UTILIZING BLOCKCHAIN TO MITIGATE SUPPLY CHAIN LOSS EXPOSURES
BEN HART
915099553
Table of Contents
Introduction………………………………………………………………………………………..2
Blockchain Technology……………………………………………………………………………3
Blockchain and the Supply Chain…………………………………………………………………4
Counter-PartyRisk……………………………..…………………………………………………..4
Supply Chain Disruption Risk…………………………………………………………………….5
Food Safety Risk…………………………………………………………………………………..7
Reputational Risk….………………………………………………………………………………8
Conclusion…………………………………………………………………………………………9
Introduction
Market globalization has substantially increased the interdependencies of the production of goods and services in different regions and industries. This interdependency has increased the complexity of an organization's supply chain and the loss exposures an organization faces. A disruption in availability of one good or service may have far-reaching effects on an organization.
Organizations need new ways to create transparency and visibility across the supply chain to reduce risk exposures. Blockchain offers the technology need to create solutions to reduce loss exposures and change the way organizations approach supply chain ERM. Blockchain technology has the reduce supply chain loss exposures such as counter-party risk, disruption, food safety risk, and reputational risks.
Overview of Blockchain Technology
Blockchain was originally created by a person or group under the pseudonym, Satoshi Nakamoto ; It was originally devised for cryptocurrencies such as Bitcoin, but the technology is now starting to be utilized for other purposes to create more visibility and transparency. Blockchain technology is now essentially the backbone of a new type of internet
At the most fundamental level, Blockchain technology is an incorruptible digital ledger of economic transactions. It is a shared ledger for recording the history of transactions and it cannot be altered. While it has primarily been used to record financial transactions it can be used to record virtually anything of value. Blockchain provides a way of recording transitions or any digital interaction in a way that is transparent and secure because it is a decentralized ledger. This means that the network operates on a peer-to-peer basis. This decentralized ledger allows the ledger's authenticity to be verified by the entire community using the Blockchain instead of a single centralized authority.
A Blockchain is comprised of blocks. Each block is, in essence, a transaction. Each block is then connected to the one before and after it and blocked together. Each block is added to the next in an irreversible chain. By storing blocks of information that are identical it prevents the Blockchain from being controlled by any single entity and ensures that there is no single point of failure.
Information stored on a Blockchain exists as a shared data base which ensures the Blockchain isn't stored in any single location. While a Blockchain is by nature decentralized and public there are different types of blockchains and their level of accessibility. There are Public Permission-less, where data is publically available to anyone who wants to participate in the network and often the users are anonymous. Each user has a copy of the ledger and participates in confirming transactions independently. The second type is Private Permission Blockchains. This is where permission is required for users to have a copy of the ledger and participate in confirming transactions.
Overview of Supply Chain and Blockchain
Blockchain can be utilized as a way to improve the transparency and traceability of goods and material across the supply chain. A supply chain that utilizes supply chain can help participants create more visibility and transparency throughout the entire supply chain. A blockchain supply chain can help participants record price, date, location, quality, certification, and other relevant information to more efficiently manage the supply chain.
Counter-Party Risk
Supply chains are built on the concept of trust – but this trust can leave organizations exposed to various losses. The broadest benefit to utilizing blockchain technology to manage a supply chain is that it creates a "trustless trust", it allows authenticated data communications and absolute assurance between each party in a supply chain, who don't need to know or trust each other, without the intermediated of a trusted central organization.
When utilized across a supply chain blockchains can reduce an organization's exposure to counter-party risk. Blockchains can be programmed with embedded instructions to carry out actions when certain conditions are met. These programmed blockchains are knowns are "smart contracts". Smart contracts link the information in a blockchain to an action or consequence when the agreed terms in contract are not met. It essentially is a computer hosted contract that defines and executes the terms of an agreement. For example, if Company A orders 50 widgets from Company B and agrees to pay upon Company B's shipment of the widgets. Once the widgets are shipped by Company B the smart contract would be programmed to pay Company B for the 50 widgets. Smart contracts will allow for more "trustless trust" and lower transaction costs. Research suggests that in the long term it will allow for more agile supply chains.
Utilizing blockchain technology to do business using smart contracts can significantly lower counter-party risk.
Supply Chain Disruption
To effectively manage a supply chain an organization must continually assess its supply chain and establish best practices to reduce and manage disruption to the supply chain. Some of the most common disruptions come from change in demand, third-party/single suppliers, production location and production bottlenecks. In today's world it is essential that an organization has access to accurate real-time data to make business decisions. The lack of reliable real-time data cause bottlenecks to emerge and inventory levels to rise or fall to sub-optimal levels; this can result in large business disruptions. To minimize these disruptions an organization can use blockchains to create visibility and traceability in real time to prevent organizations from facing internal and external supply chain disruptions.
