example, if an attacker were to alter a block, it would disrupt the hash links in the chain, alerting the network to potential tampering.

With a clear audit trail, stakeholders can view the entire chain of custody, from raw material sourcing to final product delivery. This kind of visibility and transparency help combat fraud and counterfeiting by making identifying anomalies in the supply chain easier.

Fraud can involve fake invoices, unauthorized payments, or manipulated financial records, leading to financial losses and reputational damage.

When stakeholders can trace a product's entire history, fraudsters will have difficulty inserting counterfeit goods or manipulating data without detection. This ability reduces the risk of unethical practices and promotes responsible behavior among supply chain participants.

Blockchain technology has the potential to significantly reduce cyberattacks in supply chains due to its decentralized architecture.

In traditional supply chains, centralized systems often create single points of failure, where a successful attack can disrupt the entire operation.

Blockchain's decentralized structure minimizes these vulnerabilities by distributing data across a network of nodes. With no central authority to target, attackers find it harder to disrupt or compromise the supply chain.

Digital identities and secure cryptographic signatures in blockchain can also ensure that only authorized parties can access specific information or perform certain actions. They reduce the risk of unauthorized access and insider threats, which are common in traditional supply chains.

Besides leveling up security, using blockchain for supply chain operations improves collaboration and information sharing by addressing the limitations of traditional systems for the following reasons:

• Centralized control. Centralized systems can create bottlenecks and increase the risk of single points of failure.
• Siloed data. In traditional supply chains, data is often siloed, with each stakeholder maintaining separate records, leading to inconsistencies, delays, and miscommunication.
• Limited transparency. Traditional supply chains may lack transparency, making it difficult for stakeholders to trace products or verify compliance.
• Manual processes. Many traditional supply chains rely on manual processes for tasks like inventory management and quality control. These processes are prone to errors and delays, which can affect collaboration and information sharing.

Meanwhile, a shared ledger in a blockchain-based platform can increase transparency, ensuring all stakeholders have a clear view of the supply chain and building trust among them.

Since all parties can access the same data, there is less risk of miscommunication, misunderstandings, or conflicting information.

Challenges and Limitations of Using Blockchain for Supply Chain

Blockchain for supply chain management has the potential to revolutionize the industry, but several challenges and limitations can hinder its adoption and impact. Here are some of the key obstacles to consider:

Scalability and Interoperability

Scalability in blockchain involves the capacity to process an increasing number of transactions efficiently as the network expands.

It can be a significant hurdle for blockchain in supply chain processes due to several factors:

• Consensus mechanisms. Traditional consensus mechanisms like Proof-of-Work (PoW) require significant computational power, which can slow down transaction processing as the network size grows.
• Block size and frequency. Blockchains are limited by how large each block can be and how often new blocks are added. These constraints can limit throughput, leading to bottlenecks during high-traffic periods.
• Energy consumption. The high energy consumption of certain consensus mechanisms, like PoW, adds issues in terms of scalability, as it makes blockchain networks scale sustainably.

In a supply chain context, scalability issues can lead to delays in processing due to high volumes and higher operational costs because transaction fees may increase as networks become congested.

Meanwhile, in the blockchain and supply chain context, interoperability refers to the capacity of various blockchain networks and traditional systems to connect, share information, and operate in a coordinated manner.

Building bridges between different blockchain networks requires technical expertise and resources. The main reason is the blockchain ecosystem comprises various platforms, each with unique protocols and consensus mechanisms.

As a result, developing interoperable solutions often involves complex engineering and coordination among multiple stakeholders.

The absence of universally accepted standards also makes communicating difficult for these platforms.

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Legal Considerations and Adoption

Regulatory and legal considerations are crucial when implementing blockchain technology in supply chains. Because blockchain introduces new ways of managing and verifying data, it often intersects with existing laws and regulations.

For example, blockchain's immutability can conflict with Europe's General Data Protection Regulation (GDPR), which grants individuals certain rights over their data, including the "right to be forgotten."

Meanwhile, data can’t be altered or erased easily in a blockchain, so ensuring compliance with such regulations is challenging.

The decentralized structure of blockchain can challenge how intellectual property (IP) is protected.

Companies in supply chains often use patents, trademarks, and copyrights to safeguard their innovations and designs. However, if proprietary information is recorded on a public blockchain, it could unintentionally reveal sensitive IP, risking unauthorized use or copying.

Besides regulations, you should note that adopting blockchain technology in supply chain management requires shifting from traditional centralized systems to decentralized, transparent networks.

