One of the most important technological breakthrough of 21st century is Distributed Ledger Technology (DLT). This is because, DLT will bring supply chain transformation in true sense and will change the way the businesses actually operate.
While Blockchain technology is still in an emerging state, several start-ups worldwide and companies like IBM are developing new enterprise DLT applications/solutions on day to day basis which are both implementable and scalable in nature.
Many readers of this article/blog will associate the term Blockchain with Bitcoin and other cryptocurrencies. However, it is important to note that, Blockchain has applications beyond the cryptocurrencies and has potential to affect almost all industries.
So what exactly is DLT?
DLT in layman’s language is a ledger which is distributed on the computers of several parties who are participants in a particular arrangement/transaction. Whenever a transaction is undertaken, it is recorded and timestamped on common ledger which can be accessed and verified by all the participants in arrangement on real time basis. As the record on DLT is timestamped, it cannot be altered. Hence, any transaction recorded on DLT is permanent in nature.
A particular DLT participant is able to broadcast attributes of certain transaction to the ledger which can be viewed by all the parties who are DLT participant. The immutable nature of DLT and its ability to broadcast transaction over several computers on simultaneous basis is a promise that, the new technology will lead to end to end supply chain transparency.
As DLT is hosted over several computers/nodes on internet, a single system crash/failure does not result in loss of records.
DLT can also be programmed to trigger transactions automatically (i.e. if certain pre-agreed conditions which are programmed on DLT are satisfied then asset or value may be transferred between parties or contract may be entered electronically between parties automatically or payments may be made without human involvement). Accordingly, DLT enables the execution of smart contracts and smart payments.
Today, in this blog we will focus on ability of DLT to infuse supply chain transparency and control effectiveness for food and beverage industry.
Control effectiveness? Yes.
DLT through the supply chain transparency will ensure that, internal operational controls are followed throughout the arrangement.
From a layman’s standpoint, a supply chain is a movement of goods or services through several transactions from point of procurement to point of sale which may involve several stages like raw material procurement, manufacturing/processing, packaging and distribution etc.
So how it is relevant to food and beverage industry?
Let us take case in example:
In the year 2015, a multinational company selling leading noodle brand had to destroy about 27,000 tonnes of noodles in India which was worth half billion dollars after food regulators in several Indian states accused that, tests have found noodles “unsafe and hazardous” and accused company of failing to comply with food safety laws. The noodles were accused of containing unusually high quantities of chemical named monosodium glutamate (MSG) and high level of lead. MSG is taste enhancer and lead is present in water used for manufacturing noodles.
The noodle brand was market leader with 80% of market share.
The noodles went into exile from retail stores for several weeks and returned to market only when the fresh sample of noodles were tested in national laboratories post which the company won a court battle with regulators.
This is a case where company not only suffered monetary loss but a huge reputation loss, as common people gave up consumption of noodles and there were widespread protests against the company at some places.
So how DLT or Blockchain could have made a difference?
With DLT into picture, the life of noodles would have been tracked right from point of raw material procurement i.e. rice/flour/wheat procurement to point of end distribution.
For DLT to operate, every participant in the supply chain right from the raw material suppliers selling rice/flour/wheat and other ingredients, transporter (Carriage Company), contract manufacturer manufacturing noodles, quality tester, warehouse operator and wholesale distributer and would become part of DLT. Let’s assume a futuristic scenario that even the retailers.
A question which may arise in minds of readers: “What would be incentive for all the participants in the supply chain to become participants of DLT platform?”
The answer is simple. DLT will enable complete transparency and accountability. Any operational blunder or control lapse will result in potential monetary losses for all points in supply chain either in present or future terms. Being part of DLT ensures that, each transaction or step in supply chain is tracked efficiently and each participant in supply chain is aware about how product is moving in its supply life cycle in operationally efficient manner.
Let us again get back to our noodle example:
Let’s suppose a DLT platform is set up in a manner which allows movement of noodles within the supply chain (whether in raw material, work-in-progress or finished products state) and their attributes to be tracked and broadcasted on shared ledger. For example:
- Movement of noodles will be tracked using GPS system located either on mode of transportation (e.g. truck etc.) or packaging as goods pass through each stage of supply chain. Such movement will visible and can be tracked on real-time basis on DLT.
Thus, each participant in supply chain is aware about the location of the goods. This will also help in estimating the time/day of arrival of goods at particular participant’s premises. For e.g. wholesale distributor will be able to estimate the time/day of arrival in its warehouse by tracking the truck movement.
- The packages (which may contain raw material, work in progress or finished goods) are tracked and verified using either Radio-frequency identification (RFID) or QR code by designated employee once it arrives at the premises of DLT participant. Also this may help in measuring the inventory at each point in supply chain as it enters or leaves the premises of particular participant and broadcasting the same on DLT.
