Blockchain in the Real World Blockchain in the Real World
Blockchain in the Real World — The Promise, the Progress, and the Hype
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Introduction

Blockchain. No other single word, at this moment, is as closely associated with the progressive use of technology. Some believe that blockchain is poised to trigger gigantic disruptions within business and society, while others dismiss it as overhyped and oversold. It’s no exaggeration to say that the advent of blockchain has seized the attention of the business world as its denizens seek to understand what blockchain is, what advantages it offers, and in which contexts it may be appropriate.

In this paper, we seek to clear up confusion and misconceptions with a careful, no-nonsense examination of what blockchain is and isn’t, what it does and doesn’t do, where it is actually being applied today, and what it may offer — in the short and long term — to procurement and supply chain teams.

 

First, a Brief History of Blockchain

Although research around secure sets of digital “blocks” dates back to the early 1990s,1 the concept of a “block chain” (originally expressed as two separate words) burst onto the computing scene in 2008 with the publication of “Bitcoin: A Peer-to-Peer Electronic Cash System” by an anonymous computer programmer using the pseudonym Satoshi Nakamoto.2 The following year, the first Bitcoin blockchain network was implemented and remains in existence to this day.3 In fact, in late November of 2017, Bitcoin surged above $10,000 for the first time, a 900 percent increase in value since 2016.4 Far from simply lingering on the fringes of conventional currencies, Bitcoin has seen its awareness continue to increase.

Part of why this piece of history is so critical to building an up-to-date understanding of blockchain, is that blockchain has always been a foundational technology that makes other advancements possible. Without an application — such as Bitcoin — blockchain is just a theoretical approach to cryptography, or the use of codes to secure pieces of information.

What Is Blockchain?

Blockchain technology can be applied in a number of different contexts, in contrast to, for example, the internet. We don’t say “the Blockchain”; it’s “a blockchain.” This being said, blockchain might be compared to the internet in that both provide a foundational technology that useful applications sit on top of. We don’t “use the internet” but we  do access websites, exchange emails, and stream video content — all of which are made possible by the connectivity that the Internet provides.

What people will come to understand over time are the applications that leverage blockchain technology, not the design or functionality of blockchain itself.5

 

 

Blockchain allows a network to manage information in a distributed form without the risk of loss or alteration. Blockchain is usually described as distributed ledger technology (or DLT), but it is not the only one; in other words, DLT  and blockchain are not synonymous.6  In the case of blockchain, the ledger is maintained across multiple nodes in a network, a dynamic that is invisible to end users. At a high level, blockchain technology allows a network of computers to agree at regular intervals on the true state (or single truth) of the information contained in the ledger. The ledger lives on a large set of computers (or nodes) and every node functions as a server, providing the storage and computing power through which the ledger is visible to all nodes at all times.

Just as blockchain is not one thing, there is more than one type of blockchain — at least from an access perspective.7 There are two types:

  • Permissionless (or closed-loop) blockchain that is completely open and always available
    to anyone. 
  • Permissioned blockchain which is controlled or governed so that each node has to be approved before accessing the network. This type is most likely to be rolled out in a B2B context because   the information would be proprietary to the companies involved — and in need of protection  from a wider audience just like detailed spend data is today.

A blockchain is literally a “chain of blocks,” or a list of records connected and secured with cryptography.   Each block on the chain contains a set of similar transactions or pieces of information. Examples include   a digital coin (Bitcoin or otherwise), a digital right/permission,  or  an  identity.  Creating  a  block  is  like writing with permanent marker: it cannot be altered or deleted  without  the  previous  nodes  on  the network being aware of it.

Without delving too deeply into the cryptography behind blockchain, each block’s header contains details about the contents of that block as well as the previously created blocks in its chain. Try to change the contents of the block or of the chain, and the headers will no longer align. The algorithm behind this header system is what gives blockchain its reputation as hack-proof.

Before we conclude our brief section explaining blockchain, there is another useful comparison we can draw between blockchain and the Internet, and that is the speed of their evolution and expansion of their use. The internet is being used today in ways that were probably not foreseen by its creators, and the same is already true of blockchain. This does not mean we don’t have an obligation to try to understand how blockchain works — there is always a higher expectation of pioneers and early adopters, and blockchain is no exception.

Current Status

Blockchain is commonly positioned as a progressive, or even futuristic technology, but we know it is already in use for the Bitcoin cryptocurrency. What is the current status of blockchain’s application for other uses — especially in the commercial world?

Some early adopter companies have already implemented blockchain, as discussed in the case studies included later in this paper. For the rest of the B2B world, the adoption of blockchain will likely take place in two phases:

  • A business-led approach where large companies, such as Microsoft, experiment with blockchain and look for ways to incorporate it in existing technologies. During this phase, these large companies will bear the cost of implementing and maintaining blockchain, which is run as a layer on top of an existing platform to manage identity, currency, etc.
  • A consumer-led approach where everything (e.g. data, access, and costs) is distributed. Extending beyond B2B or even B2C, this phase will be C2C (consumer to consumer) and come closer to achieving the original peer-to-peer vision espoused by “Satoshi Nakamoto.” This second phase will provide more than transparency; it will eliminate the need for certain “middlemen” in the consumer supply chain — such as the platforms that blockchain is currently being run on top of. This phase, which is likely to take place five to 10 years in the future, will be driven by startups or individual coders rather than the large players experimenting with blockchain today.