This transition presents several challenges:

• Lack of knowledge and understanding. Many business leaders and supply chain professionals are unfamiliar with blockchain technology, leading to resistance to change, and hesitation in investing in new technologies.
• Perceived complexity. Blockchain technology can appear complex due to its technical nature, involving concepts like cryptographic hashing and smart contracts. This complexity can discourage companies from exploring blockchain-based solutions.
• Cost and resource barriers. Implementing blockchain solutions in a supply chain can require significant investment in technology infrastructure, software, and staff training. Small and medium-sized enterprises (SMEs) might find these costs excessive, impacting adoption rates.

If companies decide to use blockchain in supply chain processes, the leaders should educate stakeholders about blockchain technology and its applications to reduce resistance to change.

How Industries Use Blockchain in Supply Chain Operations

The use of blockchain in supply chain operations transforms how companies operate, from automating payments through smart contracts to tracking the origin and journey of goods.

Food and Agriculture

In the food and agriculture supply chain, traceability is crucial for ensuring food safety, ethical sourcing, and regulatory compliance. This is specifically important due to the many stakeholders involved today^[1], from farmers and food processors to distributors, retailers, and regulatory teams.

Blockchain logistics create an immutable, transparent ledger where every step in the supply chain can be recorded and traced. With this technology, stakeholders can track food products from their origins—like farms and fisheries—all the way to the table.

With blockchain, supply chain management teams can access real-time information about a product's journey. This visibility offers many benefits, including:

• Reducing the risk of fraud, counterfeit products, and mislabeling.
• Providing an auditable trail of compliance with safety and quality standards.
• Pinpointing any issue related to food contamination or safety concerns quickly.
• Letting consumers know where their food comes from.

Traceability can also help track a product's environmental footprint throughout the supply chain, including proof of organic farming, fair trade, or other certifications.

De Beers, for example, has applied blockchain technology to track and verify the sustainability of fishery products, providing consumers with greater confidence in the environmental impact of their purchases.

Furthermore, smart contracts, a key feature of blockchain technology, can significantly streamline processes within the food supply chain.

Smart contracts can automate payments by triggering transactions when predefined conditions are met, such as successful delivery of goods, completion of a quality check, or after a set time.

Encoding terms into smart contracts allows stakeholders to ensure compliance with agreed-upon conditions before releasing payments. For instance, a smart contract might specify a certain temperature range during transport, and if this requirement is met, it automatically triggers the release of payment.

Smart contracts can also automate inventory management with real-time inventory records as products move through the supply chain. That way, the team can reduce the risk of overstocking or stockouts.

When food companies set predefined thresholds, smart contracts can also trigger automatic reordering if inventory levels drop below a certain point. This approach ensures a steady supply of products and minimizes manual involvement in reordering processes.

Additionally, smart contracts can be integrated with Internet of Things (IoT) sensors to monitor product conditions like temperature and humidity.

If the conditions deviate from the set parameters, smart contracts can alert stakeholders or trigger specific actions, ensuring that only quality products enter the inventory.

Pharmaceuticals

Pharma companies have complex supply chains^[2] as they work with many suppliers contributing ingredients and components for drug production.

Like the food and agriculture industry, they need to ensure the utmost safety precautions when transporting items, as any negligence of safety measures may lead to risks to public health.

The pharmaceutical industry uses blockchain logistics to improve its supply chain's security, transparency, and efficiency.

Pharmaceuticals can use blockchain to create a unique digital identity for each product, allowing stakeholders to verify authenticity at every stage of the supply chain. This unique identifier can be linked to the product's batch number or manufacturing date.

Pharma companies can also implement blockchain in supply chain management for transparent drug pricing.

Drug pricing is a complex issue for pharmaceutical companies, influenced by research and development costs, manufacturing expenses, regulatory compliance, market dynamics, and profit margins.

With blockchain, supply chain management in the pharma industry also benefits from a transparent audit trail and an immutable ledger. This allows stakeholders to trace pharmaceuticals from manufacturing through distribution.

This increased visibility provides a clear understanding of the costs at each process stage while aiding regulatory teams in verifying compliance with pricing rules and standards.

Chronicled's Contracts & Chargebacks, the first industry revenue management solution, illustrates how blockchain technology can address drug pricing complexities. It streamlines financial transactions and improves accuracy in the pharmaceutical supply chain.

The system automatically settles chargeback claims among pharmaceutical manufacturers, distributors, and group purchasing organizations (GPOs), helping to ensure drug pricing accuracy for healthcare providers, pharmacies, and other dispensers.

