Transparency in supply chains and blockchain: what is the most common trap?

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Bertrand_Malteverne.jpgBecoming aware of blockchain's weak spots is an important first step towards taking full advantage of what the technology really has to offer

By Bertrand Maltaverne

Is blockchain coming of age in 2019?
Judging by the first half of 2019, it seems that the blockchain hype is finally deflating and there is overall consensus that it will not save the world (at least not this year...). The growing trend towards pragmatism, which is now beginning to temper people's expectations, is the best thing that could happen to blockchain... A more down-to-earth approach is welcome because, like any technology, blockchain is not perfect, nor the solution to all problems. It is important to be realistic about its potential and limitations.

In particular, blockchain has limitations that threaten to jeopardise many recent high-profile initiatives to increase traceability and visibility in supply chains. Despite seeming like the ideal technology to address growing concerns about these aspects, most (if not all) blockchain implementations have an Achilles' heel: the initial digitisation of data to bridge the physical and digital worlds.

Becoming aware of these weak spots is an important first step towards taking full advantage of what blockchain really has to offer.

Blockchain's real value proposition
There are many potential and valuable use cases for blockchain, especially in procurement and supply chain management.

"If you talk to supply chain experts, their three primary areas of pain are visibility, process optimisation and demand management. Blockchain provides a system of trusted records that addresses all three", notes Brigid McDermott, Vice President: Blockchain Business Development and Ecosystem at IBM.

The most valuable characteristic of blockchain is that it serves as a backbone for "convergence":
- Better insights and actionable intelligence: blockchain is the missing link in Big Data initiatives and the convergence of the Internet of Things (IoT), Artificial Intelligence (AI) and blockchain represents a breakthrough.
- An integrated perspective: blockchain-based supply chains allow three different supply chains (physical, informational and financial) to converge into a single digital unit.

"Blockchain has the potential to converge the two main ecosystems involved in trade finance: the financial ecosystem, which includes banks and suppliers, and the supply chain ecosystem. At the same time, the technology can provide a unified platform for multiple stakeholders, potentially avoiding difficulties that slow down operations", says Béatrice Collot, Head of Global Trade and Receivable Finance at HSBC.

While these features will certainly contribute to improved supply chain transparency, there is still a critical challenge that needs to be addressed: the digitisation of data at the beginning of the process. This crucial step constitutes a fundamental weakness of many current digital supply chains.

Blockchain's Achilles' heel: mind the gap!
Traceability and transparency along a supply chain, from raw materials to final products, are a growing concern for organisations. New governmental and institutional regulations, customer expectations and companies' self-interest in issues, such as sustainability, incident management and efficiency, have created the need for an infrastructure to track, trace and store data in supply chains.

At first glance, blockchain may seem like the ideal solution. It creates a permanent record of all transactions at all levels of a supply chain, guaranteeing full traceability and establishing trust. Thus, many companies started to provide blockchain-based means of collecting information in their supply chains with the goal of making it accessible to customers as irrefutable proof of the origin of products and components.

A typical story would go like this: "thanks to our application, you can take a picture of the QR code on your product and view the entire supply chain of all components/elements that contributed to the final product you have in your hands".

This sounds great - in theory - but there is an important caveat: "at the interface between the offline world and its digital representation, the usefulness of the technology still critically depends on trusted intermediaries to effectively bridge the 'last mile' between a digital record and a physical individual, business, device or event. [...] And if humans [...] manipulate the data when it is entered, in a system where records are believed ex-post as having integrity, this can have serious negative consequences", states Catherine Tucker, Distinguished Professor of Management Science at MIT Sloan School of Management.

The use of blockchain technology thus gives people a false sense of security because it relies on cryptography and various mechanisms to ensure that information stored on it can be trusted (identities, immutable records, etc.). But, as illustrated above, the digitisation step when the information is recorded (a block added) is not protected by this same 'guarantee'. So, it is not because blockchain technology supports and enables a better transparency that it should be blindly trusted by customers or by procurement/supply chain pros.

The solution?
It is undeniable that blockchain is a form of digital trust. Much of the hype surrounding it has been driven by a broader trend in society: the erosion of trust in people and institutions. Blockchain is thus playing a major role in shifting that trust towards technology and software. This explains, in part, why compliance and transparency are the use cases that are priorities for procurement and supply chain professionals.

However, it is important to remember that blockchain's reputation as 'trustworthy' can be misleading, especially in the case of supply chain transparency. Manual operations are still part of the initial process of digitising data. Therefore, trusting data stored in blockchain also means trusting that initial step that relies on human activity.

For this reason, building trust in business partners will continue to be a vital part of the procurement function's role in the future. Introducing digital initiatives will not entirely remove the human element from the job and procurement practitioners will need to continue working on establishing trust and nurturing it with suppliers and stakeholders.

Also, from a technology perspective, there are already initiatives to close the gap between physical and digital as much as possible. Interestingly, these focus on physical objects (crypto-hardware) and not just on software. These objects are the child of radio frequency identification (RFID), connected devices and blockchain, with the intent to create a convergence between the Internet of Things (IoT) and the Internet of Value (blockchain) to create the Value Internet of Things (VIoT).

In addition to the human and technological answers that will both contribute to creating a truly integrated supply chain (physical + informational + financial), a third component will remain essential: critical thinking.

Trust and verify!

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