How Blockchains Will Turn Supply Chains Into Demand Chains

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative. 

In this opinion piece, one of a weekly series of columns, Casey argues that the value blockchain technology offers to supply-chain management will come once other technologies, such as 3D printing, bring major disruption to global manufacturing and delivery networks.

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Blockchains are a technology of tomorrow, not today.

That is not an excuse to ignore them, however. On the contrary, the future to which blockchains belong is coming so fast that a failure to properly strategize and to consider the widest range of design possibilities could eventually prove fatal for many businesses.

This is especially so in supply-chain management, a field that deals with the plumbing of the global economy: how a good’s production moves sequentially through the manufacturing processes of separately owned businesses before it is delivered to the end-user.

A combination of new technologies – artificial intelligence, big data, machine learning, the internet of things, mobile money, digital identity and, most importantly, 3D printing – is poised to seriously disrupt these underlying processes. They’ll make manufacturing more responsive and customizable to customer’s orders – in effect, turning supply chains into demand chains. But this dynamism will only be realized if they also adopt the kind of decentralized trust mediation model promised by blockchains.

Supply-chain managers are typically found only at big, downstream companies, such as Walmart. These experts have real influence in the management of many consumer brands.

Smaller upstream players occupying spots earlier on in the chain are outgunned by the bigger players and generally can’t influence the activities of others enough to warrant employing a supply-chain manager. Yet, ironically, improved chain transparency and visibility from better supply-chain management would help them gain bargaining power vis-à-vis the big guys.

So, when we hear about supply chain managers giving thought to blockchain solutions to their problems, it’s worth remembering where they are coming from: they represent large buyer companies and tend to view their supply chain proprietarily. They see it as an exclusive club over which they control access, one with a clearly defined, existing set of members.

It’s a static vision, not a dynamic one, and it’s marked by a power imbalance in their favor.

Static vision, static choices

From that perspective, it’s understandable –in fact, appropriate – that many are asking why they should bother with the cat-herding challenge of getting their supply-chain partners to jointly create a complicated, costly, multi-node computing network to run a distributed blockchain ledger.

Often they discover they can address many supply-chain information-management problems, including improving the tracking of inventory and work processes, with well-established database tools that already run internally on their company’s servers.

As Gideon Greenspan, CEO of Coin Sciences, has warned, “If your requirements are fulfilled by today’s relational databases, you’d be insane to use a blockchain.”

Firms that operate in supply chains where power is more balanced, where middle-size firms have some clout and too much to lose by submitting information to the centralized control of the biggest player, might instead conclude that a blockchain is useful. A distributed, immutable ledger could help different stakeholders overcome their inherent mistrust of each other, which could boost efficiency and visibility along the chain.

Yet here, too, the scope tends to be limited. Since the supply chain is viewed as a club with pre-existing, pre-approved members, chain managers have a hard time grasping why they would submit their transaction-sharing processes to a fully decentralized network and a permissionless blockchain such as bitcoin or ethereum. They’d much prefer to form a consortium and jointly validate the private distributed ledger.

They see other advantages in private blockchains, too: the permissioned structure allows much more transaction capacity than public blockchains; upgrades can be easily agreed to and trivially implemented; identity, privacy and other natural concerns of businesses can be addressed in ways that public blockchains cannot.

But in an era of rapid technological change that poses an existential threat for legacy businesses, it’s unwise to assume a static business environment. Many people know the Kodak story.

There’s a risk that a permissioned blockchain, based on a consortium managed by existing, pre-approved suppliers, would evolve into a rigid, gatekeeping entity. Members would be incentivized to limit access to outsiders with competing products and new ideas. And while that might protect the chain members’ margins for a while, it would ultimately render the whole chain less competitive.

It might not be a huge risk now, but, as mentioned, things are changing. Rapidly.

The supply chains of the future will be much more dynamic, flexible and customer-responsive than those of the present. Geography and longstanding relationships will be less of issue. This suggests that supply chain managers should not only be looking at blockchains but also striving for the most open, permissionless model they can handle.

They might not need to adopt bitcoin or ethereum per se; I could even be persuaded that a permissioned network of validators might still preserve a decentralized, competitive landscape if the consortium’s governance rules steadfastly allowed any new supplier to write data to the ledger.

Either way, the bottom line is that openness and permissionlessness are vitally important ideals to strive for, precisely because they encourage competition and innovation.

Decentralized trust

Taken together, new manufacturing technologies such as IoT and 3D-printing contain enormous decentralizing potential. By empowering people and businesses to do more with less, they reduce transaction costs, which means they can break down barriers to entry and challenge the economies of scale that have hitherto advantaged big, centralized companies.

If we can prevent the data-gathering behemoths of the internet 2.0 era from monopolizing them, these tools should help level the playing field. They should open the door to to a wider array of potential producers in the global economy.

But to reach its optimal potential, that decentralized, more horizontal economic structure will also require a decentralized trust model. The cost of having a single company verify the trustworthiness of an ever-widening array of potential business partners will be too high for any supply chain to remain competitive.

Let’s imagine a world in which 3D printing – known as additive manufacturing in the industrial world – is ubiquitous. Now imagine a German auto-parts producer receiving a request for quotes from an Argentine car assembler, a customer it has never previously dealt with, and for delivery in two days. The German company knows it’s highly likely that competing manufacturers in the U.S., Brazil, India and South Korea have also received offers. The only way to meet the order is to tap a hitherto untested 3D-printing company in Buenos Aires.

How can it trust this supplier? The time and cost of applying current due diligence, credentialing and approval procedures to onboard this company into an approved list of suppliers would take too long and cost too much money. It would leave the German company outcompeted for the job.

As supply chains start to function more like the demand chain of this scenario, trust dilemmas like this may force manufacturers to look to blockchain solutions.

There’s a lot of work going into how to use blockchain-based input logs and unique identifiers to prove the veracity of data emanating from interconnected devices such as 3D printers. Applying a similar change-of-state log for alterations to software, blockchains could also assure users that the code in a particular file used to print the relevant part complies with the specifications as advertised, that it hasn’t been tampered with. Cryptographic proofs of the integrity of a 3D-printing process may well allow manufacturers to hire a supplier in minutes, whereas previously they could never do so without face-to-face meetings.

This kind of blockchain model could greatly speed up the onboarding process. But it would need to be based on permissionless, open access for new suppliers.

The changes we’re talking about are step up from the 1990s round of disruption and decentralization that came with the advent of the Internet and globalization. Those trends created a wider pool of potential suppliers, disintegrating decades-old supply chains.

New IT technologies like 3D printing are an extension, or perhaps an acceleration, of the disruption unleashed then when the Internet decentralized the information-gathering process and removed barriers to communication. The next big step-function change will come from decentralizing the trust barrier.

That’s the prism through which the boldest, most innovative manufacturers should be viewing blockchains and their critical role in the global economy of the future.

Image via Shutterstock.

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