Blockchain Application to Transform Supply Chains Towards Sustainability

Blockchain applicability in supply chains currently enjoys widespread attention by researchers, businesses, and policymakers. Blockchain’s immutable, permanent, decentralised, and timely shared record promises transparency in otherwise obscure supply chain networks, from the upstream supplier to the downstream consumer. Thereby, the technology addresses inherent supply chain weaknesses, rooted for example in sourcing, logistics and network collaboration. In response to public demand for responsibly sourced and ethically produced goods, there is considerable interest in whether and how blockchain technology can contribute to more sustainability in supply chains.

First of all, what is sustainability?

To understand the concept of sustainability it is useful to break it into three distinct but intrinsically interconnected realms: economic, social, and environmental. Each of these pursues different actions, all contributing to render a product’s supply chain more sustainable, respecting social and intergenerational justice and planetary boundaries, as well as continuous profitability and market share of companies. Economic sustainability considers the long-lasting success of a company, maintaining a market share and continuous satisfaction of demand. Social sustainability is concerned with safe and humane working conditions, adhering to international minimum standards and refraining from forced or child labour.

Moreover, the social realm addresses consumer safety and continuous societal well-being. Environmental sustainability encompasses responsible resource consumption, consideration of negative externalities of production and distribution, finiteness of natural resources, and planetary boundaries. A sort of hierarchy needs to be considered, according to which the economy is subsumed under the social implications at large, which in turn fall under the wider umbrella of the environment. Together, these realms can target practices that contribute to long-lasting societal and planetary well-being, while preserving business interests.

Supply chain weaknesses and expectations

Supply chains require collaborative, well-orchestrated efforts of multiple parties: suppliers, auditors, distributors and coordinators, to name a few. With growing complexity, owed to advances in transport and communication infrastructure, cheap outsourcing and customised demand, supply chains face a lack of transparency and accountability of intermediate steps and inputs. Due to rising consumer consciousness and available information on hazardous working conditions in distant factories, depletion of natural resources, and the ecological footprint of products, companies require transparency to certify authenticity and responsibility. Disclosed misconduct along supply chains leads to boycotts and reports damaging the reputation of goods and brands.

How blockchain can address these

Blockchain technology’s inherent qualities can support all main supply chain management tasks, as presented in the figure. In the development stage, blockchain technologies can facilitate sustainable design by accessing the immense amount of (historical) data gathered along a supply chain. To exploit the full potential of data storage and sharing, artificial intelligence can contribute to helping analyse weaknesses and inefficiencies, that can then be mitigated for future transactions. Moreover, timely shared, transparent and immutable information added to the blockchain can strengthen the cooperation of supply chain network partners, and help to better plan subsequent supply chain processes. A prominent weakness of supply chains lies in the bullwhip effect, according to which supply deviates from demand due to information asymmetry. Thus, upstream suppliers lacking visibility of final consumers may produce more than what they can sell, leading to larger inventories and storage inefficiencies. Information shared on a blockchain can help prevent these inefficiencies, while preserving the competitive advantage of companies. Moreover, facilitated direct cooperation among network partners allows for disintermediating costly supply chain actors, such as auditors, notaries and import-export companies.

To source intermediary inputs responsibly, adhering to labour standards in raw material extraction and refraining from depleting natural resources, blockchain’s immutable record safeguards the authenticity of inputs, such as their origin, quality and quantity. In this, the technology helps to reduce corruption and fraud, occurring at intermediate steps along the chain. Additionally, blockchain-enabled end-to-end visibility and traceability increase trust in the final product. During the manufacturing and production processes, stored and shared data on the blockchain can safeguard that only certified factories and producers are employed, strengthening human rights, working conditions and adherence to environmental standards. During delivery, combinations with Internet-of-Things advances prove particularly powerful to track products, also ensuring product safety for example of uninterrupted cold chains throughout transportation. This traceability of raw material input and intermediate production steps also facilitates adherence to regulatory frameworks, such as supply chain due diligence laws and corporate responsibility.

Finally, the permanent immutable record of the blockchain has the potential to strengthen returns beyond the final consumer in three domains. Firstly, in the case of compromised products, the technology allows more pointed recalls reducing costs and reputational damage. Secondly, it can strengthen trust in second-hand products, proving their authenticity and good use, i.e., for luxury or technological goods. Thirdly, blockchain-based solutions can strengthen the end-of-life use of product parts, increase the recycling and reuse of parts and improve lifecycle assessments and ecological footprint calculations. Along with all of these tasks, the additional potential is associated with the automation of recurring processes and transactions via the instalment of smart contracts.

Limitations and conclusions

Despite these opportunities to implement blockchain technologies in supply chains, there are some limitations to be acknowledged and addressed. First, interoperability challenges with the existing software and lack of standardisation of blockchains, refrain supply chain managers to implement blockchain solutions. Second, in order to obtain a complete digital representation of the supply chain, prior end-to-end visibility is a precondition. However, this is precisely the challenge of obscure and complex supply chain networks. Third, there is the problem of ‘garbage in, garbage out’ according to which data stored in the blockchain is immutable and tamper-proof, yet there is no guarantee that inputted data is correct and complete. Fourth, non-digital goods require a digital token for representation on the blockchain. Here, questions arise concerning the degree of granularisation (size of product unit), as well as materials subject to mixing, i.e., during the melting process.

Before adopting a blockchain-based solution, an analysis of supply chain expectations should be held against the possibilities inhibited in the technology. With regards to environmental sustainability, this includes energy requirements. Whereas only Proof-of-Work consensus mechanisms are associated with vast energy consumption during mining, all blockchains suffer from storage issues due to the inherent data redundancy, sending an updated copy to all nodes. Therefore, other digital technologies could prove useful achieve desired results with less inefficiencies. To conclude, blockchain technologies have the potential to strengthen social and environmental standards while safeguarding profitability and business interests. Supply chain managers must consider both potentials and limitations, expectations and questions of feasibility before adopting a blockchain-based solution.