The Blockchain and Value Chain: the Love Story of ‘Two Chains’

Blockchain technology is one fascinating piece of engineering marvel that has taken the 2020s by storm. By now, you may only associate the blockchain with cryptocurrency but interestingly, the application of blockchain technology spans above and beyond what Bitcoin, Ethereum, and alt-projects have achieved so far. Being a decentralized and distributed ledger technology that makes data altercation impossible, the blockchain is a revolutionary asset for customer data security in healthcare, transfer of wills, protection of copyrights and loyalties, the IoT, voting, and of course, cryptocurrency. But there is a sector where the blockchain gains special attention: The value chain.

The complexity and competitiveness in businesses have experienced steep increases since technology became handy for all businesses, especially SMEs. Most businesses are forced to improve their value chain efficiency to still have a competitive advantage and stay in business. The value chain is simply the A to Z of transforming a business model from idea to reality while maintaining a competitive edge and keeping costs reasonable. Michael E. Porter (Harvard Business School) introduced the value chain concept and it has been brilliantly employed by some popular brands such as Starbucks. For more understanding down the line, we can use the supply chain to explain this: the supply chain deals with the procurement process of goods and services from suppliers while the value chain deals with adding values at various stages of production and marketing to create profitable value for product delivery. That is, the supply chain is a subset of the value chain.

Here, we are going to dissect the relationship between the blockchain and the value chain as it pertains to businesses. Most especially, how blockchain technology can be employed to increase the value chain efficiency in companies. But what we are looking at is not just how the blockchain improves the value chain for businesses, but also insights into the possibilities this love story has for the future and therefore, why this is an area for more focus. This is the ‘how’. But before that, we’ll look at the ‘why’: reasons the blockchain is a value driver for the value chain.

The Why: Why is the Blockchain a value driver for the Value Chain?

Presently, a typical value chain can house thousands of entities such as retail stores, supply chains, distribution centers, manufacturing spaces, and warehouses, to mention a few. These tiers of processes, buildings, and equipment can prove a daunting task to manage and coordinate while successfully maintaining good visibility and knowledge of the extended supply chain. The importance of maintaining good visibility of the extended supply chain cannot be overstated because, without it, there could be an increase in production cost, production time, poor customer relations, and more. Of course, traditional central databases can be used to manage the value chain. However, the blockchain is superior in terms of overall performance and the case of a possible merger with AI and IoT. So what are the performances? They are:

• Improved efficiency and trust via smart contracts: A smart contract is a protocol that is used to create and manage contracts between two or more parties. The smart contract is built to execute the final terms of the contracts when predetermined conditions have been met by all parties. Smart contracts offer immutability of the terms and values of the contracts, and timely and accurate execution of contracts. This creates a sense of confidence and trust in the management of the operational and daily streamlining of goods and services throughout the value chain because it eliminates the possible errors, delays, and inefficiencies associated with the manual verification of contracts.

  
  

• Information sharing within a large network: The value chain includes various levels of suppliers that may be spread over a large distance and may not have direct contact with the brand companies that use their products. Yet, these brand companies will be held responsible for any bad or substandard product in their facilities caused by their suppliers. A public blockchain can increase visibility and communication throughout the value chain and solve this problem in various ways:

  • A blockchain provides a trustless medium of communication and transactions through smart contracts.

  • The decentralized nature of the blockchain solves the issue of cybersecurity threats and downtime that a single/central database may encounter due to a large amount of data and information.

  • The blockchain has a more structural ability to cater to a large number of users without restricting user accessibility.

    
    

• Competing companies can safely collaborate through the blockchain: Although competing companies may be reluctant to collaborate at first, a collaboration may be needed between companies for government regulations compliance, improved operational deficiencies, or support for accelerated product development. But due to limited trust, companies would hesitate to share information through a central database or even through a third-party database due to incidents of data loss. However, a blockchain, being a decentralized P2P (Peer-to-Peer) technology would be very useful in securing information and providing a trustless medium of transaction.

The How: How the Blockchain can be used to improve the Value Chain

Porter’s value chain model divides the value chain into two main groups: primary activities and support activities. This segmentation is very necessary as it helps companies to diagnose and improve their competitive levels.

The primary activities deal with inbound logistics, operations, services, marketing/sales, and outbound logistics. The support activities on the other hand deal with activities that support the primary activities such as human resource management, technology development, the firm’s infrastructure, and procurement. We will be taking closer looks at how the blockchain impacts each of these activities.

The Primary activities:

1. Inbound logistics: Suthikarnnarunai defines inbound activities as the process of moving components and parts from supplier to manufacturer. This means that inbound logistics involve the transportation and storage of raw materials in the value chain and are controlled by supplier management and supply chain management technologies such as Vendor Managed Inventory (VMI), Enterprise Resource Planning (ERP), EDI (Electronic Data Interchange), and CRP (Continuous Replenishment Program). The blockchain can play a revolutionary role here through the integration of these systems and providing secure channels for sharing of sensitive information between supply chain partners. More so, the blockchain can provide a high level of tracking for raw materials through a combination with the Wireless Sensor Network (WSN) and Radio-Frequency Identification (RFID) technologies.

   
   

2. Outbound logistics: These are activities that revolve around the storage and distribution of goods to the final consumer. The blockchain provides a good outlook on the products and tracks them to ensure reliable information as the goods move from the manufacturer to the last part of the chain through the blockchain’s one-up/one-down product tracing approach. More so, all the data related to the suppliers will be permanently recorded on the blockchain, thereby giving the businesses the freedom to focus on improving the physical product, if the businesses like.