This will provide consensus in recording of inventory quantity by all participants in the supply chain. Thus, mismatch of inventory quantity record by different parties in supply chain will be eliminated and the problem of inventory record inaccuracy may be completely removed.
- State of goods (noodles in this case) is broadcasted on DLT by every participant in supply chain through photographs at the time/point of arrival and at time/point of exit from their premises. Another method to test state of goods is by using data sensors. Such sensors may sense a shock event (like sudden change in temperature, a damaging physical jolt or even a theft) and then create an entry into the ledger to the record the point in supply i.e. which participant had the product at the shock event, time stamp providing the record of the event, location, and the shock.
Hence, if particular packets are tampered with or are damage, then it will be possible to for each DLT participant to know the point in supply chain where such tampering/damage may have occurred.
Further, if manufactured noodles are not in desired state (e.g.: colour, shape), it may be able to track such discrepancies.
Another advantage is that, disputes between carriage company and company will be reduced as there will be complete transparency in respect of state of goods during its movement through supply chain and any damage/shock event is appropriately tracked.
- The quality testing firm/company may test the quality of product and will broadcast the findings on the DLT to the participants. For example: in case the quality testing firm finds discrepancy in the quality of raw materials, such discrepancy will be broadcasted on DLT and will evident to all supply chain participants which would help company to trigger instant remediation measures.
- DLT may also help supply chain participants to smartly and efficiently manage their inventory i.e. both wholesaler and retail company will be able to track the movement of inventory and thus efficiently estimate reorder level and process new order of goods.
A DLT may be programmed with business logic to execute the reorder of goods automatically when goods reach the reorder point. This may be accompanied by smart payment when goods reach retail company.
A question which readers may ask is whether it is possible to bring competing retail companies on same DLT? The answer is – “Yes, It is Possible!”
The main noodle company owning DLT platform may program the platform so as to restrict the DLT view of the transaction leg between wholesaler and retail company only in respect of their own transactions rather than broadcasting the details of competing transactions among all DLT participants who may be competitors being at same stage of supply chain. Such programming may be essential in all cases where two or more DLT participants may be competitors being at same stage of supply chain.
From the above analysis, it can be inferred that, all the participants in the supply chain would be able to track the movement of goods and state of goods on real time basis. Broadcasting attributes of product by each participant in the supply chain leads to supply chain transparency.
Further, DLT may aid in achieving both operational efficiency and effective compliance of regulatory requirements/prescribed standards which may prevent another debacle for noodle company.
In the case under consideration, the contract manufacturer’s computer system will electronically track, measure and broadcast to DLT the nature and quantity of each ingredient used for manufacturing noodles along with the recorded levels of chemicals, lead and other metals present in water.
Such attributes will be broadcasted and recorded in common ledger and will be visible to all participants in supply chain. Accordingly, the manufacturing will be undertaken only if the ingredients, quantity and metal and chemical levels meet the pre-agreed levels/standards set by noodle company. Hence, if the manufacturer ignores the pre-agreed levels/standards and manufactures the noodles, such operational lapse will be evident to all the participants in supply chain on the real time basis. In this case, noodle company will refuse to accept the output of the contract manufacturer.
Let’s assume a scenario where DLT is programmed to execute smart contracts where the condition is that, manufacturing contract only executed between contract manufacturer and company only if the contract manufacturer undertakes manufacturing as per pre-agreed standards. No contract is entered between the parties if there is lapse on part of contract manufacturer. On other hand, DLT may be programmed in such a way that, execution of smart contracts and effective delivery of goods (as stipulated between parties) may lead to automated payments between parties (smart payments).
While the author is aware of the debate that, smart contracts may not stand the test of contract law in the court and it will be difficult to claim liability in case of certain lapse, we are looking at scenario where DLT may be transparent to audit all the steps in the transactions and the cases of legal disputes/claims will be closed to negligible.
Further, with State of Arizona in US giving legal recognition to smart contracts executed on Blockchain, we may see government in different parts of the world to recognize smart contracts.
In a futuristic scenario, where we combine DLT with artificial intelligence (AI), the manufacturing system will not operate in case the ingredients, chemical and metal levels broadcasted on DLT do not meet pre-agreed standards. This is because, the broadcasted attributes will fail the business logic programmed on DLT.
Moving ahead in the supply chain, let’s assume that product packing company is instructed to use recyclable material to pack the noodles before they are supplied to wholesalers and finally to retail shops. In this case, DLT may help in recording the attributes of the material used for packing through photographs.
