Before the onset of the COVID-19 pandemic, companies were
already exploring the promise of blockchain to modernize certain
aspects of their supply chains. Traditional supply chains can be
inefficient, data intensive and costly, often characterized by
burdensome paperwork, conflicting records and delays resulting from
manual reconciliation processes involving a series of transactions
and document exchanges among multiple parties. Blockchain offers
potentially substantial benefits in this context, including the
secure and auditable validation of transactions, automated
documentation to support legal and customs compliance, improved
quality control, enhanced end-to-end transparency (e.g., for
verifying sustainability or ethical sourcing standards), and
overall improvements in efficiency and cost-control. Indeed, ever
since news reports in 2018-19 that Walmart had successfully tested
a blockchain platform for food traceability and
accountability to track mangoes and other products through the
supply chain, entities have been looking in earnest at, and
investing in, blockchain solutions targeting the supply chain.
Indeed, Walmart has continued to invest and conduct trials of
blockchain solutions, having recently announced in August the promising results of Walmart Canada’s use of
blockchain technology to reduce inefficiencies and invoice
disputes for freight and trucking payments.
Blockchain applications in the supply chain to date have largely
been in the testing or pilot phase, however, due to the complex
array of necessary considerations. As a preliminary step, companies
seeking to leverage blockchain solutions need to assess
blockchain’s potential applications and advantages, the
practical aspects of transitioning away from legacy systems, and
the legal and operational issues associated with the use of
blockchains. Before going live, participants in a private
blockchain must first understand and be satisfied with how the
blockchain will be implemented and administered, including, for
example, which parties will be responsible for maintaining the
blockchain, which data will be stored “on-chain” or
“off-chain” to achieve the desired functionality without
compromising the confidentiality of certain proprietary data, and
how cybersecurity and data origin integrity issues will be handled.
In many situations, an overarching written legal agreement among
the various participants is necessary to ensure clear and robust
governance and to address key legal issues. Also, testing a
blockchain solution in the supply chain context is necessarily a
collaborative affair (e.g., it may involve assembling a consortium)
because a working platform that delivers business value in a supply
chain will require participation by the various players in the
ecosystem. This can raise antitrust compliance considerations, requiring
careful structuring. Thus, while there was optimism in using
blockchain to bring the supply chain into a new digital age before
the pandemic, many organizations felt that implementation could
wait. However, the COVID-19 outbreak has spurred changes in that
mindset.
The impact of COVID-19 has shown that traditional supply chains are not always resilient
or adaptable enough to handle a pandemic or another widespread
disaster. During the pandemic, for example, many companies have
suffered serious supply chain disruptions, perhaps most acutely in
the healthcare sector, which was disrupted by shortages of vital
medical equipment and supplies. In the early days of the pandemic,
affected companies had to make rapid decisions to resolve supply
chain issues, but in many cases such efforts were stymied by the
inefficiencies of traditional systems, where real time data needed
to diagnose the problem and find new supply chains may not have
been available or reliable. Even during the best of times, the data
on a supply chain may reside with numerous parties and may not be
passed accurately along the chain. Such issues are in addition to
any regulatory hurdles from government agencies, which themselves
likely were short-staffed or affected by the crisis. Thus, as the
supply chain issues became highly pressing, companies struggled to
solve provenance issues or conduct adequate due diligence on new
suppliers (particularly those new manufacturers who pivoted from
another industry to produce goods needed to fight the virus). As a
result, many businesses found themselves unable to onboard
alternative suppliers and perform contractual obligations.
Given that other events of similar impact are likely to occur in
the future, many companies are seeking to mitigate current and
future disruptions by rethinking their supply chains, whether by
diversifying, “near-shoring” or looking to adopt a
blockchain solution.
Since the outbreak, there have been reports of blockchain
research and implementation to resolve stubborn supply chain
issues. For example, blockchain was looked at for applications in
the early days of virus response, such as helping to connect medical providers with needed equipment
during the COVID-19 outbreak and potentially produce reliable
COVID-19 immunization passports stored on a
blockchain, and even using the technology to prevent price gouging.
On a related front, blockchain-based contract tracing apps are
being developed to enhance privacy protections of mobile users by
storing digital information in a cryptographically secure manner.
As for implementation, in late April the Rapid Supplier Connect blockchain network was
launched to assist government agencies and healthcare entities
with finding new suppliers and excess inventory to procure supplies
to fight the virus, as well as vetting and onboarding new
suppliers. Similarly, Rapid Medical Parts was created when a company
leveraged its existing blockchain network, VeriTX, for the
buying and selling of digital assets, to establish a new blockchain
platform that allows customers to custom order parts needed for
medical devices. It was also recently announced that the U.S.
Air Force has been funding a project to employ blockchain to modernize its supply chain
and procurement processes; the Agriculture Department, in a proposed rule about bolstering organic food
certification, also expressed its opinion that digital ledger technology will play an essential
role in supply chain traceability. Moreover, members of the
Congressional Blockchain Caucus wrote a letter in April to the Treasury Secretary
urging the department to explore blockchain and distributed ledger
technology to help streamline the process of sending stimulus
payments and other government aid to recipients and another letter in September to various agencies
imploring the government to establish a digital infrastructure to
modernize crucial supply chains. And in the trade finance arena, a
Japanese bank recently announced that it had joined two trade finance
blockchain consortia. Interestingly, the bank noted that, due to
remote work arrangements following COVID-19, it was seeing issues
in the document-intensive trade financing process, compelling a
trend toward digitalization.
It follows that blockchain will be a part of the modernization
of supply chains, and that investment and testing in existing or
new applications will likely be a higher priority going forward. As
we see consortia successfully conducting tests of new supply chain
platforms, there is growing consensus that a permissioned
blockchain platform that connects vendors, customers, shippers,
government agencies and other players can work to bring needed
transparency and efficiency to the process of goods moving
throughout the distribution chain.
As society moves toward Industry 4.0 – characterized by the greater
implementation of automation, IoT, big data, smart solutions and
data exchange – blockchain seems to have earned a spot in the next
digital revolution. With COVID-19 having laid bare the weaknesses
of the traditional supply chain, the use of blockchain to modernize
the supply chain seems likely to increase, as businesses see
firsthand the benefits of smart manufacturing and smart
distribution.
Traditional Supply Chain Challenges During
COVID-19 Spur Innovation In Blockchain Applications
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