   
   

3. Operations: This involves metamorphosing the inputs or raw materials into finished goods. Here, the blockchain could be very disruptive by creating a new manufacturing business model. Watanabe et al. noted that optimizing the manufacturing processes using blockchain technology could drastically improve productivity through value-generating activities and creating more capabilities. This is because the blockchain gives a new level of control of product authentication to businesses and creates new channels for sharing manufacturing resources and leveraging capabilities and assets. More so, the blockchain could be employed in smart factories to digitize assets, circulate information throughout the production process, and conduct the trustless exchange of data.

   
   

4. Marketing and Sales: Typically, the internet has changed the ways goods and services are marketed through digital marketing because customers now have more access to the product before purchase which affects their buying decision. Marketing and sales could benefit greatly from blockchain because of its intermediary nature as this could allow businesses to access the customers’ data (with customers’ permission) without passing through intermediaries like Facebook or TikTok. Due to its traceability ability, businesses will also be able to track their marketing teams’ successes and campaign growth in the supply chain. This will also benefit stakeholders in the supply chain due to the transparency of data used to foster marketing processes and interestingly, the blockchain would automate the customer loyalty programs through the blockchain-based rewarding system, thereby boosting customer retention.

   
   

5. Services: This deals with after-sales services. This could revolve around the delivery and installation of products, spare parts delivery, and return of faulty parts. Due to the fast and accurate needs of customers in after-sales services, the blockchain can be used to monitor and automate these services. That is, businesses would be proactive and not reactive because they will be able to track and monitor the states of these goods and provide high responsiveness to the customers. The blockchain could also establish an effective redress system for supply chain exchange partners, which will see warranty problems solved easily.

The Support activities:

1. Human resource management: The productivity and effectiveness of the team due to competition depend on human resource management. When there is healthy competition, it will be a good driver for increased efficiency in all operational spheres of the company. Healthy competition can be created by investing in employee development. Developing human resources involves hiring, training, workers' motivation, and career development. The blockchain offers a change from the Human Resources Management (HRM) systems to a protocol that increases trust in the hiring processes through the provision of verified and immutable copies of potential employees’ CVs. The blockchain-based human resources management system proposed by Onik et al., entails one that can verify and store hiring data, thereby reducing cost and need for third parties. A very good example is that HR could use a blockchain-based system to automate payroll criteria and bonus-performance timings through a smart contract. These payments could also be in cryptocurrencies, thus decreasing fees by eliminating bank fees (presently, one would avoid the Ethereum chain and rather use L2 for that).

   
   

2. Firm infrastructure: The firm infrastructure is the physical structure of the firm that helps in the execution of the firm’s goals. These structures need to be frequently updated to meet new market needs and conditions to sustain the business’ effectiveness when it comes to value creation. Blockchain technology can provide a way for companies to scale up their infrastructures by improving processes and building up capabilities. This is possible because the blockchain easily allows for the scalability and more efficient use of available resources (information sharing, trucks, technical know-how, warehouses, skills, manufacturing plants, expertise, goods, etc) and capabilities. Therefore, businesses would profit from this strong infrastructure without stressing the supply chain. A good example is the data storage provider of the blockchain which would take some loads off the networking infrastructure of the business.

   
   

3. Procurement: Blockchain could play a big role to disrupt how procurement is used to enable businesses to succeed in networked, dynamic, yet complex business environments because there is a need for businesses to scale up their procurement levels and reduce operating costs. Blockchain technology provides a suitable solution for improved procurement technologies, the growing need for more transparency in procurement decisions, and the growing complexity of buying decisions. Interestingly, by utilizing the key features of the blockchain, the parties involved can gain access to a secured, shared, and immutable database to create a lasting buyer-supplier relationship.

   
   

4. Technology development: With increasing technological developments in each firm, these firms will be faced with the issues of patenting their new and updated patents to establish proof of ownership as well as streamline patent registration. The blockchain comes in here to simplify that for businesses. The blockchain enables excellent management of intellectual properties such as domains, patents, branding items, and others., through its hashing feature and proof of existence. For example, blockchain helps by allowing the recording of a hash of a patent description, and through proof of existence, it could publicly record the fact that a patent document exists without revealing its content. Also, in a study, it was discovered that blockchain technology has the potential to improve anti-counterfeit and copyright procedures. Blockchain technology was used to create a physical anti-counterfeiting technique that could validate the uniqueness and quality of 3D-printed parts. The proposed strategy represents the technology's ability to protect firms’ intellectual properties, such as copyrights and patents.

Final words

Of course, the blockchain is not the skeleton key for all business problems but its unique and advanced features make it a premium solution to most problems businesses face. The technology itself is young and still largely unexplored, still regarded as complex by many, with no real regulations. However, the technology holds great potential for the future in its full maturity and when integrated with AI and IoT, could elevate the benefit it offers businesses to unimaginable levels. From the value chain perspective, the blockchain drastically improves collaboration, process efficiencies, and visibility through real-time tracking of raw materials movement. Although with limitations, the automation potential offered by the blockchain in this regard is second to none. Therefore, the blockchain being used in the value chain sector and value chain management is something every business should look into and possibly, adopt.

Featured picture source: Tumisu.