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The Rise and Fall of Blockchain in Supply Chain Management

Why blockchain for the supply chain has never lived up to the hype

Executive Summary

In this edition of the Elementum Blog, well discuss the strong advanced billing that came for using blockchain for supply chain management, and the reasons why many industry experts thought it might become a game-changer. Then we’ll turn to discuss how the reality has played out. We’ll cover the wide range of hoped-for advancements, discuss the underwhelming results, and consider some key reasons why the revolutionary vision has not been achieved.  We’ll conclude by examining the “post hype-cycle” outlook for blockchain in supply chain management, and conclude with a look toward other ideas that have actually delivered.

 

Defining Blockchain in Supply Chain

We want to begin our exploration by defining blockchain within the context of supply chain operations. Defining blockchain itself is rather simple — here’s IBM’s working definition:

Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

Substitute the term “supply chain” for “business network” above, and you have a great working definition for our purposes. However, as we shall see, the hoped-for benefits of reducing risk and cutting costs have proven elusive at best. 

 

The Rise and (Recent) Fall of Blockchain’s Fortunes

For most people, awareness of blockchain has come part-and-parcel with the rise of two new asset types: cryptocurrencies, and NFT’s. Both use blockchain as their supporting authentication and accounting technology, and both saw meteoric rises that peaked in 2021. 

The hype for cryptocurrencies like Bitcoin, and companies like Coinbase and Open Sea, who facilitate crypto transactions, culminated early in 2022 with an onslaught of Super Bowl advertising, featuring A-list celebrities like Matt Damon and Larry David. NFT’s (token-authenticated digital art) had a similar run-up, and these were also fueled by superstar involvement. Meanwhile, financial stalwarts like Fidelity started featuring crypto as an option for retirement plans.

As the value for these assets has bloomed, the future envisioned for blockchain technology rose as well. The entirety of this revolutionary new ecosystem, endlessly angling for business interest and consumer trust, became known as Web 3.0. 

Web 3.0 is envisioned as a more transparent and democratic space than today’s internet, using blockchain to enable and assure transactions in a “trustless” environment. Meaning, an environment so secure and transparent that it obviates the need for adherence to any external rules or regulation. NYU Professor Scott Galloway is just one of many critics who has pointed out that this is essentially an impossible task, particularly wherever human interactions (and especially financial transactions) are concerned.

 

The Crypto Crash

As you certainly know, throughout the spring and early summer of 2022, the markets for crypto have crashed.  Stocks have had a similarly rough ride in 2022, but crypto has seen devastating losses. On June 12, Celsius “paused all withdrawals, Swaps, and transfers between accounts.” TeraUSD, a so-called “stable coin,” built on the blockchain, “was de-pegged on May 9, drastically losing its value in a matter of days, and is now almost worthless as of this writing, hovering around 2 cents per UST.” Coinbase announced plans to lay off 1,100 employees, citing fears of an impending “crypto winter.”  Many lesser known crypto tokens have lost as much as 90% of their value. 

 

This Time It’s Different

Crypto prices have lost value before, but this time there’s a growing sense that this damage may never be undone. Earlier price decreases attracted much less attention, and far less total dollars were involved. The reputational damage, hot on the heels of the celebrity-fueled hype explosion, has permanently cracked the well-burnished myth that crypto is a stable, non-correlated asset class. The bigger they are…

As a result, the whole Web3 concept, with crypto at its center, is now receiving closer, and more critical attention. Under the re-examination urged by the crypto crash, the much-touted benefits of blockchain’s unique features, particularly its distributed authority, vs. traditional, centralized authority — have been found wanting.

…But it had already been found wanting by supply chain leaders, as we’ll soon discover.

 

Supply Chain: In Early On Blockchain

From 2014 through 2017, blockchain was the talk of the town in supply chain management circles. The new, “disruptive” technology was going to enable complete supply chain transparency, with significant benefits attendant to this breakthrough. The central thesis was that a combination of fully distributed ledgers, smart contracts, and digital tokens would enable a truly complete log, with immutability of records, verified transactions at every step, and positional records for every single item of raw material, every sub-assembly, and every finished good. Blockchain would enable “chain transparency” — and offer up a totally seamless, end-to-end process.

Major initiatives were kicked off, and the range of methods to improve supply chain operations was as broad as the horizon:

Increased automation. By tracking each step of the supply chain, blockchain would eliminate the need for all the paperwork at every handoff point, and replace it with blockchain’s distributed ledger. This would increase speed while decreasing error and conflicts.

Improved collaboration. Because itd be easier to track components in the supply chain, itd be easier for partners to problem-solve. Everyone would have the correct information in real-time.

Improved safety. With a distributed ledger, itd be possible to track food (for one example) all the way back to the farm, to make sure it is being produced and transported safely. If theres ever a sanity problem, like an e coli outbreak, then it will be easy to identify the source, and immediately neutralize it.

Ethical sourcing. As with safety issues, companies would be able to see if their goods are being ethically sourced. 

