Blockchain for the Supply Chain: Reality vs. Hype

If you could measure the progress of a concept by how much it’s talked about, then blockchain would already be an everyday reality for business.

Blockchain for the Supply Chain: Reality vs. Hype

When it comes to technological innovation, however, hype is no benchmark for success.

You’d be hard pressed to find a major industry today that isn’t talking up blockchain as a cure-all for the ills of global supply chains. The idea of a virtual, distributed ledger that can serve as an indelible system of record for any number of business transactions between supply-chain partners — well, it’s irresistible.

Who wouldn’t want a means of propagating key contract terms and payments, and making certain that they’re accurate and honored? Blockchain promises to do just that, which helps to explain why so many companies are leaping at the opportunity to adopt it.

Yet few have reached that goal. SAP recently queried more than 3,500 domain experts who had indicated an interest in blockchain. How far were they down the path of adoption?

“The overwhelming response we got was that ‘we’re still in the early phases,’” says Gil Perez, SAP’s senior vice president of products and innovation, and head of the company’s digital customer initiatives.

More than 90 percent of respondents view blockchain as an opportunity for improving business processes, notes Perez, but only 3 percent claim to be at the live stage. And many of those are technology vendors pushing blockchain services, not direct customers of SAP’s software.

So what’s holding up the train? An underlying irony, as it turns out. Global supply chains, by definition, consist of multiple, independent partners, making them ideal candidates for blockchain. But that very same quality is what’s slowing adoption of the technology.

Because supply chains are networks, a blockchain initiative can’t be implemented by a single company. “It’s more about industry adoption,” says Perez. “For that, you need to have business alignment, agreement and consensus.”

Take the issue of digital signatures. The technology has been around for a long time, but many organizations and countries still require the maintenance of original signed documents, with all of their accompanying costs and inefficiencies. The same kind of disconnect exists with business processes that are eligible to be registered on a blockchain.

For example, approval by multiple parties to a transportation arrangement is required in order to issue an authorized bill of lading. All must agree to the precise form of that document before the release of international freight and the transfer of funds. Achieving consensus in that area is a problem of business-process alignment, not technology.

At the same time, technical standards are needed to govern the various processes that are unique to freight transportation and other logistics-related services. Just because a company devises a “smart contract” that streamlines and automates basic functions doesn’t mean that all parties will automatically accept it.

Standards are also needed for shoring up blockchain security. Proponents of the technology argue that the distributed nature of a ledger residing on a blockchain means it’s impervious to tampering. Nevertheless, a working group under the aegis of ISO is developing standards for security, privacy and identity associated with the use of blockchain technology.

“I do not believe that saying something is immutable is necessarily saying something is secure,” says Perez. “There is definitely a reason and need to continue pushing security and getting standards.” (At the same time, he stresses that current blockchain implementation procedures “are top tier.”)

For their part, domain experts contemplating a blockchain initiative told SAP that their most important attribute was supply-chain transparency. Number two was “trustworthiness of the shared data.” So security is clearly on the minds of those who are proceeding along the blockchain path.

Then there’s the question of what kind of businesses are suited to blockchain. Perez says it depends “on the use case, and the value that you get from it.” A pharmaceutical company, for example, is likely to find blockchain to be of high value, as means of complying with strict regulations on maintaining a drug’s chain of provenance. In such cases, “it’s not a question of cost — it’s the law.”

For early adopters, blockchain can be a costly and burdensome undertaking. The process of getting data recorded on a blockchain is anything but real time — some transactions can take days to post. That’s especially the case with public blockchains that involve multiple nodes, perhaps running into the millions. It’s less of an issue with semi-private, permissioned networks, in which a fixed number of enterprises are invited to participate.

Adding to the hesitation over blockchain is the creation of multiple cryptocurrencies — virtual “coins” that in many cases are being “minted” to fund blockchain initiatives and bypass traditional sources of venture capital. The stability and longevity of such securities is highly questionable, to the point where some highly respected investors are predicting a bursting of the cryptocurrency bubble.

Will the blockchain concept blow up along with it? Perez believes the recent spate of initial coin offerings (ICOs) “only further complicates and confuses everybody.” Yet he sees a path to blockchain success that doesn’t involve the need for cryptocurrencies. In fact, their demise might remove a key barrier to progress.

