There’s an old saying that goes “teamwork makes the dream work.” For people who work in supply chain management, the dream is to have efficient and reliable reporting. With blockchain technology, hundreds if not thousands of computers can make that dream a reality by working together.
To understand how this is possible, you first need to understand SCM and blockchains.
Supply chain management (SCM) involves the procurement of raw materials for use in manufacturing. The transportation and warehousing of raw materials also falls under the umbrella of SCM, as does documenting raw material inventory levels and costs associated with procurement. Supply chain managers are responsible for making sure a manufacturer never runs out of, nor ever overpays for, raw materials. The availability and integrity of data is very important to supply chain managers, since if they do not have access to timely and reliable information they risk causing problems that can inflate costs and/or halt production.
Blockchains are encrypted, timestamped sequences of events that are mutually-agreed upon by a number of computers and can be used as ledgers. The first blockchain was created in 2008 by an anonymous person, or an anonymous group of people, who published a paper about their invention under the alias Satoshi Nakamoto. Today, blockchains are most commonly used to keep track of cryptocurrency transactions – but the ‘events’ they keep track of can be anything. For the purpose of supply chain reporting, they can be shipments that are received by warehouses, bids that are placed by freight companies, materials that are requested by factories, and etc.
Blockchain networks consist of small or large numbers of computers, which are simultaneously running specialized programs that let them ‘mine blocks’ and add them to a core blockchain. ‘Blocks’ are discrete sequences of events. A batch of alloy rods being ordered, shipped, then received by a manufacturer could be the information contained in a block, for example. ‘Mining’ refers to computers that are part of a blockchain network ‘listening’ for activity related to blockchain events. If supply chain reporting were a forest, and an order for raw materials being sent were a tree falling over, the ‘miners’ would be what hear it.
Building a blockchain is not as easy as putting together blocks one after the other. Sometimes, computers make mistakes when mining blocks, or a person tries to maliciously alter one. This is why blockchains are built using a ‘Merkle tree’ structure. To illustrate what that means, imagine a baker making a wedding cake. The couple is adamant that everything is perfect, so they ask the baker to make multiple copies of each layer and to only use the ones that the couple decides are the best. Adding more complexity to the mix, the couple occasionally changes their mind about the design, and the changes they make always affect every layer above a certain point. So, the baker has to make multiple versions of each layer, throw away the imperfect ones, and, every once in a while, throw away and remake a section from the top. That is basically how blockchains are made: multiple versions of blocks are made concurrently, then the imperfect ones get deleted, and occasionally a section from the end of the blockchain gets deleted and replaced.
Now that you know all of the important details about SCM and blockchain, you should now clearly see how the two of them are virtually a ‘match made in heaven.’ Blockchain can prevent fraud, protect against data loss, and add scalability to supply chain reporting, which would greatly reduce risk in supply chain management.
It can prevent fraud by decentralizing the ledger that supply chain managers use to make decisions. When a central database is used, the possibility of fraud is higher since hackers need only one set of credentials to alter information. With blockchain, hackers have to simultaneously alter files that are housed on many computers – something that is nearly impossible to achieve.
Decentralizing the ledger also protects against data loss. Central databases can become corrupted, which would mean that some or all supply chain information would get permanently lost.
Lastly, it can add scalability, by virtue of multiple computers being used to facilitate data collection and storage at once. Central databases can only handle so much data traffic, but with blockchain, a manufacturer would simply just have to find more computers to run the software with.
Manufacturers can utilize the computers they already have when building a blockchain network. Blockchain programs take up little space and run ‘in the background.’ Manufacturers can also, provided they are given consent, leverage their employee’s personal computers to build a block chain network. Or, they can provide their partners, vendors, and customers with incentives to lend them a fraction of their computing power
So think about it: if you were a supply chain manager, and you wanted none of the information you had to be wrong, would you rather have one computer checking that information or a thousand?