Blockchain technology has the potential to improve trust through increased visibility within a range of industries and companies. The trigger for deploying blockchain’s capabilities will likely occur as a result of C-suite teams challenging their organizations to explore new technologies to achieve efficiencies, lower costs, and deliver growth. With likely developments and increased familiarization, blockchain may even foster the creation of entirely new industries, particularly in cases where there are no owned physical assets — such as with Uber and Airbnb — and therefore low barriers to entry.

The trigger for deploying blockchain’s capabilities will likely occur as a result of C-suite teams challenging their organizations to explore new technologies to achieve efficiencies, lower costs, and deliver growth.

The corporate function most likely to adopt blockchain first is finance, due in large part to blockchain’s association with Bitcoin and payment-related transactions. Seen initially as a way to streamline and secure payment management, its applications are already expected to progress further particularly in B2C industries where consumer trust and ease of use are critical to growing market share and competitive advantage.

Applications for Procurement and Supply Chain

Like other B2B sectors, procurement and supply chain will probably use permissioned blockchains to restrict access and keep information such as capacity and pricing proprietary. At a high level, the value of blockchain for procurement is expected to be focused in three primary areas: “smart contracts,” supply chain finance, and increased supply chain visibility and traceability.

Smart Contracts

One of the most commonly touted opportunities associated with blockchain — even outside of procurement circles — “smart contracts” will use the power of the ledger to validate identities and trigger actions related to each contract. By recording information on a blockchain network, contracts would become “self-executing” as certain conditions are met.8

Blockchain could enhance the security of corporate contracts by distributing storage and preventing documents from being altered without authorization or loss. It would also eliminate the need for an intermediary to handle identity validation and signature, and prevent companies from having to break the digital flow of the procurement process by detouring into hard copy before a contract is executed.

Supply Chain Finance

Smart contracts create the potential to eliminate the transactional responsibilities of accounts payable and invoice management. This would allow companies, their suppliers, and other relevant parties to access the very latest information about the contract and the transactions it governs at any point, saving time and effort while increasing accuracy and compliance.

Blockchain may make it possible for suppliers to better leverage supply chain finance programs by helping banks confirm whether a payment should be released.9 This application is actually an extension of the smart contract concept. In this context, the buying company’s bank would be able to use information in the ledger to validate both the identity of the supplier and also the value of transactions between the two companies before releasing funds with increased control and full auditability.

Supply Chain Visibility

The first use case of blockchain within procurement and supply chain may be driven by consumer demand for food product traceability. In fact, some companies are proactively investing in blockchain initiatives in anticipation of this demand. Beyond the food supply chain, consumer packaged goods (CPG) companies and retailers are likely to play a leading role in adopting blockchain for supply chain visibility, as well as for the promise of cutting down on transaction costs.

Blockchain could reduce costs and increase efficiency by helping companies identify weaknesses in their supply chain. For instance, once supplier costs are more visible to companies downstream in the supply chain — because a distributed ledger is used to record and manage all purchase and sale transactions — suppliers could be challenged to provide their products and services on a reduced margin or asked to speed up production and delivery schedules.

Case Examples

Walmart Increases Traceability of Chinese Pork 

When a food recall needs to be issued, time is of the essence. Determining which shipments need to be recalled is a complex effort that requires fast access to data that may extend multiple tiers into the supply chain. Information doesn’t always flow easily between the tiers and may not be accessible on the quick timelines that companies need. A company’s handling of a recall determines not only how many people get sick but also how much damage is done to their brand with consumers in general.

IBM and Walmart are using blockchain to manage the retailer’s pork supply chain in China — from producers to processors to distributors.10 Their ability to track product on a detailed level increases their knowledge in real time — a critical asset in the case of a recall. In addition to building human networks with their first tier and potentially second tier suppliers, Walmart will have access to facts that provide actual visibility multiple tiers into the supply chain.

Bajaj Electricals Speeds Supplier Payment with Smart Contracts 

Companies may have the desire to pay their suppliers more quickly, but lack the processes to do so — leaving key supply partners without resources to invest in R&D and pay overhead.

Bajaj Electricals, a consumer electrical equipment manufacturer in India, is using blockchain-based smart contracts to automate and accelerate the speed of payments to suppliers.11 By implementing a permissioned blockchain with a key supplier and Yes Bank, processed invoices are transferred to Yes Bank for discounting and then payment. Rather than paying suppliers 4-5 days after delivery, payments are being issued nearly in real time. Blockchain was evaluated and deemed faster and more secure than Yes Bank’s existing API, superseding the traditional payment management option.