Blockchain expert Michael Casey in his article “Global Supply Chains Are About to Get Better, Thanks to Blockchain” published on Harvard Business Review has expressed a view that, use of designated employee by each participant in DLT to broadcast attributes, status of products and operational aspects of its activity on distributed ledger would enable supply chain participants to monitor the activity of their employees, automatically avoid control lapses or even frauds/thefts.
For example : if the designated employee has to ensure that, particular equipment used for manufacture are sterilized before such manufacture is undertaken, then the employee has to undertake sterilization and record on DLT that, such sterilization was undertake. The designated may authenticate his/her identity on the system using the fingerprint/retina/bar code authentication procedure which may also be broadcasted on DLT to ensure that, the procedure is performed only the responsible person. The electronic/computer system may be automated and integrated with DLT such that, once the designated employee initiates particular procedure (sterilisation in this example), the same is automatically broadcasted on DLT without need of employee to manually record such step.
The cases of theft/embezzlement are common when the product is in transit in supply chain. Often it is seen that, quantity of product is reduced on account of embezzlement at certain stage of supply chain and investigating such embezzlement is difficult and even time consuming. However, the real-time recording of movement of goods and its attributes at each point of supply chain leads to avoidance or minimization of possibility of fraud or theft. Further, investigation of theft/embezzlement may be localized to particular point in supply chain where diversion of attributes were recorded.
Therefore, we can conclude DLT would serve as boon for noodle company as DLT would ensure end to end supply chain transparency and operational efficiency.
Like noodle company, in recent past, the soft drink industry in India was accused on a point that, drinks manufactured contain high levels of pesticides which may be hazardous in nature. The DLT may come to the rescue in this case too in a similar manner.
Michael Casey in his article (supra) has given another example of Mexican food chain which had problems on account of E.coli outbreak leading to closing of outlets and fall in share price of concerned company. In his article, Michael says that, problem of food contamination could have been avoided had DLT technology may have been available.
A futuristic view may be, regulators becoming the participants of the DLT and auditing the transaction on real time basis to track any potential violation of prescribed manufacturing/processing standards. However, this will require changes in existing regulations and creation of necessary infrastructure on part of government. Further, the concerns on supply chain confidentiality and data do remain in such case as government may not sign non-disclosure agreement.
Further, as auditing the transaction will be undertaken on real time basis due to DLT, the need of operational/internal auditors may be removed. In-fact, a new role of DLT auditor/controller may come into existence which simply means operational/internal auditors will perform real time audit of DLT to ensure that, transactions are undertaken/recorded as per desired management standards/control levels. However, number of employees required to conduct DLT audit/control may be significantly lesser than compared to internal audit team which company may usually employ.
A last question which readers will ask: How the consumers know the existence of DLT and whether the value of products is enhanced on account of DLT?
In case of noodles example, let’s assume the retail outlet has a computer screen which has view-only records of DLT. When end consumer scans bar code on the noodle packets, the computer screen provides the view of product journey through entire supply cycle from point of procurement to point of sale and related qualitative attributes at each point in supply chain. On account of such transparency, the intrinsic value of product in mind of consumer is automatically enhanced, as end customer is convinced that, product is manufactured as per certain regulatory and quality standards.
This feature may be most relevant in cases where company selling a particular product claims that, product is manufactured using special raw materials. For example: a particular beverage company may claim that its mango juice is produced using the alphonso mangoes from a particular village in Ratnagiri district in India. Some of the readers may recall alphonso is called as king of mangoes and the highest quality is available only in certain villages of Ratnagiri district. The DLT records may help end customer to verify whether the mangoes were actually procured from the source as claimed by the company.
Let’s consider a situation of product recall from retail outlets (like a situation of noodle company above), where the company is required to recall products and in some cases also destroy such recalled inventory in an environmentally sustainable manner.
In this case, DLT may be instrumental in tracking end to end movement of goods from retail outlets to the point they are destroyed in environmentally sustainable manner. In fact DLT may help company to verify if the planned destruction is actually undertaken in manner which adheres to law.
Further, moving away from food & beverage industry, if we consider automobile industry where product recalls are more common then, DLT may be useful for both end consumers and consumers who may view DLT records to track the movement of the vehicle from dealer premises to the automobile company’s workshops and status of the replacements etc. We will discuss the relevance of DLT to automobile industry in separate blog.
One thing is clear, the Distributed Ledger Technology is a boon for food & beverage industry. This is because, the transparency and real time audit records will enable industry to not only improve the product quality, optimise costs, bring operational efficiencies & transparency but also demonstrating to the regulatory authorities that, prescribed standards were effectively complied with. To conclude, the real winner of such supply chain transformation will be end consumer who will have access to best quality and hazard free products.
(Sagar Wagh is a Blockchain Enthusiast and Supply Chain Specialist based in London. He can be reached at email@example.com)