While initially developed as a means of validating cryptocurrency transactions, blockchain systems present a marvelous opportunity for the digital transformation of supply chain management. Errors in common logistics processes are an all too common challenge and the benefits of transitioning to decentralized ledger technologies promises to bring robust operational efficiencies while virtually eliminating payment problems. To learn how blockchain technology makes this possible, read on.
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Blockchain is a distributed database of records, or blocks, that are linked together electronically in a digital format amongst the nodes of a computer network.
Blockchain and cryptocurrencies stem from similar origins, and is most commonly associated with Bitcoin as it the system served as a means to maintain a secure and decentralized record of transactions enabling decentralized peer to peer financial service through digital channels.
The technology’s transparency and security has led to a growing adoption over time. Notably, in 2013, developer Vitalik Buterin published a white paper that proposed a platform combining traditional blockchain functionality through the execution of computer code. This sparked the Ethereum Project, an open source system with smart contract functionality – a collection of code, or functions, and data that resides at a specific address on the ethereum blockchain. This enables users to develop new programs that communicate with each other across the blockchain, and eventually Non-Fungible Tokens (NFTs).
Also known as distributed ledger technology (DTL), each block contains a cryptographic record of the previous block, a timestamp, and transaction data. These blocks form a chain because they each contain information from the prior block, with each additional block fortifying the ones before it in chronological order. Consequently, blockchains are resistant to the modification of their data because, once recorded, the data in any given block cannot be altered without amending all subsequent blocks.
In process, when a transaction is entered the data is transmitted to a network of decentralized peer to peer computers across the world. This network then uses equations that validate transactions, which are then blocked together and added to the chain, creating a permanent history of prior transactions.
Consequently, blockchain serves the foundation for immutable electronic ledgers, or records of transactions that cannot be altered, deleted, or destroyed. This alleviates the concerns of a siloed database that can be subject to destruction or corruption.
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Different Types of Blockchain
There are four different types of blockchains:
· Public blockchain networks can be joined by anyone (i.e. Bitcoin). Public blockchains help to eliminate challenges like as security flaws and centralization. A consensus algorithm is used to verify information authenticity. Two common consensus methods include proof of stake (PoS) and proof of work (PoW). Yet, Public blockchains are not without shortcomings as the system requires substantial computing power, little or no privacy for transactions, and weak security beyond was is already offered through the blockchain system.
· Private blockchain networks are similar to a public blockchain and still operate using a decentralized peer to peer network. However, one organization governs the network, controlling who is allowed to participate, and executing consensus protocols and maintaining the shared ledger. Private blockchains often work well for private businesses or organizations since they can be run behind a corporate firewall and even be hosted on premises.
· Permissioned blockchain networks, alternatively known as hybrid blockchain, offer a private network that allows for access permissions to be extend to authorize individuals. Offering some of the best features of public and private networks, this system enables better structure when assigning who can participate in the network and what transactions they can access.
· Consortium Blockchain, similar to permissioned blockchains, this allows multiple organizations to share network maintenance responsibilities. This network offers the components of both public and private components, with the exception that multiple organizations will manage a single consortium blockchain network. Organizations are selected in advance, determining who may submit transactions or access data. This option is ideal for businesses where participants require permissions and shared responsibility.
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Blockchain Technology in Supply Chain Management
The difficulty in altering prior transaction data means that blockchain offers a true innovation for ledger systems by allowing digital information to be recorded and distributed but not edited. This guarantees the fidelity and security of recorded data, ensuring trust without the requirement of third party verification. The supply chain struggles witnessed over the course of 2021 were exacerbated by the familiar challenges of inefficiencies in administrative logistical activities. Even before the COVID-19 pandemic, supply chain management payments and inefficiencies had long been source great waste.
One of the more notable examples of how blockchain resolves this is Walmart, a known leader in supply chain management. Discrepancies in invoice and payment processing for freight carriers demanded costly reconciliation efforts and led to long delays. In 2019, Bison Transport, a Canada based carrier for Walmart, implemented blockchain to build an automated system for managing invoices from and payments to its 70 third-party freight carriers. While previously over 70% of invoices were disputed, “today less than 1% of invoices have discrepancies, and these disputes are easily flagged and quickly resolved.”
This use case would suggest outstanding digital transformation of a long standing logistical challenge. However, as with all tools, blockchain technology and how it is implemented comes with broader implication for the businesses using it.
Key concerns for blockchain technology:
· Selecting a Blockchain Type: The variety of options means organizations should select a blockchain network that makes sense for their individual size, partners, and security needs.
· Standardize Formulas, Rules, and Calculations: Because transaction data is generated automatically, business must have clear agreements with vendors and third parties one what formulas the blockchain will use to calculate each invoice. The variety of unique vendor data needs to be accounted for (vendor name, payment terms, contract duration, and general terms and conditions) before a blockchain system can go live. These rules and calculations are combined with governing master tables that include fuel and tax rates.
· Self-Regulating System: To prevent errors and detect opportunities for enhanced performance, businesses should set automated checks and balances to resolve errors. This allows carrier data to be verified against internet of things (IoT) data to automatically highlight discrepancies. Overtime, as carriers present data from similar launch and destination points, set check and balances contribute to a self-learning system.
· Maintain Legacy Systems: Rather than replacing existing IT systems, blockchains can work in tandem with prior systems, leveraging the unique data points to further validate datapoints. This creates incredible end to end visibility across the supply chain that can often lead to operational improvements.
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