Taking Blockchain Mainstream

Today, blockchain is still in an experimental stage for the majority of individuals and corporations. Progress is being made rapidly and will present opportunities for forward-thinking individuals to test the limits of their imagination. Much of blockchain’s evolution is likely to take place beyond the common view, and new uses and solutions may be brought to market without anyone realizing that they incorporate distributed ledgers.

As with all new technologies and scientific advancements, however, there are some questions that need to be addressed before blockchain will be ready for broad-scale, mass-market implementations, including:

Who is going to pay for blockchain?

Today, blockchain is still in an experimental stage for the majority of individuals and corporations. Progress is being made rapidly and will present opportunities for forward-thinking individuals to test the limits of their imagination. Much of blockchain’s evolution is likely to take place beyond the common view, and new uses and solutions may be brought to market without anyone realizing that they incorporate distributed ledgers.

When individual consumers benefit from the implementation of blockchain, such as in supply chain traceability applications, we can expect B2C companies to assume the cost, but when suppliers are the primary beneficiaries, blockchain may become a new factor in invoice payment discounting.

Which blockchain will become the standard?

As we’ve explained, there is not one blockchain, but rather a number of companies and programmers experimenting with applications for distributed ledger technology. This has resulted in multiple competing standards with limited interoperability, diminishing the potential value to be gained by creating visibility all the way back through the supply chain and making it difficult to operate within individual industries. There is an effort underway involving the International Organization for Standardization (ISO/TC 307) that would establish standards for terminology and concepts related to blockchain and distributed ledger technologies, but with the speed of development, companies may be faced with the need to make decisions before such a standard is accepted and put into practice.12

Who is favored by the additional visibility afforded by blockchain?

In discussions of increased supply chain visibility and traceability resulting from blockchain, it’s natural to assume that one’s own organization will be the beneficiary. And yet this is not necessarily the case.

Would attitudes toward visibility be different if it meant your company’s customers would have vastly increased insight into your operation? The primary winners from early blockchain implementations are likely to be large, resource-rich companies at the end of each supply chain. Cost information will be available that will allow them to engage in detailed discussions with their suppliers around cost and delivery. Once one company in each supply chain is in the blockchain “power position,” it will send a ripple through the companies making up the rest of the chain. If the roll-out does start with consumer- facing food/CPG companies as we have suggested earlier in this paper, multiple tiers of upstream suppliers will have to adjust to their demand for increased visibility instead of mandating it for their own purposes. On a more positive note, all parties would benefit from increased transparency, trust and speed, creating stronger partnerships along the way.

Who will regulate business conducted via blockchain?

In a fully distributed blockchain, there is no need for a central administrator because the block-level cryptography makes the data stored in them immutable. Cryptocurrency blockchains are always on the lookout for something they call a “51 percent attack.” Under a 51 percent attack, a group of “miners” (programmers) would have a controlling interest in the blockchain, allowing them authority over all of the blocks seeking authorization.13 In July of 2014, mining group ghash.io briefly went above the 50 percent point in the Bitcoin blockchain. The group voluntarily reduced its share of the network and put a plan in place to prevent them from going above 40 percent in the future.

 

 

In a permissioned blockchain (such as we expect to see implemented in a B2B scenario) there might not be such altruism. If something goes wrong, there are no regulations to govern blockchain-based transactions. Where would affected companies go to make an appeal?

 Why Is Procurement so Interested in Blockchain?

This one, final unanswered question provides us with an opportunity for self-reflection rather than technological exploration. For all intents and purposes, blockchain is not ready for prime time in all but the largest, most experimental companies. So why are procurement professionals and organizations investing so much time exploring the subject so long before we can expect to apply it? Why does the hype work?

Procurement’s intellectual curiosity has been demonstrated with the planned or actual implementation of technologies including artificial intelligence (AI), robotic process automation (RPA), machine learning, cognitive computing, etc. These examples serve as proof that the transformation we have pursued is taking place at a foundational level — not necessarily through the processes and technology we use but in how we think about our role in the enterprise and our potential for impact.

Just like blockchain, procurement is a foundational function — we often enable supplier risk management, increased innovation, top-line growth, and other initiatives instead of leading them directly from the front lines.

Consider the efficiencies and advantages that have been generated through procurement’s efforts. When transactional buying was being “up-skilled” and “tech-enabled” to become strategic procurement, few people would have predicted the full impact this investment would have. If we apply the same unknown future potential to blockchain, it doesn’t matter that we can’t implement it today — we should still get in on the ground floor and start building knowledge and understanding. Procurement teams that do so can only stand to benefit.

Acknowledgements

Three members of the GEP team were instrumental in making this paper possible. They are:

  1. Biju Mohan, Vice President, Consulting
  2. Bruno Khan, Senior Director, Consulting
  3. Vengat N, Senior Director, Consulting

 

Sources:

 

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