How Blockchains can revolutionize the supply chain
To really answer this question, we need to understand what Blockchains are and what they bring to the supply chain world. Let’s start by reviewing what they are.
Blockchains initiated with the advent of the cryptocurrency Bitcoin, a digital currency that does not require any trusted intermediaries such as banks or central banks in order for it to function. As Bitcoin took off, people started to wonder whether its underlining principles could be applied towards other problems. As a result, the general architectural principles behind Bitcoin were "extracted" as Blockchains.
However, it is important to understand that Blockchain is more a set of principles that can be interpreted in many ways, and there are many types and variations of Blockchains.
Think of Blockchain as a shared database or ledger where anyone can write to, everyone can read from, and everyone gets a copy of the entire ledger so that there is no central owner. While anyone can write to it, these writes are mediated by potentially complex rules and validations specific to the Blockchain itself.
For example, in the Bitcoin Blockchain, one cannot spend Bitcoins they don't have. The Blockchain, through sophisticated consensus mechanisms, enforces these complex rules impartially and every participant has visibility to the up-to-date state of transactions recorded in the ledger. So, a better analogy is a “mediated shared state,” as the lack of a central owner implies that both the shared state (data) and the mediation (business logic) themselves must be distributed.
What Blockchains bring to the Supply Chain?
Blockchains are important to the supply chain, because they bring three main advantages over traditional options:
- Create an immutable single version of truth: This ensures that valuable and trusted information is shared between trading partners. Currently, supply chains and related business processes are highly fragmented across thousands of trading partners each with their own version of data that must be reconciled after-the-fact during business transactions. Because the Blockchain is an immutable ledger, it can be utilized to maintain an audit trail for verified origin and chain-of-custody information across multiple parties for a product’s entire lifecycle.
- Allow near-real-time sense-and-respond: Business logic and processes are now orchestrated across multiple trading partners in a multi-enterprise setting. rather than within traditional enterprise silos that only exchange data as an afterthought through point-to-point integrations. The resulting velocity can then lead to dramatically better business metrics such as lower inventory levels, higher service levels, lower total landed costs, etc.
- Require no central owner: As trading partners can transact directly with each other without any intermediaries. This eliminates unnecessary middle-men, reduces cost, and creates a frictionless marketplace.
Blockchain in Action
To really understand how Blockchains can work in the supply chain, let’s look at a typical drop-ship scenario. This scenario involves many parties; a buyer places the order to a seller who, in turn, shares the order with a fulfiller then creates a shipment and calls a carrier to pickup and delivery.
Now, imagine what would need to happen if there was a last-minute change order where the quantity of items in the shipment was increased. In a Blockchain, the change will be known in real time and rules such as “no changes allowed if the shipment has already been picked up” can be enforced and all necessary parties notified.
However, this is not possible in a traditional enterprise centric solution, as it is not able to maintain a real-time state across many partners.
Also, in traditional supply chains there will be many different orders that will need to be reconciled repeatedly in order to execute. There will be a purchase order in the buyer’s system, a sales order in the seller’s system, a transport order in the Fulfiller’s system, a shipment in the carrier’s system, and so on.
In a Blockchain, every one of the trading partners will have a single version of truth and have visibility to the same order and the same shipment, so no reconciliation is needed.
Finally, the Blockchain also disintermediates, so no single party owns the end-to-end process, because it is orchestrated by the Blockchain as an impartial entity.
The Privacy Problem in Blockchain
There is one catch with Blockchain and unfortunately it is a big one; anyone can read the entire shared state. Most supply chain participants do not want their information shared with their competitors, much less anyone else. Most blockchain initiatives in supply chains have run into this problem and progress has been thwarted beyond concept demos or limited use cases where the privacy is not an issue.
So, can Blockchains revolutionize supply chain? Our answer is a resounding “yes, but for the privacy problem.”
The need for Privacy in Supply Chains
Let’s face it, supply chains are really networks of many businesses coming together to serve the consumer, and there are many parties involved. For example, in a typical drop ship scenario, a buyer places an order with a seller who contacts a fulfiller who, in turn, creates a shipment and tenders to a carrier for pickup and delivery.
While the buyer and seller need to have visibility to the price, they may not want this to be visible to other buyers or other sellers. Similarly, while the fulfiller may transact with a carrier for delivering the shipment, they may not want to expose the commercial terms to other parties.
Because of situations like these, people looked to solve the privacy issue in multiparty business transactions and the idea of the permissioned Blockchain was born.
