Busted: 3 Myths about the use of Blockchain in Supply Chain Management
- Xelene Aguiar
- Mar 1, 2022
- 4 min read
Today’s business world is unfortunately abound with catch-words that, while they sound cutting-edge, are very misleading and many times do not make business sense. “Blockchain” is one of these trending hashtags (pun intended- if you get it, you get it).
Let me clarify upfront, I am an ardent crypto and blockchain enthusiast. I think it is one of those paradigm shifting innovations that come but rarely. But, let’s not forget the most important criteria when selecting any business solution: APPROPRIATENESS.
If you’re wondering if blockchain is a suitable solution for your supply chain, read on.
Myth 1: Blockchain improves visibility in the supply chain
You will find multiple publications from the biggest consulting firms preaching about how blockchain can improve visibility in your supply chain. But before you pull out the big bucks, read the fine print. What you will find hidden within the Bold typeface is a very innocuous word “traceability”. THAT is the crux of the matter.
What these reports fail to tell you is that blockchain DOES NOT itself provide ‘traceability’. The reports refer to a combination of blockchain technology AND some version of detailed inventory data recording and management (with words like IOT, RFID, sensors, etc thrown in). Put very simply, take away the blockchain, and you will still have the same level of supply chain visibility.
Most of the traceability solutions, at the heart of it, consist of simply assigning a unique identifier (for example: unique QR codes or RFID) to every unit of inventory and tracking this identifier as it moves through the chain. Blockchain can only provide a level of protection that prevents changes to the data once it is entered into the database.
If you’ve spent enough time in supply chain management, you will know that the biggest concern, especially in product movement, is the accuracy of the recording of the physical identifier applied to the product units or rather, the accuracy with which the goods can be tracked. A blockchain cannot solve this. The information of what product is where at what instant of time is only as good as the ‘Traceability’ solution API integrated with the blockchain.
Myth 2: Blockchain makes your supply chain more efficient
Again, a blockchain is not a magic bullet that can take away the hard work that goes into the creation of an efficient supply chain. It cannot replace demand analysis and prediction, best inventory management practices, etc. It does not even give you the kind of accurate real time data required for more precise predictions and management. All the technology does is protect that data once it has been recorded. It cannot even ensure the authenticity of the data being recorded into the block. We’re talking about converting the physical world (i.e. movement of goods) to a digital transaction record.
The real-time data comes from as above, the underlying supply chain ‘Traceability’ solution.
Myth 3: Blockchain reduces supply chain costs
Would you take a bazooka to a knife-fight? Of course not. That would be a sheer waste of resources and consequently- money. Similarly, if you use blockchain technology to provide data security to your supply chain when it isn’t warranted, you just end up adding costs without any of the additional benefits. And these aren’t miniscule costs we’re talking about.
Here’s a very rudimentary estimate of basic storage costs associated with maintaining a blockchain (these were provided to me by a senior blockchain engineer and have been replicated verbatim):
1. If the data needs to be maintained on a single node (that too private) — this is not blockchain.
2. Going a step ahead, if there are nodes being maintained across different teams within the same organization:
a. A single AWS ec2 instance (with the minimum required configurations for a blockchain node) ~ $110 / month
b. Each instance will have storage volume SSD ~ $90 / month
c. Even if using 3 nodes min., total comes around ~ ($200 3 12) ~ $7200 per year
3. On the other hand, if we have a regular database storage (let’s consider RDS by AWS itself):
a. single RDS instance (with min. reqd. config)~ $100 /month
b. Have one more for backup , so for a year ~ $2400 per year
You can read up a little bit more on potential costs here:
And let’s not forget the added costs of hiring blockchain engineers to maintain it for you (these do not come cheap by any yardstick).
Do remember, we’re only talking about the cost of the blockchain here. The underlying ‘Traceability’ solution costs are independent.
Does this mean blockchain is all hype and no substance?
No! That’s not what this article implies.
I do want to highlight the most important use of blockchain in supply chain management: Data Authenticity/ Security/ Trustworthiness. This is what the technology solves.
One of the crucial aspects of the use of blockchain in SCM is the conversion of physical transaction (movement of physical goods) into digital information. The suitability of this technology depends on a few characteristics of the supply chain. Here’s a look at a flowchart that elucidates this.
In short, if your supply chain is internal to only your organisation (like it is for most manufacturing businesses), then implementing it only increases your cost without the real benefits of this technology. In most business use-cases, simple access-controlled data manipulation privileges are sufficient to ensure your data security.
References:
I have referred to multiple Blockchain in SCM publications across business and technology consulting firms to understand advice given by these firms. I am not listing them here to avoid possible conflicts.
All other references are included in the article itself.
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