The automation enhances trust and transparency in drug pricing by providing a blockchain-based platform for managing contracts and chargebacks.

Automotive

Auto manufacturers lose billions annually because of damaged, lost, stolen, and counterfeit car parts. For example, in Europe, it’s estimated that around $2.4 billion is lost annually to counterfeit tire sales alone. Meanwhile, counterfeit battery sales steal $198m from the original equipment manufacturer (OEM).

Traditional methods of combating counterfeit parts include QR codes and holographic labels. However, experienced counterfeiters may still outsmart these efforts.

With blockchain, supply chain management in the auto industry can have more visibility. This enables the companies to trace spare parts back to their OEM and identify exactly where they might have been lost or damaged.

Blockchain logistics can tackle the issue of low-quality counterfeit spare parts, which put consumers at risk and influence automakers' profits and customer satisfaction. With this technology, parts are tracked by their individual codes on a tamper-proof ledger, which can ensure their authenticity.

Implementing blockchain in supply chain management within the auto industry can also help securely record critical documentation, such as certifications, warranties, and test results. This feature ensures that these documents can’t be tampered with or altered, providing a reliable source of information.

Blockchain technology has a significant role in safety recalls within the automotive industry.

Safety recalls occur when car manufacturers find a defect or safety problem in their vehicles. This means they must alert customers and fix the issue. The traditional process for managing recalls can be challenging due to complex supply chains and the need for precise record-keeping.

With the traceability that blockchain in supply chain provides, automotive companies can quickly identify affected parts, monitor their distribution, and pinpoint vehicles with faulty components. This capability allows them to respond quickly to safety concerns and minimize damage to the brand's reputation.

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Luxury Goods and Fashion

The global luxury goods industry was expected to grow by 22% to around $378 billion in 2022. Despite this growth, the industry still has issues, including counterfeiting, supply chain fraud, and unethical sourcing of goods.

The counterfeit luxury goods industry not only cuts into a brand's revenue by tricking customers with fake products, but when these lower-quality imitations are mistaken for genuine items, they can harm the brand's reputation.

Blockchain logistics offers a secure and transparent way to track luxury goods and fashion items throughout the supply chain. Here's how it can be applied:

• Provenance and traceability. Blockchain enables companies to track the journey of luxury goods from raw material sourcing to distribution. This traceability allows customers to verify the origin of products, ensuring authenticity and ethical sourcing.
• Combating counterfeiting. Blockchain's immutable ledger creates a tamper-proof record of each item's journey, making it easier to identify genuine products and detect counterfeit goods.
• Digital certificates and ownership verification. Luxury goods companies can use blockchain to issue digital certificates that prove the authenticity and ownership of high-end items like watches, jewelry, and designer handbags.

LVMH, the parent company of Louis Vuitton and other luxury brands, is a major advocate of blockchain-based technology in the luxury goods industry.

It founded the Aura Blockchain Consortium, a non-profit organization that helps luxury brands track and verify their products with a private, permissioned blockchain.

Since its launch, other luxury brands like Prada and Cartier have joined Aura. Recently, Aura introduced Aura SaaS, a cloud-based software-as-a-service that allows other brands to integrate blockchain into their operations more easily, covering aspects like supply chain tracking, legal compliance, and product warranties.

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Conclusions

Blockchain technology transforms the supply chain landscape, offering transparency, security, and efficiency. Enabling traceability from source to shelf with blockchain allows stakeholders to monitor and verify every stage of the supply chain, helping combat fraud and counterfeiting and enhancing accountability.

A crypto wallet, such as the Ledger Nano X or the Binance Wallet, can also play a vital role in the broader ecosystem of blockchain and supply chain management. It provides a secure method for managing digital assets, ensuring blockchain-based supply chain transactions are safe from tampering or unauthorized access.

However, the adoption of blockchain in supply chain management can face challenges. Scalability remains a concern as blockchain networks can struggle to handle high volumes of transactions. Regulatory compliance and legal issues also present obstacles, given the varying laws and standards across different regions.

Despite these challenges, real-life examples demonstrate that blockchain can deliver tangible benefits. Companies like Walmart and IBM have used blockchain to improve food safety and traceability, while LVMH and Prada use it to ensure the authenticity of luxury goods.

Scientific References

1. P. Dutta, T. Choi, S. Somani, et al.: ‘Blockchain technology in supply chain operations: Applications, challenges and research opportunities’;

2. S. Abdallah, N. Nizamuddin: ‘Blockchain-based solution for Pharma Supply Chain Industry’.