Understanding the Difference Between Permissioned and Community Blockchains
So, what exactly are permissioned Blockchains? The idea behind the simplest permissioned Blockchains is that some central authority would vet who could participate in the Blockchain. Instead of anyone being able to read or write to the Blockchain, now only those authorized community members could and the term “Community Blockchains” was created.
Unfortunately, these community Blockchains still do not solve the privacy problem. Once again, the sticking point is that any community member can read the shared state without mediation. Even in a private community, buyers for example, would not want other buyers to see information about their orders.
Micro-Community Blockchains to the Rescue?
One solution to the problem is the idea of micro-community Blockchains where the membership is so small that the fact that every-member can read everything is no longer a problem. By partitioning communities into smaller ones, (such as specific buyer-seller pairs or in small set of participants such as the specific buyer, seller, fulfiller, carrier, etc.) found in our drop-ship example earlier, then it might make sense to let everyone see everything that resides within that micro-community.
While this approach may work for very simple applications, the problem is that, in general, supply chain transactions are not neatly compartmentalized, as most form an interconnected graph-like structure. Which begs the question; where do the boundaries of this graph lie?
A second problem is that external writes by a party are not the only kind of writes in today's real-time intelligent supply chains. With the increasing application of artificial intelligence (AI) and machine learning technology, intelligent decision-making agents constantly monitor the real-time shared state and are triggered by certain events. These agents work by reading a portion of the shared state to determine how to react to these and then writing back to the shared state.
Examples of intelligent agents include continuous forecasting, last minute allocation of scarce supply, prioritized expedite, supply disruption, re-promising, etc. These Intelligent agents are helping to revolutionize the potential of mediated shared state but are essentially impossible with the micro-community Blockchain approach.
A Compromise Approach – Welcome to the Backchain Initiator
The most effective way to solve the privacy and micro-community boundary stalemate is through a compromise approach. In this way, writes to the ledger are mediated by a centralized entity in order to gain the ability to tackle almost all real-time multi-party supply chain problems and an immutable ledger with no mediator for perpetuity thereafter.
Known as a transient central mediator, the “Backchain Initiator” is the only entity with unencrypted read access to the entire mediated shared state. The Backchain Initiator maintains a transient single version of the truth of the shared state that allows it to execute arbitrarily complex mediated writes which may access the full shared state. It can also execute intelligent agents as it can retrieve any required data to its unfettered read access across the entire mediated shared state.
Once a transaction is mediated by the Backchain Initiator, it is then sliced by trading partner using the specific read permissions of that trading partner on the multi-party transaction. These sliced transactions are then intersected with each other to find common elements of the transaction. The slices and intersections are then encrypted and placed onto the Blockchain/Backchain.
The intersections are critical because they enable proof of transaction existence without revealing any private information to any party. This ensures every party still has an immutable, non-reputable record of all transactions but, through appropriate encryption keys, are only able to see the subset of information for which they have permissions.
This essentially expands the range of addressable problems to the entire multi-party supply chain problem space. Also, it results in the business benefits of moving to mediated shared state in terms of dramatically improved supply chain metrics.
This has the very important property of requiring the parties to only place transient trust in the Backchain Initiator rather than perpetual trust. The figure below illustrates the notion of Single Version of the Truth (SVOT) in this scheme.
Because the Backchain Initiator places transactions onto a decentralized Blockchain/Backchain, the need for trust on a centralized entity is reduced from perpetual to transient.
If the Backchain Initiator is compromised at some point in time or goes out of business, there is no impact on the validity of historical transactions or on its non-repudiability. Needless to say, this is a massive reduction in reliance on a centralized entity.
Additional safeguards that further mitigate the reliance on transient trust, include holds that can be raised by any party and resolved based on consensus.
Deciding When to use Backchains
So, while Blockchains can indeed revolutionize supply chains, it is important to first address the thorny privacy problem. Tools such as a Backchain Initiator can resolve this conundrum by serving as a transient mediator.
Think of Blockchain implementations as either Frontchains or Backchains. Frontchains are utilized for those supply chain applications where it is ok for everyone or every member to have access to the entire supply chain shared data state.
An example of a Frontchain would be a shared public Frontchain for the origin and chain-of-custody ledger of high value items such as diamonds or gold in a supply chain. Only certain members of the broad supply chain will run on Frontchains, but all the specific supply chain applications will. For most supply chain applications Backchains are what is desired and for this to be truly effective will require the use of a Backchain Initiator.