Foreword

Blockchain technology has rapidly developed over the past decade, taking root in various fields and transforming many industries, and supply chain management is an area with significant potential for blockchain applications. As an essential part of modern enterprise operations, supply chain management requires effective coordination of resources across different regions in the globalized landscape to ensure smooth service and production processes and accurately meet customer demands. With its characteristics of transparency, trustworthiness, and automation, blockchain technology can enhance information exchange capabilities among users and improve the performance of other drivers in the supply chain, such as production, inventory, and transportation.

In this course, we will start by introducing the basic principles of blockchain and then explore its applications in supply chain management. The decentralized distributed ledger and cryptographic security of blockchain make it an ideal solution for many problems in supply chain information systems. By establishing supply chain data on the blockchain with immutable records, enterprises can realize the traceability of products throughout the process, from the purchase and inspection of raw materials to real-time monitoring during manufacturing and from logistics management during shipment to sales by retailers. In this way, all participants in the supply chain can share real-time data, increase process visibility, ensure product quality, improve collaboration efficiency, and reduce the risks of delays and errors. We will provide practical examples and experiences in this industry to help you gain a deeper understanding of blockchain applications in supply chain management.

Basic Principles of Blockchain

Blockchain is a special type of database where data storage is subject to specific rules and cannot be arbitrarily deleted or modified. Its core technology is the distributed ledger, where each piece of data is linked to the previous one, and data stored in this manner is generally referred to as a “block.”

Each block is built on top of the previous block, connected and ordered through timestamps, and identified by a unique hash value generated by a hash function. Hence, it is called a “blockchain.” New data can only be added as part of a block to the blockchain, and the collection of blocks constitutes the blockchain database.

It is widely recognized that in a blockchain network:

1. Data can be added.
2. Data cannot be arbitrarily deleted or modified.
3. Each piece of data is linked to the previous one.

This tamper-proof database is valuable as it does not require a trusted central authority (a third-party intermediary) to operate the system, minimizing the potential for trust to be misused or abused. Its characteristics of data transparency, easy verification, and immutability significantly reduce the cost of trust.

Blockchain relies on a peer-to-peer distributed network and uses a consensus mechanism to achieve a shared understanding among all participants of the data contained in the database and to synchronize any updates. Once a block is added to the blockchain, it can be considered permanently valid.

As a result, blockchain technology can serve as an information-driven factor to enhance the responsiveness and efficiency of supply chain management. It can increase transparency, traceability, and coordination of data exchange between different participants while also preventing forgery and fraud.

Introduction to Blockchain Technology

Cryptography

Cryptography is the foundation of blockchain technology, and its applications include digital signatures, asymmetric encryption, and hash functions. Digital signatures are used to verify the authenticity and integrity of data, ensuring that data has not been tampered with. Asymmetric encryption uses public and private keys, where data is encrypted with the public key when initiating a transaction and decrypted with the private key, ensuring the confidentiality and security of information transmission.

Cryptography plays a crucial role in blockchain by safeguarding data security, preventing unauthorized access and tampering, and providing participants with anonymity and privacy protection, enabling blockchain to securely handle sensitive information and transactions.

Consensus Mechanism

In distributed systems, the problem of trust among participants arises. Enabling communication and achieving consensus among all participants in the presence of faulty information is known as the Byzantine Generals Problem. Systems that can overcome this problem are called Byzantine Fault Tolerant (BFT) systems.

Traditional approaches rely on trusted central authorities to determine the authenticity and order of data. However, peer-to-peer blockchain networks use consensus mechanisms to resolve disputes.

The goal of consensus mechanisms is to determine the true data in the network and correctly order events. Different blockchain platforms and projects may use different consensus mechanisms, such as Proof-of-Work (PoW) and Proof-of-Stake (PoS).
In the PoW mechanism, participants need to solve a complex mathematical problem to prove their contribution to the system and gain the right to write data. In the PoW mechanism, participants need to hold a certain amount of cryptocurrency as collateral to submit data. Malicious nodes will be identified and suffer losses, thus avoiding malicious attacks and ensuring that all participants can reach a consensus to maintain the smooth operation of the blockchain network.