Looking past the hype, blockchain for supply chains would appear to be an idea that’s here to stay — but global businesses are going to need some time in order to get comfortable with it.

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When it comes to technological innovation, however, hype is no benchmark for success.

You’d be hard pressed to find a major industry today that isn’t talking up blockchain as a cure-all for the ills of global supply chains. The idea of a virtual, distributed ledger that can serve as an indelible system of record for any number of business transactions between supply-chain partners — well, it’s irresistible.

Who wouldn’t want a means of propagating key contract terms and payments, and making certain that they’re accurate and honored? Blockchain promises to do just that, which helps to explain why so many companies are leaping at the opportunity to adopt it.

Yet few have reached that goal. SAP recently queried more than 3,500 domain experts who had indicated an interest in blockchain. How far were they down the path of adoption?

“The overwhelming response we got was that ‘we’re still in the early phases,’” says Gil Perez, SAP’s senior vice president of products and innovation, and head of the company’s digital customer initiatives.

More than 90 percent of respondents view blockchain as an opportunity for improving business processes, notes Perez, but only 3 percent claim to be at the live stage. And many of those are technology vendors pushing blockchain services, not direct customers of SAP’s software.

So what’s holding up the train? An underlying irony, as it turns out. Global supply chains, by definition, consist of multiple, independent partners, making them ideal candidates for blockchain. But that very same quality is what’s slowing adoption of the technology.

Because supply chains are networks, a blockchain initiative can’t be implemented by a single company. “It’s more about industry adoption,” says Perez. “For that, you need to have business alignment, agreement and consensus.”

Take the issue of digital signatures. The technology has been around for a long time, but many organizations and countries still require the maintenance of original signed documents, with all of their accompanying costs and inefficiencies. The same kind of disconnect exists with business processes that are eligible to be registered on a blockchain.

For example, approval by multiple parties to a transportation arrangement is required in order to issue an authorized bill of lading. All must agree to the precise form of that document before the release of international freight and the transfer of funds. Achieving consensus in that area is a problem of business-process alignment, not technology.

At the same time, technical standards are needed to govern the various processes that are unique to freight transportation and other logistics-related services. Just because a company devises a “smart contract” that streamlines and automates basic functions doesn’t mean that all parties will automatically accept it.

Standards are also needed for shoring up blockchain security. Proponents of the technology argue that the distributed nature of a ledger residing on a blockchain means it’s impervious to tampering. Nevertheless, a working group under the aegis of ISO is developing standards for security, privacy and identity associated with the use of blockchain technology.

“I do not believe that saying something is immutable is necessarily saying something is secure,” says Perez. “There is definitely a reason and need to continue pushing security and getting standards.” (At the same time, he stresses that current blockchain implementation procedures “are top tier.”)

For their part, domain experts contemplating a blockchain initiative told SAP that their most important attribute was supply-chain transparency. Number two was “trustworthiness of the shared data.” So security is clearly on the minds of those who are proceeding along the blockchain path.

Then there’s the question of what kind of businesses are suited to blockchain. Perez says it depends “on the use case, and the value that you get from it.” A pharmaceutical company, for example, is likely to find blockchain to be of high value, as means of complying with strict regulations on maintaining a drug’s chain of provenance. In such cases, “it’s not a question of cost — it’s the law.”

For early adopters, blockchain can be a costly and burdensome undertaking. The process of getting data recorded on a blockchain is anything but real time — some transactions can take days to post. That’s especially the case with public blockchains that involve multiple nodes, perhaps running into the millions. It’s less of an issue with semi-private, permissioned networks, in which a fixed number of enterprises are invited to participate.

Adding to the hesitation over blockchain is the creation of multiple cryptocurrencies — virtual “coins” that in many cases are being “minted” to fund blockchain initiatives and bypass traditional sources of venture capital. The stability and longevity of such securities is highly questionable, to the point where some highly respected investors are predicting a bursting of the cryptocurrency bubble.

Will the blockchain concept blow up along with it? Perez believes the recent spate of initial coin offerings (ICOs) “only further complicates and confuses everybody.” Yet he sees a path to blockchain success that doesn’t involve the need for cryptocurrencies. In fact, their demise might remove a key barrier to progress.

Looking past the hype, blockchain for supply chains would appear to be an idea that’s here to stay — but global businesses are going to need some time in order to get comfortable with it.

Comment on this article

Blockchain for the Supply Chain: Reality vs. Hype