Blockchains can reveal where an asset is at any point in time, who owns it or is handling it, and what state it's in. With that data, organization can better predict when goods will arrive and in what condition. For example, corn, could be tracked from the farm to the ship container to the factory floor to the chips on a shelf. IBM reports that organizations are already testing sensors that monitor crop conditions and record them on the blockchain.
Not only will it provide more real-time data on the location of the products and condition, but it can also provide real-time synchronization of decisions made with supply chain partners. For example, organizations are already testing sensors that monitor crop conditions and record them on the blockchain. Long before the corn arrives on the factory floor, managers could access various data points and attributes on that shipment of corn such like moisture content, or whether it has been genetically modified.
Some companies are already beginning to implement the use of blockchains to minimize disruptions. According to one IBM report, Toyota expects to use blockchains to track the thousands of parts that travel through countries, factories, and suppliers to a manufacture a single car. These blockchains not only reduce exposure to disruptions but revolutionize the modern supply chain.
When an organization's suppliers face disruptions, this can trickle down the supply chain and is hard to prevent these losses. The transparency blockchain provides will also allow organizations to quickly and reliably find new suppliers if a new supplier is quickly needed. This is largely due to the audit trail established by blockchain. If a partner produces a good on time, that becomes part of a permanent record on the blockchain. Positive reputations can be established on the blockchain and open up new partners. Blockchain will allow organizations to be more agile and switch suppliers if disruption occurs.
Food Safety
The total costs associated with foodborne illness in the United States alone range from $55-93 billion. IBM risk studies attribute issues in today's food safety risks across the supply chain to a reliance on manual, paper-based processes, operational silos, and lack of trust. Simply getting food from a farmer to the table is an increasingly complex process utilizing multiple intermediaries such as food suppliers, processors, brokers, retailers, logistics and regulators. Data sharing in this ecosystem is usually limited to groups that have direct contact, and no one has a complete, end-to-end view of the supply chain.
To decrease exposure to food safety risk end-to-end transparency is needed. Blockchain offers the technology to see what is in a food and its origins from the farm to the table in seconds. This offers organizations an easier way to provide traceability and visibility. The transparency and traceability of blockchain technology significantly outperforms the current paper-based system utilized in food supply chains and will reduce regulatory fines, contamination issues, and make recalls simpler.
If food contamination occurs blockchain can significantly improve the track and trace capabilities of the organization, industry regulators, and the consumer to reduce response time needed recall products. The ability to have increased visibility and traceability allows for reduced liability exposures associated with food contamination and product recalls. Blockchains will allow for the point of contamination and party responsibility to be easily identified as the Blockchains can reveal where an asset is/was at any point in time, who owns it or is handling it, and what state it's in. This will not only reduce liability exposures associated with food contamination but operating costs from food waste due to recalls or fear of contamination.
As the food supply chain becomes increasingly complex and consumers and regulatory agencies such as the FDA are demanding to know where their food is coming from blockchain technology has the potential to transform and improve food safety across the industry.
Reputational Risk
As global supply chains become more complex, managing them can cause due-diligence to become more complex and less transparent. Third-Party risk exposures can greatly threaten the reputation of a company as well as exposure the organization to legal ramifications. Some of the most common third-party risk exposures include: Bribery and corruption, financial crimes, slavery and human right abuse, environmental crime, and conflict martials. With blockchain it is possible to digitize physical assets and create a decentralized, immutable record of all transactions, making it possible to track the asset from production to delivery or use by the end user and provide greater product history allowing for transparency at every step of the supply chain. This provides more visibility to both businesses and consumers into the products they consume. It turn this reduces an organization's reputational risk exposures resulting from third-party suppliers.
One industry in particular that has begun to take advantage of blockchain to reduce third-party reputational risk exposures is the diamond industry. A UK based company, Everledger, has placed more than one million diamonds on a blockchain. This protects the history of a diamond, usually recorded on paper, from being tampered with. Diamonds are held to strict certification requirements to ensure they are sourced ethically and are not considered "blood diamonds". The use of blockchain allows for immutability, security, and transparency between diamond certification houses and global suppliers for the certification process. This same process could be used for other conflict material such as gold, tantalum tin, and tungsten which is used in popular products such as the Apple iPhone.
Utilizing blockchains across the supply chain creates more visibility as to who and what third party suppliers are doing in real-time in a taper-proof way, further providing trust-less trust. This can overall reduce the reputational risks an organization faces across their supply chain.
Conclusion
Organizations need new ways to create transparency and visibility across the supply chain to reduce risk exposures. Blockchain offers the technology need to create solutions to reduce loss exposures and change the way organizations approach supply chain ERM. Due to the decentralized ledger and real-time data it provides, blockchain technology has the reduce supply