Applying Blockchain to Supply Chain Management

By Nathan Nakahara Published on Oct. 24, 2018

Modern supply chain chains are the lifeblood of our society. Many of our goods and consumables have traveled across the globe through multiple continents, modes of transport (cargo ship, plane, train, truck), and a multitude of invoices and regulations. Depending on the product, a supply chain today may span hundreds of stages over months of time. As supply chains continue to expand, new challenges such as transparency and quality control have been a thorn in the side of many companies.

With the rise of blockchain technology in other industries such as finance, where blocks are created to record transactions. There has been much interest in how the same concepts can be applied to the transportation and logistics industry.

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The Traditional Problems in Supply Chain Management

Supply chains a hundred years ago were relatively simple when compared to today's. Most processes and materials were sourced locally because most commerce was local. But the development of transportation technology such as the freight trains, trucks, and cargo ships has allowed for faster and cheaper movement of goods.

The sheer size and complexity of these systems has made it difficult for consumers to know the true value of a product because of a significant lack of transparency in the current system. Governments and regulatory bodies also face difficulties in investigating illegal or unethical business practices because of this absence of information.

In traditional supply chain, actors don't trust each other which result in problems of losses, thefts, and, in fact, carelessness. Why? Because nobody takes responsibility in supply chain. The main tool to transfer ownership is the CMR, which follow the product all over the chain. But it is just an old piece of paper, and it has nearly no value in today's world: handwritten signature can be faked easily and numbers can be edited.

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How can blockchain help?

The most common use of blockchain today is in finance, where it is used to transcribe and record transactions of cryptocurrency such as Bitcoin or Litecoin into public “blocks”. These blocks are recorded on what is called a ledger. A ledger can be described as a large spreadsheet with account numbers and balances, much like a traditional bank system. But unlike a traditional spreadsheet or database, ledgers are not stored on any one central computer system, it is instead distributed across every computer or “node” in the system.

As an example, if Mike wants to send 5 Bitcoins to Allison, he would broadcast a message from his computer or “node” to the rest of the computers on the network that his account balance should decrease by five, while Allison’s should increase by five. When each computer gets this message, it automatically updates its own version of the ledger with the most recent transaction. This saved information is known as a “block”, these blocks are recorded in succession hence the name “blockchain”.

An overarching definition of blockchain us “ a system that allows a group of connected computers to maintain a single updated and secure ledger.”  It goes without saying that a system that can securely, quickly, and accurately update itself without the need for human intervention and free of tampering from third parties would have gained tremendous interest in the supply chain management industry.

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New Leaders

As companies and startups rush to stake their claim on the blockchain landscape a few startups have emerged as pack leaders. Ownest SAS and Medex have emerged as two leaders in the race.

Ownest SAS is a startup aiming to empower actors of the supply chain, so that every action is done with a notion of responsibility, to avoid losses and thefts.

In traditional supply chain, actors don't trust each other which result in many problems. The main tool to transfer ownership is the CMR, which follow the product all over the chain. But it is just a piece of paper, and it has nearly no value in today's electronic world. A handwritten signature can be easily faked and numbers can be edited. Some 'E-CMR' project have been imagined but none were successful until now.

The reason being that those projects were centralized, and supply chain actors fear that their data can be accessed by a single actor (institutional or not). Ownest is a new tool to use blockchain to create an E-CMR, but in a decentralized way, where no actors have control over the network.

Actors that use Ownest can create blockchain trackers that represent the responsibility over a physical or digital good. Those trackers can then be transferred from an actor to another, with the good attached. Each time a transfer is done, there is digital proof that someone else took the responsibility over the good.

In the future, the supply chain will be a supply chain of trust and efficiency, where actors will always know who and where there goods and stocks are. For the drivers or warehousemen, it will be a simpler work, where nearly everything will be concentrated in a simple app. They will be able to contact and chat with other people within the app (in an encrypted way), view every action they have to do and view the current status of their stocks, and of course, sign their exchanges with blockchain in a simple tap on the screen.

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Medexchain, based in Illinois, is a Pricing and Contract management platform that automates processes and removes partner data opacity in the Drug/Pharma/Medical and Surgical Supply chain.

Healthcare supply chain today suffers from data opacity between the partners (Supplies, GPOs, Distributor and Hospitals) resulting in huge disputes and write-offs. This increases the cost of the products significantly. The contracting process is slow and hence time to revenue for the New products is inefficient. It takes 6 to 9 months to get the contracts done and the product codes set up in the proper partner data sources before the Hospital/Customer can order the Product. The Purchase process has problems due to data asynchronicity between the partners. 

An example of this is the "Charge back loss" between the Supplier and the Distributor. The loss is due to price discrepancy of the agreed price published between the GPO (published discounted price in the Roster) and the Supplier (contracted price) for the same customer. The Distributor buys the product at list price from Supplier and then charges the Hospital based on the GPO roster based Discounted price. The distributor later collects the difference i.e the discount, from the supplier.  If the Supplier pricing/contract information is inaccurate/old/expired he denies the Distributors claim. This is a loss to the distributor and runs into hundreds of millions of dollars annually.

The healthcare industry evolved over time through acquisitions. This has introduced a lot of middlemen in the echo-system resulting in cost escalation and inefficiency due to slow-moving manual processes. The hospitals grow through acquisitions, similarly the Distributors and the GPOs have grown through mergers. It is highly fragmented and suffers from complex business arrangements between the partners.

If the data transparency and automation are not improved the Pharma/Medical/Surgical supply cost will continue to increase. Medex’s estimates show, today, they add about 20% to the cost structure on an average. The problems cited above hurt the Insurance companies most since they have to bear the brunt of these escalating costs. The proper automated and well-designed supply chain of the future will be a supply expressway and not a chain.

Blockchain is going to change supply chain as we know it, but true innovation is so much more than that. 

At Plug and Play's supply chain accelerator, we are in touch with corporations and startups that are changing the world as we know it. Join our platform today.

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