Network Structure of Blockchain

Blockchain is a distributed ledger maintained by many mutually untrusted participants using encryption and consensus mechanisms. These participants are commonly referred to as nodes, but not all nodes are the same. They can be classified based on their functionalities as full nodes, light nodes, and miner nodes. Full nodes perform extensive checks on block contents, including validating transactions and storing complete copies of the blockchain. However, they require significant resources to operate. Light nodes connect to other full nodes and only validate limited block data, thus requiring less storage and bandwidth resources. Miner nodes are either full nodes or light nodes and are responsible for providing computational power or staking tokens to process transactions, earn rewards from the consensus algorithm, and protect the blockchain network from malicious attacks.

The data writing and exchange between different nodes create a decentralized, peer-to-peer, synchronous, and trustless blockchain network, which mitigates the risk of a single point of failure leading to a system crash.

Public Blockchain, Private Blockchain, Consortium Blockchain

Blockchain technology can be applied to different scenarios. According to the identity and purpose of participants, it can be categorized into public blockchains, private blockchains, and consortium blockchains.

Public Blockchain

A public blockchain is an open blockchain network where anyone can participate, and transactions and validations can be conducted anonymously. Data and transactions on a public blockchain are open to all, allowing all participants to view and verify them. Typical examples of public blockchains include Bitcoin and Ethereum. They are characterized by decentralization and transparency but also face scalability challenges.

Private Blockchain

A private blockchain is a blockchain network limited to invited or authorized participants. It is often used within organizations or specific business application scenarios, providing enhanced privacy and security. This allows for better control of data access, ensuring that data is only transparent within the internal network. Some examples of private blockchains are KitChain and the IBM Blockchain Platform, which cater to specific enterprise needs, such as high throughput, low latency, and zero fees.

Consortium Blockchain

A consortium blockchain is a type of blockchain network that integrates public and private blockchain features. It is jointly managed and operated by multiple organizations or institutions, and participants must sign agreements to determine consensus mechanisms and data-sharing rules. Consortium blockchains are typically applied to blockchain projects involving specific industries or partnerships, such as payment clearing among financial institutions. Examples of consortium blockchains include AntChain and the Energy Web Foundation.

Smart Contracts

Smart contracts are self-executing code with programmable logic on the blockchain, similar to deterministic programs. They execute specific tasks when certain conditions are met. Smart contracts work by following “if…then…” statements. Their rules are pre-defined by programmers and can be replicated and executed by all nodes once deployed on the blockchain network.

Smart contracts allow the establishment of trustless agreements, enabling users to conduct secure and reliable transactions without the need to trust a third party. They can be used to implement various businesses and transaction commitments. Smart contracts only come into effect when specific conditions are met, which means that if the conditions are not met, the smart contract will not be executed.

The use of smart contracts can eliminate the need for intermediaries, significantly reducing operational costs related to human errors and delays. They can be utilized to develop various types of decentralized applications (DApps).

Shorten Production Cycles to Improve Traceability

In the electronics manufacturing industry, eight partner companies, including Arrow, Lenovo, Micron, SK Hynix, ZT Systems, and Wiwynn, utilized blockchain services provided by Microsoft Azure to optimize their existing supply chain’s manufacturing and procurement cycles.

The global outbreak of the COVID-19 pandemic in 2020 made supply chain management even more challenging, with disruptions in transportation routes and unpredictable order demands leading to significant delays in production lead times for many manufacturers. Through blockchain technology, the independent data nodes on the supply chain were connected to form a data network for information sharing, enabling frequent communication between upstream and downstream partners.

The blockchain network has made data in each link of the supply chain transparent, from component supplying, manufacturing and transportation to warehousing and delivery. This not only provides visible and reliable data exchange but also enables the traceability of goods, facilitating proactive and dynamic supply chain management.

