Why Blockchain Benefits the Supply Chain

Supply chains are having a moment.

Many of the world’s most successful systems and products are invisible, but it’s no surprise that supply chains are suddenly being noticed – not because of their immense success, but because they have been taken for granted for a long time and are presently congested.

Paul Brody is EY’s global blockchain leader and a CoinDesk columnist.

Supply chains run on information. Much of the information is pretty bad – think of supply chains as a game of long-distance telephone where messages from the first participant end up badly garbled by the end. Without blockchain technology to ensure the message is clear throughout the ecosystem, we have learned to live with these big information gaps.

Recent supply chain history

Supply chains started to be widely digitized in the 1970s with the arrival of manufacturing requirement planning (MRP). MRP systems took a bill of materials (BOM), expanded it into constituent parts and then helped companies place automated orders.

On the foundation of MRP planning, companies added demand forecasting and constraint management. In theory, the flow of goods at the front of the supply chain, the retail store, affects the entire supply chain all the way to the securing of the most basic raw materials. In reality, data and technology gaps and competitive concerns interfere with much of that flow.

In a normal year, these gaps aren’t too visible because so much of what happens is predictable: Christmas comes every December, which reliably follows Black Monday after Thanksgiving. The supply chain gears up to address these yearly surges in activity. But recently, nothing about demand has been predictable.

The coronavirus pandemic has brutally exposed the weaknesses in many supply chains. A supplier missing a shipment, for example, typically ignites a cascade of bad events that can turn a small shortfall into a planet-wide production crisis.

The smart planning systems upon which companies rely will downgrade the supplier, leading them to order more in expectation of more missed shipments. After ordering all other supplies, the inventory costs to these firms of holding so much material are high. So these organizations often will try to find missing materials on spot markets to finish their production runs.

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Suppliers may encounter multiple buyers who, fearing shortages, will suddenly increase their orders. Many suppliers will then promise to allocate pro-rata shares to customers, incentivizing them to order more than they need. Meanwhile, if there is a spot market for a constrained product and demand increases because of smaller availability, spot prices will skyrocket.

This cycle, known as the “bullwhip effect” is one of the first things that supply chain professors teach new students. Ironically, although everyone in the supply chain business knows exactly what is happening, they do it anyway because not doing so would put them at a competitive disadvantage. Just like the doomed participants in the prisoner’s dilemma – game theory describing situations in which individuals make decisions that are not in the best interest of a group – the best choice for each firm does not lead to ideal results overall.

The power of blockchain

Blockchain technology’s biggest benefit to the supply chain is its ability to connect companies without giving one company a competitive advantage. Blockchains also support the compatibility of tokens between locations, which means that not only will more information flow across a network but it is likely to be more accurate.

When you move digital tokens that represent an asset from one location to another, you must remove the tokens from the original location to put them into the new one. This sounds simple, and it’s exactly what banks do with money. But it’s not standard procedure in supply chain interactions between companies.

The pandemic has exposed the big myth of supply chain management: that the information used for most planning is accurate.

It isn’t.

The only fix for this weakness is to embrace blockchains that provide end-to-end consistency and compatibility. Blockchains can clear up the confusion inherent in supply chains, ensuring the smooth, efficient delivery of goods.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.