Blockchain and supply chain, how does optimization work?

We can often see the terms blockchain and supply chain in the same sentence. That is no coincidence: companies, which choose to take on a digital transformation to maximize their efficiency, suffer from the limitations resulting from the poor visibility of their supply and distribution chains, which in many cases involve several people and can be extremely complex. After all, visibility is everything: if it is lacking or it is simply not detailed enough to meet market demands, the only option for companies is to rely on well-established strategies, trusting the organizations that are part of their supply chain. Unsurprisingly, all of this introduces several critical elements: inadequate product traceability, difficulties in attributing responsibilities, possibility of fraud, and difficulties in proving regulatory compliance.

The challenges of modern supply chains

Before understanding the reasons that drive companies to associate blockchain and supply chain, we can ask ourselves about the challenges that modern supply chains have to face. Supply chains can be remarkably complex and sophisticated, but their efficiency is – regardless of the size of the business – one of the most important factors affecting competitiveness on the market. Their complexity is determined by factors such as globalization, the constant search for agility by companies and their desire to hit the market with the right, high-quality product and at the right time, so as to meet consumer tastes and needs. In supply chain management, this collides with the lack of end-to-end visibility (which leads to continuous reconciliation processes) and the uneven levels of organization and digitalization that characterize the companies involved. This, combined with the enormous size of certain supply chains, amplifies the possibility of fraud and inefficiencies, potentially creating a chain reaction that could affect the entire value system.

Requirements for an efficient supply chain

Therefore, an optimized supply chain must strive towards a single great objective: end-to-end visibility, which means being able to cover all processes, providing complete and accurate data. Production data, traceability of components, movement of materials, logistics, and inventory constitute not only essential information, but also fundamental elements for the purposes of compliance with regulations and with the quality standards set by the manufacturer: such data must not only be part of an efficient supply chain, but should also be something that stakeholders can trust. This does not mean that the companies involved should trust each other, but it is crucial that the tools used for the acquisition and processing of data can be trusted.

The role of Blockchain in the ideal supply chain

We can now answer the initial question: “Why are blockchain and supply chain often associated?” It’s simple: because the concept of blockchain is, by its very nature, an answer to many of the critical issues discussed above, representing a stable foundation for a value chain based on the principles of transparency, security, and traceability. Blockchain, which can be coordinated via IoT platforms to maximize the efficiency of larger networks, is in fact the basis of ‘trust economy’, and distribution chains are one of its first areas of application.

Blockchain takes the form of a transaction register shared by all members of the network, which in this case are the internal and external stakeholders involved in the supply chain: they are responsible, on the basis of predefined validation and agreement principles, for updating and maintaining the register, which is not kept nor managed by a single trusted central authority, but by all network participants. In fact, everyone keeps a copy of it, identical for all parties involved. Furthermore, once the information has been validated and written in the register, it can no longer be modified or deleted, and is visible to all authorized entities.

That being said, there are two characteristics of the blockchain that perfectly address the needs and critical aspects of the management of modern supply chains: transparency, which allows for traceability and end-to-end visibility, and immutability of the data. The first element allows companies – and in some cases consumers, as in the food industry – to finally have full and absolute visibility of all processes, thus modeling their production activities, perhaps by following the demand trend. In addition, a blockchain-based supply chain allows to detect fraud much more easily, promptly react when a product needs to be recalled, and minimize damage by accurately tracing the cause of the problems.

Finally, registry security is another pivotal element, as the trust companies place in the tool is what allows them to share their data. Blockchain offers a system that is secure by design: there is no authority that certifies the security of the data and the reliability of transactions – which also has a positive impact on implementation costs; it is the system itself that does that, thanks to its decentralized nature, the cryptography, and the particular concatenation of the blocks, which is secure and creates the trust on which an efficient and productive business can be founded.

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