In the future, quality management will also be strengthened, extending further to mineral raw materials, data centers, and EOL (End of Life) disposal.

By creating “digital twins” for each component to record relevant documents and information, it becomes possible to prevent the inclusion of counterfeit and substandard components into the supply chain. It also allows for the verification of upstream sources of components, avoiding the use of inhumanely-obtained raw materials extraction and conflict minerals, and identifying quality issues in complex processes.

Paperless Trade Reduces Friction Costs

Paperless trade is the ideal goal for international commerce, which will not only significantly improve the efficiency of global logistics, but also benefit independent traders and consumers from different countries. According to Trademark East Africa, in a single transaction, African entrepreneurs may need to fill out up to 96 paper documents.
To address the digitization challenges faced by Kenyan exporters, Trademark East Africa has partnered with the IOTA Foundation to establish a critical trade document access system based on the Tangle network in Kenya. They share information with the customs of destination countries to expedite the export process, further enhancing the competitiveness of Kenyan companies on a global scale.

Currently, Trademark East Africa has made this project a strategic focus and is experimenting with more trade routes. For example, they are exploring tea exports to the UK, fish exports to Belgium, and textile exports to the US. They are also collaborating with other East African governments to test the integration of this technology with their border agencies.

This application has helped Kenyan border agencies establish standards for cross-border and cross-industry exchange of trade information, bringing us one step closer to the global goal of making trade accessible and effortless for everyone. The project has received strong support from government development agencies in the Netherlands, the UK, and the US.

Enhanced Food Safety

Intel has partnered with Curry & Company, a large independent blueberry distributor, to strengthen food supply chain traceability and quality control using Hyperledger Sawtooth blockchain. This partnership ensures that fresh blueberries can be transported to the market for sale within a specific timeframe after harvesting.

Intel® Connected Logistics Platform is integrated with the blockchain network, incorporating sensors throughout the entire supply chain and leveraging Internet of Things (IoT) technology to monitor real-time factors like temperature, humidity, and light conditions. The system can verify and track the environmental conditions for products at every stage, starting from harvesting and storage to delivery, ensuring optimal food freshness and superior quality for consumers.

Compared to traditional supply chain management methods, the introduction of blockchain technology has significantly improved food traceability and safety. By continuously monitoring the status of fruits, potential food spoilage and recall issues can be proactively avoided, and food waste can also be reduced.

Furthermore, digital records have replaced many manual data entries, facilitating data exchange between supply chain partners and fostering a highly efficient, transparent, and trustworthy collaboration among them.

Strengthen Transportation and Logistics

Maersk, one of the world’s largest container shipping line and vessel operators, has collaborated with IBM to develop TradeLens, a blockchain-based real-time tracking system for the international shipping of goods. This platform enables convenient and secure information sharing, allowing different enterprises across the supply chain to collaborate, thereby promoting a more transparent and efficient global trade.

The functioning of the TradeLens platform relies on numerous sensors attached to goods, transport units, and port equipment, which use IoT technology to track the location of goods and other data such as temperature, vibrations, humidity, etc. The information is recorded on the blockchain for all users to access, ensuring constant monitoring of cargo status.

Moreover, when the ship reaches its destination, pre-programmed smart contract codes are used to automatically populate documents related to containers and goods, such as financial calculations, tariff payments, audits, etc. Through TradeLens’ core automated interaction feature, participants can streamline workflows and expedite data processing. The blockchain network ensures all data is trustworthy, with no errors or inaccuracies.
Currently, several international shipping companies utilize TradeLens to reduce logistics costs. Companies such as Agility, APM Terminals, PSA International, CMA CGM, DP World, and others leverage blockchain technology to enhance the speed and efficiency of cargo consolidation, declarations, customs clearance, payments, and other operations.

