How to Implement Blockchain in the Supply Chain: 7 Mandatory Steps

For several years, Walmart, McDonald's, IBM, FedEx, Alibaba, Starbucks and many other well-known brands have been using blockchain to optimize their supply chains and require the same from partners, as new technology can save billions of dollars, simplify workflow, eliminate errors and inaccuracies as well as increase customer confidence.

As FedEx CEO Fred Smith said at the Consensus 2018 conference: “You will either implement blockchain or disappear!” And today we will describe how to do it - how to implement blockchain in the supply chains of your business. What is needed for this, who should do what and what problems you may encounter.

Does your business need blockchain?

Blockchain and smart contracts are great technologies, but you don’t need to implement them in your business. It is possible that in your case these innovations will not be useful, for example, if your partners and counterparties in the supply chain do not agree to use the blockchain on their side.

It’s also not worth introducing blockchain if:

• your logistics and supply chain are fairly simple (short);
• your business is tied to cash and / or personal ties and the transition to the “number” is undesirable for your partners (typical for developing countries);
• your logistics generates data that is impossible or too difficult to bring to a single standard and / or formalize.

If the above items are not your case, you can safely proceed with the implementation of the blockchain in the supply chain of your business. This will require from a couple of months to a year of real time, depending on the scale and complexity of your logistics. To speed up and simplify this process, use our step-by-step instructions.

Step 1: Defining Use Cases

The first step in implementing the blockchain is to decide how exactly you will use it. It is not necessary to describe the technology itself at this stage, only use cases. A simple example is Walmart's Food Traceability Initiative. The trading network, together with IBM, created a blockchain to track the life path of food products from the manufacturer to the shelves in supermarkets.

Their platform collects information about:

• the manufacturer (name, location, technology and equipment);
• carriers (transport, equipment, route, transportation conditions);
• involved parties (name, status, history of cooperation, etc.);
• product (ingredients, shelf life, storage conditions, etc.)

Walmart launched this project to track counterfeit, spoilage and fakes, as well as in the case of force majeure, such as in the case of greenery infected with E.coli, to quickly track the source of infection and infected lots. Provenance, MediLedger and TE-Food startups went along a similar path.

But this is not the only way to use blockchain in supply chains:

1. Maersk and GSBN have created global blockchain platforms that could potentially become the standard for all market participants.
2. Alibaba and JD use the blockchain to track the authenticity of food products, baby products, luxury goods and alcoholic beverages.
3. UPS is developing a blockchain to streamline billing and workflow.
4. FedEx launched a blockchain project to store shipping records to use this data as a source of truth during dispute resolution.
5. Tallysticks and Blockshipping blockchains are focused on optimizing cash settlements in logistics and supply chains.

Define use cases for your business and move on according to instructions.

Step 2: Attracting partners to the project

As a rule, about 30 counterparties participate in global supply chains, up to 10 in local ones. When implementing a blockchain in a specific supply chain, it is necessary to ensure that they all also start using the new technology, since without this the “history” of goods will be incomplete.

If you are a big "fish", for this it is enough to threaten with refusal to cooperate, as Walmart did after the next case of infection of the greens with E.coli bacterium. If your influence is not so great, you need to show partners the benefits of switching to blockchain:

• reduction in the cost and complexity of logistics processes;
• reduced fraud and overhead;
• improving data quality and reliability;
• accelerated production and distribution;
• increase in sales.

If your partners are already using blockchain to optimize supply chain logistics, it might be better to join their project rather than create something of their own. In this case, you will save a lot of money and time, but most likely you will not get a lot of rights with regard to the management and development of the blockchain platform.

Step 3: Define a matching method

When all participants in your sales chains (or pilot project) have agreed, you need to choose a method for reconciling data in the administrative register. It's about blockchain type and consensus algorithm. By type of blockchain, they are divided into:

As for the consensus algorithm, there are also several options. For example, in the Walmart blockchain (Hyperledger Fabric), a separate service is engaged in the formation of blocks. VeChain uses Proof-of-Authority (PoA). The JPMorgan Chase blockchain called Quorum uses a modified version of Proof-of-work (POW). Which algorithm to choose depends on the blockchain platform and the distribution of rights and responsibilities between participants in your supply chain. For supply chains, it is best to choose a private or blockchain consortium, since they are fast and allow you to hide some of the information: financial calculations, the content of documents, and the like.

