Blockchain to the rescue

Consumers are more and more preoccupied with how products
are made. After decades during which price and quality were the two
primary attributes they looked for in products, nowadays the demand
for sustainably produced goods is on the rise.

Contributing to this increased awareness are both a
greater concern for the environment and also frequent scandals
involving labor rights violations in the supply chains of some of
the best-known brands, like Apple, H&M, or Nike.

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BLOCKCHAIN-POWERED WORLD IS STILL A LONG WAY AWAY: 11 BLOCKCHAIN
EXPERTS ON THE CHALLENGES AHEAD^[1]

But telling sustainable products apart from their less
sustainable counterparts in hard. After all, sustainably sourced or
produced goods often don’t look any different. Many green labels
and certifications seek to address this issue, but they are
generally used for products that come in packaging (How would you
stick a label on, say, a potato? If you had to sell it in packaging
in order to show it’s sustainable, wouldn’t that defeat the purpose
of the label in the first place?). And, despite the complicated
audit process required to get such labels, they are often as
fallible and corruptible as the contexts in which they are
awarded.

But what about goods like cut flowers, timber, diamonds,
or fish? How can we tell if these products are sustainable? That
their production complied with the law — for instance,
that our furniture is not made out of illegally logged
timber? And that the workers who labored to bring them
to the shelves of our local supermarket or shop were fairly
treated?

Ensuring transparency and traceability across supply
chains in our globalized economy is no easy feat. Luckily, an
entire suite of technological solutions is emerging to help solve
this problem.  

Blockchain to the rescue

Over the past five years or so, several global
companies — and some startups — have
developed blockchain-based applications to help track goods across
supply chains. A pioneer in this area is IBM, which has established
various such initiatives on its own and in collaboration with other
companies.

For instance, the IBM Food Trust^[2]
is a blockchain-based platform that aims to ensure traceability and
sustainability in the supply chains of foods and
beverages.

In addition, in August 2018 IBM launched TradeLens^[3]
in collaboration with Maersk, the largest shipping company in the
world. The aim of this blockchain-based platform is “to promote
more efficient and secure global trade”, IBM said in a press
release^[4].

Aside from IBM, recognizable names like diamond company
De Beers^[5]
and retailer Walmart^[6]
have joined the blockchain bandwagon.

The way in which such solutions operate is that they work
to transpose physical supply chains — that is, the
networks of producers, intermediaries, processors, auditors,
certifiers, sellers, and customers — onto an online,
blockchain-based platform in order to create a virtual registry of
the provenance and trajectory of products.

TradeLens, IBM Food Trust, and Tracr (the
diamond-tracing platform) all fashion themselves as
industry-specific ecosystems or networks. The importance of this
detail cannot be overestimated, for, in order for the solution to
work in the first place, supply chain actors need to opt in and
join the network. And the well functioning of the platform depends
on it becoming the most used solution in a given sector.

Blockchain — the distributed ledger (or
registry) technology that was first developed to support the
BitCoin —lends itself particularly well to the
management of complex networks like supply chains because of its
decentralized nature.

The two key issues with tracing products (particularly
commodities) across supply chains are the need to establish trust
among parties that often don’t even speak the same language and the
need to manage a large amount of data.  

The story goes that blockchain can help solve such issues.
That is because, through its very design, a platform running on
blockchain is secure. Through blockchain, users are only able to
access the records that they are entitled to see. And, before their
information gets added to the blockchain, several other users
(dubbed miners) get to vet it, thus ensuring that more than one
entity has control of the accuracy of the stored data.
 

After being checked, each block of information is then
stored onto the blockchain and can no longer be altered by anyone.
In this manner, the registry grows in size with the addition of new
blocks of dependable information.

For instance, a fisherman in India may suggest adding a
block with information about his latest capture of shrimp,
containing details such as weight, provenance, date of capture, and
others, to the blockchain-based platform that IBM is prototyping
for Walmart. This information would be checked by several miners
(like the collection point where s/he dropped off the shrimp), who
can testify whether it is accurate or not.
 

If deemed accurate, the information would be added as a
block onto the blockchain. With each passing through a new port or
processing facility, the shrimp would get tracked using a QR code
placed on the container in which it travels. Once it reaches
Walmart’s shelves, the consumer would be able to access the entire
history of this product using a simple scanner or an app on their
smartphones.

By ensuring the accuracy of the information and all but
eliminating human error, such a platform promises to reduce
insurance, audit, and legal compliance costs for
retailers. 

But there are several issues with this model. The first is
the need for users to opt into platforms. In industries that are
heavily centralized, like the diamond industry, it is easy for a
near monopolist like De Beers to convince suppliers to partake in a
platform that it launched.

But in so doing, it perpetuates asymmetric economic
relationships and calls into question the issue of trust.
Blockchain has been touted as a form of ensuring trust in online
transactions among real-world strangers. But what if the
institution that controls the blockchain-based platform and
dictates the rules of the game has vested interests, like De Beers
does? It is conceivable that the blockchain could be corrupted in
such cases, despite the monopolist’s pretenses of
non-involvement.

That is to say nothing of the varying levels of
connectivity around the world. While Internet penetration rates are
rising everywhere, there are still parts of the world where
connection is poor. If blockchain is the only way small producers
can supply to global companies, then those of them who are the
least connected — and likely the most economically
disenfranchised — will be left out. Blockchain would thus exclude
those in need of opportunities from having access to them.

As for industries that are more fragmented, such as pulp
and paper, several conflicting platforms used to track at the same
commodity could emerge. This would force producers and suppliers to
specialize based on who their client is or to learn how to use
multiple platforms. The risk of confusion and mistakes would
evidently be high.

Focusing on functionality instead of the
technology

In an interview^[7]
with Knowledge@Wharton, Stefan Gstettner of Boston
Consulting Group (BCG), warns against overhyping the functionality
blockchain affords in the management of supply chains.

“In the early days of blockchain, there was the
notion that blockchain can help connect parties in the supply
chain,” he says. “That is in general true. However, if we only want
to connect parties that anyway know each other, there are many
competing technologies like EDI [electronic data interchange], or
what many call a supply chain control tower. The question then is:
Why should blockchain be considered a promising competing
technology here?”, he adds.

Instead, he recommends focusing on the unique
functionality the technology brings, which is its ability to
establish trust in interactions among strangers. Companies must
figure out how to channel this advantage while avoiding the
abovementioned drawbacks of such platforms before being able to use
blockchain in supply chain management on a wide scale.

For the time being, experts agree^[8]
that it’s still early days for blockchain; that most companies
don’t quite know how to use it to add value to their businesses and
that the learning curve ahead of us is steep.