Environmental Protection and Compliance

South African paper company Sappi and Indian pulp and fiber manufacturer Birla Cellulose have collaborated to create GreenTrack, a system that tracks the flow of fabric products and recycled materials. Partners can use real-time tracing by scanning QR codes, ensuring that the production process comes entirely from certified sustainable forests. This helps consumers make more informed purchasing choices. Currently, the platform has been adopted by over 250 supply chain partners, including well-known companies like Walmart and Marks & Spencer.

In the fisheries sector, TraSeable Solutions has partnered with the World Wildlife Fund (WWF) to meet customer demands for seafood supply chains that comply with ESG standards and prevent illegal fishing. Their system collects data about each fishing vessel’s catch, including coordinates, catch logs, and crew details, and then labels the product packaging with QR codes to enable end consumers to retrieve information recorded on the blockchain network and minimize the sale of illegally caught fish. In the jewelry industry, De Beers, one of the largest diamond producers, uses the blockchain platform Tracr to track diamonds from mining, processing, and shipping to jewelry stores. Each diamond is assigned a unique ID immediately after being mined. Sensors detect each diamond’s section, clarity, color, and weight, and the information is then recorded on the Tracr platform. Subsequent data on polishing, processing, shipping, and resale is also updated in real time, allowing all relevant stakeholders to trace and review the diamond’s journey. This not only enhances transparency and trustworthiness in the records but also prevents inhumane blood diamonds from entering the market through illegal channels.

Conclusion

In this course, we have explored the application of blockchain in supply chain management. Blockchain technology stores data in a distributed ledger, providing immutability and decentralization. It also uses consensus mechanisms to ensure that participants reach a consensus, thereby achieving data transparency, traceability, and seamless coordination. Additionally, we have gained insights into different types of blockchain networks,such as public blockchains, private blockchains, and consortium blockchains, offering enterprises the flexibility to select the most suitable technology according to their specific use cases and requirements.

In supply chain management, blockchain technology has demonstrated significant success. It has proven effective in shortening production cycles, improving product traceability, enhancing transportation and logistics management, reducing manual operational costs, and ensuring environmental protection and compliance. The use of smart contracts has significantly enhanced supply chain management, enabling secure and reliable transactions and business operations. It has also reduced the need for intermediaries and lowered operational costs arising from human errors and delays.

In the upcoming lesson, we will delve into blockchain applications in supply chain finance and explore future trends and potential challenges.

Takeaways

1. Blockchain is a special type of database that stores data using a distributed ledger and a chain-like structure, characterized by immutability and decentralization.
2. Through consensus mechanisms, blockchain ensures that all participants reach a consensus on the contents included and synchronize any updates, achieving data transparency, traceability, and coordination.
3. Cryptography plays a crucial role in blockchain technology, including digital signatures, asymmetric encryption, and hash functions. It ensures data security and transaction confidentiality.
4. Consensus mechanisms play a crucial role in addressing trust issues in distributed systems, ensuring genuine data and correct ordering. Common mechanisms include Proof-of-Work and Proof-of-Stake.
5. Public blockchains are open blockchain networks where anyone can participate, and data and transactions are public, characterized by decentralization and transparency.
6. Private blockchains are blockchain networks with limited participants, used within organizations or in specific application scenarios, providing higher privacy and security.
7. Consortium blockchains are a type of blockchain network that incorporates both public and private blockchain features, jointly managed and operated by multiple organizations or institutions.
8. Smart contracts are self-executing codes on the blockchain with programmable logic, enabling secure and reliable transactions and business operations without the need for trust in third parties. They can eliminate the need for intermediaries, reduce operating costs caused by human errors and delays, and are used to develop various decentralized applications (DApps).
9. In supply chain management, blockchain technology has been practically applied in various scenarios, including shortening production cycles, increasing traceability, enhancing food safety, strengthening transportation and logistics, reducing manual operational costs, improving collaboration efficiency among enterprises, promoting environmental protection, and ensuring compliance.