Quantifying the Value of Blockchain-Based Supply Chain Networks—Part One

This is the first in a series quantifying the potential value of implementing blockchain-based supply chain networks.

Supply chain application networks

Multi-enterprise processes require multi-enterprise software solutions

Supply chains don’t buy software. Individual enterprises do. It is perhaps for that reason that the vast majority of business software is enterprise-centric. However, many, if not most, business processes are inter-enterprise in nature. The placing of a purchase order by one company triggers the creation of a sales order at the supplier, starting a chain of activities that may include buying raw materials from suppli­ers, production of the goods by outsourced manufacturers, packaging by a third party, a whole set of logistics activities involving third-party logistics providers (3PLs), carriers, inspectors, insurers, and other third parties, and ultimately payment involving banks and payment service providers.

Multi-enterprise processes require multi-enterprise software systems. And multi-enterprise software is architected very differently from single-enterprise software. We refer to this type of multi-enterprise software as a “supply chain application network”—i.e., a network of companies tied together by shared applications, processes, and data.

Supply chain application networks are built to solve multi-enterprise challenges. A number of these networks have been developed over the past two decades to solve problems such as procure-to-pay, logistics and global trade, multi-tier channel management and collaborative demand management, as well as industry-specific exchanges. Some of them have hundreds of billions or even trillions of dollars of transactions flowing through their network. These networks enable the creation of multi-party digital supply chains with automated processes. They form the foundation for autonomous supply chains, where more and more of the routine processes can be performed without human intervention.

What if the supply chain application network you need does not exist?

Challenges in creating supply chain application networks

What can a business do if the supply chain application network it wants does not yet exist? That is a common scenario, since there are a limited number of networks in existence and a nearly unlimited number of high-value use cases that have not yet been built. Unfortunately, creating a viable supply chain application network from scratch requires a tremendous investment, typically in the ballpark of $100M or more.¹ It usually takes more than a decade to create the technology platform, then build, prove out, and refine robust applications on the platform, hone the business model, and build up a critical mass of participants (see sidebar, “Key elements of a supply chain application network”).

This would be daunting even for a company that has software competencies but has never built a network like this, and even more daunting for a company that does not have software engineering, productization, and marketing as a core competency. The technical challenges alone are significant since a network architecture is substantially different from the much more common single-enter­prise application architecture. However, the business challenges are often as big as or greater than the technical challenge. This includes figuring out how to incentivize participation to build up a critical mass of participants to achieve a network effect while coming up with a business and revenue model that is sustainable and that participants are willing to pay for the value received.

A faster way to create a supply chain application network

Blockchain technology provides a shared database between multiple parties without requiring a centralized third party. Blockchain technology can thereby serve as a foundation for creating a blockchain-based supply chain application network (BSN). Blockchain technology by itself does not solve most of the challenges listed above, and some versions can suffer from performance limitations.² Fortunately, major technology providers have put together managed blockchain services that help with much of the technical heavy lifting. Examples include IBM Blockchain Platform and IBM Blockchain Services, Amazon Managed Blockchain, Microsoft Azure Blockchain Service, and services from other providers such as Oracle, Google, and others, including startups such as Copperwire.

Among these, IBM provides a particularly comprehensive set of capabilities and services, especially for solving supply chain challenges. The breadth of services and assistance that IBM offers allow companies that do not have software engineering as their core competency to create and manage a BSN. IBM uses the terminology “convening a network” rather than “building a network,” as they offer a lot of pre-built application-level software, experience, and knowledge, and can do much of the technical heavy lifting. Together, these technologies and services allow someone to convene a BSN in a shorter time and well below the cost of building a supply chain network from scratch, without having to recruit scarce and costly blockchain engineers. A minimum viable network can be brought up in commercial production use within a matter of months, and a critical mass of functionality and participants³ can be reached within as little as two to three years, rather than a decade or more.

Estimating the value of a blockchain-based supply chain application network (BSN)

Hypothetical BSNs illustrate value generated

BSNs (blockchain-based supply chain application networks) can bring considerable value to the convener and to the participants along many dimensions. Industry-specific scenarios can help illustrate the specific elements of potential value created by BSNs and better estimate the magnitude of value that can be generated. In this series, we focus on a hypothetical BSN that provides chain-of-custody-related application functionality for pharmaceutical supply chains. This proposed network tracks the handoffs and monitors pharmaceutical products’ condition at a serialized unit level from the point of manufacturing to the point of consumption by the patient. It includes multi-party applications such as traceability, inventory management, cold chain, anti-counterfeiting, expiration management, regulatory compliance, and patient adherence. The capabilities of this hypothetical pharmaceutical BSN are covered in more detail in part three of this series, describing a potential ‘Produce-to-use’ Chain-of-custody Solution.

Next, in part two of this series, we lay the foundation for understanding our hypothetical pharma BSN by using a schematic diagram to illustrate the structure of the pharmaceutical industry (with the scope of the proposed BSN overlaid). We also cover some of the key pharmaceutical supply chain challenges that blockchain could help mitigate including: diverse and conflicting incentives for the various players in the pharma supply chain; complexity/opaqueness of financial flows and services; complexity/opaqueness of distribution/product flows; onerous and ever-evolving pharma regulations; increasing share of perishable products (e.g., biologics); and the considerable patient adherence challenges that drug companies face.

In future installments of this series, we imagine a hypothetical ‘typical pharmaceutical company’ to illustrate what the typical benefits might look like. The value and benefit estimates we present in subsequent installments of this series are based on what that average or typical company that we imagine might see.