Step 4: Choosing the Right Platform

Next, you need to decide which blockchain you need. To do this, analyze use cases and understand:

1. What processes will be digitized and transferred to the blockchain?
2. What information will the blockchain collect and how?
3. How fast should the system process transactions?
4. What information will be entered manually, and what will come from automated IoT sensors and other sources?
5. How many participants will be in the system and what are their roles?
6. How will the data be validated?
7. To whom and what information will be available?
8. Other...

Having an understanding of which blockchain you need, you should see if there are ready-made solutions that can satisfy your requests. It will be cheaper and faster. The easiest way to deal with this is by examining the cases of other logistics projects, preferably those whose solutions can be used as Supply Chain-as-a Service. These include SUKU, VeChain, Provenance, ShipChain, and most of the IBM blockchain developments.

If these solutions do not work, then you need to choose one of the universal platforms and optimize it for your project. We are talking about Ethereum, TRON, EOS, Hyperledger Fabric and other blockchains sharpened for launching applications. Here, the best solution would be EOS, since this blockchain is fast, has no problems with scaling, and is customized for work with IoT. Hyperledger Fabric is also a good option, especially if you need to create a private network with several levels of access rights.

Step 5: Developing Smart Contracts

The next step in the implementation of blockchain in the supply chain will be the development of smart contracts. These are computer algorithms for automating formalized business processes and exchanging values, such as money, goods, property rights, information or documents. They speed up and reduce the cost of processes, eliminate intermediaries, and also help fight corruption and the human factor.

Their development is subject to the following rules:

• availability of electronic signatures for all participants in the transaction;
• the terms of the contract must be expressed mathematically;
• the simplest possible logic: if event A occurs, then we start action No. 1, if event B occurs, then we start action No. 2;
• the presence of a software environment, for example, the Ethereum or VeChain blockchain;
• availability of tools for fulfilling the contract: oracles, settlement accounts, DApps applications, IoT devices.

Creating smart contracts on your own is optional. To do this, you can hire a development company or buy the necessary contracts, for example, in T-Mining. This company created a framework for the development of smart contracts customized for logistics and supply chains. Now they are testing contracts for the transfer of containers (ownership and responsibility), automation of workflow and data exchange.

Step 6: Application Development

Having on hands blockchain and smart contracts, you can begin to develop an application - a program with which you will manage the system. If you do not have a development team on staff, it is best to hire a development company (technical partner) for this. With their help you:

• determine the technical requirements for the application;
• develop a UX / UI application design for different user roles;
• draw up terms of reference, roadmap and development budget;
• test the finished software product;
• other ...

Creating an application with the maximum set of functions at once is not worth it. The optimal solution is to develop a minimally viable product (MVP), with which you can test the concept for relatively little money and identify its shortcomings that do not take into account any nuances of your business (at the initial stage, most likely, there will be many).

In addition, statistics show that many companies overestimate the effectiveness of their business processes, neglecting the lack of standards, a large number of errors and data losses when transferring from one department to another (or between partner companies). Usually, such things create a lot of problems that are solved manually without the knowledge of the authorities, so the authorities who decided to integrate the blockchain into their business are not able to assess the scale of the work ahead.

In the article “ERP System Development Process: Key Tips” we described how such things failed to integrate ERP systems in companies such as Nike, PG&E, HP, Woolworths and Target. It also describes how to avoid such problems.

Step 7: Deploying Blockchain

The last step in introducing blockchain into supply chains is to test it on real business processes. Usually, a pilot project is launched for this, that is, the system is tested on a small scale on a small chain in which all user roles are involved: manufacturer, carrier, distributor, retailer, buyer and financial contractors.

For example, Walmart tested its system on the supply of mangoes from Mexico to the United States. Their pilot project involved 16 farms, 3 brokers, 2 packaging lines, 2 warehouses and retail stores Walmart. After confirming the concept, the network retailer expanded the pilot project to supply pork from China and supply packaged goods within the United States, and then to other supply chains.

You need to go the same way. Choose a simple (short) supply chain in which you can use all the user roles of your blockchain platform. Test the system on this chain, identify all problems and fix them, and only after that integrate the blockchain into all the logistics processes of your business.