Improved accountability. For a company with multiple suppliers, or, more likely, multiple tiers of suppliers — it would speed identification of upstream bottlenecks. Finally, companies could hold all their partners fully accountable.

Decreased fraud. Companies (particularly in retail) could see exactly where in the supply chain goods were being lost.” 

Data security. Blockchains are extremely difficult to hack. Putting supply chain information on the blockchain would reduce the risk of fraud, forgery, and security breaches

The hype and enthusiasm around the potential for these use cases was something you could almost feel in the air. There was a period around 2015 when I couldnt join a meeting with a supply chain exec without being petitioned about blockchain.  Even if my companys technology and solutions didnt make use of blockchain, I had to be knowledgeable, otherwise I could quickly lose credibility.  Id frequently hear statements like these:

“Really, you dont use blockchain? Thats surprising for a startup these days.”

You know, we have a special budget for blockchain innovation. If you had blockchain, we could get a pilot going right now.”

Okay, even if you dont have blockchain right now, you will soon, right?”

Going to trade-shows at that time, there were more and more vendors showing up, exclusively highlighting blockchain use-cases, like those from our list above.

At Elementum, we saw the potential for what blockchain was claiming, but we just didn’t see the anticipated benefits materializing. Perhaps we were lucky that we didn’t have the technical capabilities to be innovators in the space. As a result, we stuck with our own product vision, and kept a watchful eye on blockchain projects, building our own knowledge base. We advised our customers where we thought blockchain might prove to be helpful, and stayed open to the idea of eventually partnering with blockchain solutions when the opportunity felt right.

What we soon saw was the cultural wisdom of supply chain veterans taking effect, and this threw a new and different light on the whole picture.

 

Early On…and Early Off

If you know them, you know that supply chain leaders tend to be a skeptical bunch. Because they have the explicit responsibility to manage-down risk, they tend to be risk averse by nature. Can anyone blame them? After all, they’re the one called on the carpet for having too much stuff, too little stuff, not the right stuff, the right stuff at the wrong time…and so on.

As a result, supply chain people are not the kind to jump early when big promises are being made.  Their ears are tuned to detect the unmistakable tones of wishful thinking, and perhaps especially to the sound of experiments proposed for their dime and dance-floor.

At the same time, supply chain people work very hard, and have an outsized sense of responsibility…it comes with the territory.

So, when a brand new technology comes around, and has the rapt attention of executives, promises massive innovation and savings — theyre certainly going to be open to trying it. But it has to work — supply chain folks, above all, are responsible for one thing: results. And supply chains, global and local, makeup the ultimate “real world” testing ground. 

Here’s the long and short of it: with blockchain, the results spoke loud and clear. In its current form, blockchain simply did not deliver benefits to supply chain management

Despite the hype for the fully distributed ledger, the applicability was not clear or compelling. The use cases we discussed were not more readily achieved with blockchain than with standard database technologies. In fact, many promised functions just couldn’t be done. Going end-to-end in supply chain still required a one-to-one stitching together of all the different partners, with data landing in a traditional databases.

Ultimately, there was no reduction in paperwork, increase in automation, or improved collaboration with blockchain. Instead, supply chain teams increased visibility, decreased fraud, and improved safety with good old hard work, like they always had. The much hyped “trustless system” failed to improve on the age-old supply chain ethos that have always exercised trust with the utmost selectivity — and has always included checks to make sure that trust is continuously earned.  And has backups, just in case.  

Its still easy to find articles from 2020 heralding the promise of blockchain in supply chain. However, by 2019, the great majority of supply chain practitioners knew that viable applications just could not live up to the promises that had been made. 

It certainly appears now that blockchain’s opportunity as a supply chain game-changer has passed. Over the last 24 months, as both crypto and blockchain have been called to account, supply chain leaders have had more urgent issues to attend to: like keeping the world running through a global pandemic.  As we’ve discussed previously on this blog, those results have been mixed — but some of the best companies in the world have found success by treating supply chain as a profit center. By now, you won’t be surprised to hear that they were able to do this without applying block chain technology.

 

Is There A Future For Blockchain in Supply Chain?

To be blunt, as of this writing, blockchain is a dead technology for supply chain management. There may be a few small-scale projects cooking here and there, but there’s clearly no “movement” afoot. The excited talk that I used to hear at every meeting, has now become a noticeable silence. Innovation in supply chain has shifted back to improved visibility, automation, machine learning, workflow, BI, and other proven capabilities — all of which have a history of real, tangible successes.

That said, supply chain management isn’t getting any easier. And despite the fact that many supply chain leaders were burned by blockchain experiments the first time around, if it can make a difference, supply chain people will listen. 

But nobody will be basing their decisions on hype. Nope, Matt Damon and Paris Hilton won’t cut it. Supply chain leaders will expect very detailed, explicit proof points for how the technology will be applied. Small pilots, with timely, quantifiable benefits will be a must.

In the meantime, theres still plenty of innovation for supply chain leaders to keep themselves busy with — as we will explore more fully soon, in our future blog posts.

David Blonski

David Blonski

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