Blockchain in supply chains – is it the right solution?
Following rapid adoption of blockchain technology for supply chains in China, e-commerce companies, suppliers, and consumers worldwide have been jumping onboard. Is now the right time to join in? Johan Annell, Partner at management consultancy firm Asia Perspective, and James Godefroy, Senior Consultant at international IP firm Rouse, discuss.
Technology for supply chain traceability is on the rise as governments and companies increase efforts to solve inefficiencies, produce sustainably, curb unfair labor and stop counterfeits. In recent years, blockchain solutions have come to the fore.
Developments in blockchain for supply chains have largely been spearheaded by China. The country’s latest five-year plan outlines blockchain as a technology that can help them to achieve world leadership by 2025, and the government has been actively encouraging firms to innovate with blockchain over a number of years.
The impact of this support has been profound. Since 2016, the number of enterprises in China registered as working with blockchain has gone from a few hundred to over 24,000 in 2020.
But is this a trend that others should follow?
The main advantage of using blockchain technology is that it improves transparency.
We know consumers are eager to have transparency about the products they are buying. An IBM study, corroborated by previous research by the Food Marketing Institute, found that 73% of consumers will pay a premium for full transparency into products. Yet, consumers typically find it difficult to access the product information they need to inform their buying decisions, such as data on authenticity, quality, ingredients, or supply chain ethics. Where this information is available, they have to rely on the word of the seller.
Blockchain offers an alternative. Unlike traditional systems which are centralized with one organization and can be altered, blockchain enables the creation of an information trail that is secure and distributed. Members to a supply chain and consumers can both get access and can contribute, read, and verify the relevant information.
In global supply chains, businesses need to build trust with both suppliers and consumers. This is much quicker to achieve with a system that puts everybody transparently on the ‘same page’ and eradicates the possibility of tampering – and this is precisely what blockchain can deliver.
Gaining trust in practice
In China, blockchain has successfully helped to address a trust issue in supply chains. Just a few years ago, disrespect of standards, disruptive supply practices and faulty control systems plagued many industries there. Nationwide scandals erupted, and Chinese consumers became highly concerned.
Many e-commerce companies responded to this by implementing blockchain to increase transparency. E-commerce giant JD.com is a prime example. It has now worked with over 1,000 companies on blockchain solutions, helping their customers to trace their products throughout the whole production and logistics cycle, for instance via QR codes.
Efforts like these have helped to increase consumer confidence. In a sample selected by JD, a near 10% increase in sales was seen for traceable products.
Blockchain technology further gives companies opportunities to add value for their customers. At the simplest level, it offers more chances to interact. For example, directing customers that scan a QR code to a competition or to obtain a coupon.
More importantly, blockchain offers a different way to tell a product’s story and communicate brand value. One example is Two Hands, which exports lobsters from Melbourne to Shanghai. Using smart tags, each lobster is tracked at every point in the supply chain, and customers can discover their journey from sea to plate with a simple scan.
Another cutting-edge area is the use of blockchain for Non-Fungible Tokens: virtual tokens that show ownership of digital assets, and can be collected and showcased. These tokens, which allow consumers to obtain digital copies of the luxury goods they buy for use in the gaming world, are increasingly being used in the luxury, fashion and digital art sectors.
As more companies innovate around storytelling and value add for their consumers, the possibilities feel endless. But the advantages of blockchain are also practical.
Global supply chains typically involve extra burdens based on a lack of trust. These range from the administrative costs for document handling to legal disputes.
Tech giants in China have been investing in blockchain to tackle these burdens. TradeLens, a collaboration by Maersk and IBM using blockchain technology, is working towards an ambitious goal of making the entire shipping eco-system more efficient, with unified Application Programming Interfaces (APIs) and ways of controlling documentation. While some of Maersk’s competitors have proved a barrier to widespread adoption, the project provides a great roadmap for what could be achieved in shipping and other sectors.
With oversight of the full supply chain, blockchain is also helping businesses to reduce fraud, cut middlemen and help prevent consumers from mistakenly buying counterfeits. For some companies, this could equate to cost savings throughout the supply chain of around 20%.
Blockchain further holds promise for when legal disputes arise, over counterfeiting issues or otherwise. Typically, the notarization of evidence needed for court proceedings is often costly and time-consuming. But in China, blockchain has already been recognized as a legitimate means to collect and tamper-proof data, and used in place of notarized evidence in some cases. Additional regulations from the Supreme People’s Court in August suggest the government plans to continue integrating blockchain into court proceedings.
For brands, this might be a double-edged sword. As well as helping their suits, it will also be much quicker, easier and cheaper for members of the supply chain or consumers to bring legal action against them using blockchain records as evidence.
Tightening data regulations are another challenge. Moving data across borders is becoming increasingly difficult, particularly for international companies dealing with China, where the government has been taking an aggressive stance in recent months. Companies need to ensure compliance with the latest laws or face harsh penalties.
One solution that many international companies employ is to use separate data servers within Mainland China and elsewhere to hold the protected data. All of the data on those servers can be linked together with blockchain records, but no readable data is stored on the blockchain or outside of the market itself.
In adopting blockchain-based technologies, companies should additionally be wary of lock-in to proprietary solutions. Fully understanding the incentives for key parties and the technological integrity of the solution is also a must. Even if blockchain technology can ensure tamper-proof, traceable data and equal access, it ultimately links to data servers or cloud solutions, and security depends on the code quality and design choices. Many of the solutions being implemented by companies are actually substantially different from truly decentralized examples like Bitcoin, and it’s possible in these cases for a few central actors to exert control over the system.
Is blockchain the answer?
China’s rapid blockchain adoption stemmed from a will to embrace new technology and take the lead in global standards. But their innovation can be learned from and applied globally.
Companies will need to be strategic in deciding the scale at which to implement blockchain and keep vigilant for the ways innovative counterfeiters evolve in response to the technology.
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But ultimately, blockchain offers a significant opportunity to increase profits, decrease interference from bad actors, and build brand trust. Companies should proactively monitor and engage in China’s rapid development in blockchain, and look to capitalize on similar developments in other regions.
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