How Blockchain is Transforming the Supply Chain

Companies like SAP Ariba and IBM are leveraging the blockchain to increase supply chain transparency upstream and downstream

Dubai Plans To Become Global Diamond Trade Hub 58ffc0ab2de96

Though diamonds have been around forever, it wasn’t until the 1950s that the four Cs for diamond quality—cut, color, clarity and carat—became a globally accepted standard for describing diamonds. There is a fifth C, however, and that is certification.
A diamond certification is a diamond-grading report, which is a printed opinion on the quality of a diamond by a specific diamond grader at a set time under exacting conditions. The certificates provide an unbiased third-party opinion as to a diamond’s characteristics and a means of identifying one diamond from another.
In 2000, an additional certification measure went into effect when the United Nations (UN) General Assembly passed a resolution to create an international certification scheme for rough diamonds to stem the trade of conflict diamonds. This measure, approved by the UN in 2000 and in effect by 2003, is known as the Kimberley Process Certification Scheme, and sets the standard for controlling rough diamond production and trade.
However, despite having precise certification methods in place, fraud still runs rampant in the diamond world. In April of this year, the Federal Bureau of Investigation (FBI) arrested 10 men in New York for their alleged role in fraudulently obtaining millions of dollars in untraceable diamonds in New York, Las Vegas and Mumbai. A few years earlier, a criminal network in London, known as the boiler-room gang, was convicted for selling dozens of colored diamonds to investors at up to 30 times their value.
Leanne Kemp, the founder and CEO of Everledger, a startup launched in 2015 through the Barclays Techstars accelerator, hopes to restore the diamond industry’s tarnished image by making sure the provenance of diamonds is crystal clear.
The London-based fintech company seeks to accomplish this by cross-referencing certified diamonds against a digital ledger that records ownership and origin of the stones to prevent fraud. Everledger securely captures the defining characteristics of the diamonds and creates a digital thumbprint that is stored in the blockchain for each one. This information, which includes history, transport, events and ownership, is relied upon by multiple stakeholders across global supply chains to verify each diamond’s authenticity.
Blockchain, the decentralized record book that underpins Bitcoin, was the perfect place to create a digital ledger designed to trace and verify certification of diamonds, according to Kemp.
“Diamonds are the perfect use case for blockchain technology,” she says. “Blockchain is a network technology, orchestrating trade amongst participants with embedded trust and smart enablement of contracts. Take the Kimberley Process as a prime example of a network in which there was already a consortium and operating protocols. This framework of consensus plays well into the fabric of blockchain. In the diamond industry, we have inspection points, certificates and physical scientific laboratories. It is a controlled environment where certain levels of science and scanning technologies are applied. All of these are important parts to the structure of integrity.”
More than a million diamonds were added to Everledger’s digital ledger since its inception in 2015 to prevent unauthorized access and tampering, and meet the industry’s stringent security requirements. But Kemp sees the use of this technology extending far beyond diamonds. Everledger currently is working to build additional security platforms for fine art, rare wine, luxury goods and electronics—all industries that Kemp finds in need of similar protections. “The eventuation of this technology can prove ownership, tackle fraud and deter theft,” she says.
Blockchain’s use for diamonds and other luxury goods has those in nearly every industry, including supply chain, excited by its potential. In the words of Ramesh Gopinath, vice president of blockchain solutions for IBM, “Blockchain is going to fundamentally transform industries across the board-every industry you can imagine. And why? Well, what is business about at the end of the day? It’s about businesses interacting with each other, building up contractual obligations, meeting those obligations and then getting paid for it.”
Everledger works to understand blockchain at its deepest core, according to Kemp. “We learned that beyond bank payment technology, it was well-suited for supply chain transparency, business network orchestration and operating an ethical supply chain,” she says.


Blockchain Builds Trust


To understand the attraction of blockchain in the supply chain, one must first understand what blockchain is. Ars Technica, a technology news website, defines it as follows: “A blockchain is a ledger of records arranged in data batches called blocks that use cryptographic validation to link themselves together. Put simply, each block references and identifies the previous block by a hashing function, forming an unbroken chain, hence the name.”
Ars Technica adds, “A blockchain sounds like a database with built-in validation—which it is. However, the clever bit is that the ledger is not stored in a master location or managed by any particular body. Instead, it is said to be distributed, existing on multiple computers at the same time in such a way that anybody with an interest can maintain a copy of it.
“Better still,” Ars Technica’s site continues, “the block validation system ensures that nobody can tamper with the records. Rather, old transactions are preserved forever and new transactions are added to the ledger irreversibly. Anyone on the network can check the ledger and see the same transaction history as everyone else.”
The fact that blockchain is an independent, transparent and permanent database, coexisting in multiple locations and shared by a community, builds trust. Gopinath states that data in a blockchain can be trusted for three primary reasons:
Any data added to a blockchain undergoes a vetting process for people to reach critical consensus.
Anything that goes into a blockchain goes in with digital signatures, so there is the notion of non-reputability, so you can’t say you didn’t do that. “Once the data gets sent, it’s relatively permanent,” he says. “I say relatively because all software is software, so there is a very small chance that something could go wrong.”
It is virtually immutable in that there are multiple copies. If a user were to unilaterally change a copy, it would become inconsistent with the rest of the data. “There’s this notion of taking a fingerprint off of a block of transactions and putting it into the next, and that’s why it’s called blockchain,” he says.
“Because of these three properties, and the fact that what goes in there stays unchanged or unaltered into perpetuity, is why it can be used to store salient information relevant to business transactions,” he says.
This process makes sense in the supply chain, he adds. He gives the following example: When a U.S. retailer buys an item from a Chinese manufacturer, there are many actors involved. There is the shipper in China, then a trucking company that takes the goods to a port, where the product must go through customs and various brokers. Then there is the carrier that ships the product to the United States. Once in the U.S., the product moves through a similar setup before the consignee receives the goods. Then there is movement of money in the opposite direction, possibly with financing behind it, a letter of credit and so forth.
“There are really three flows: There is the flow of goods, there is the flow of information associated with the physical flow and the movement of money,” he says. “Today, a lot of information is shared in a highly inefficient fashion, often manual and paper-based. By having a database, or blockchain, that is trusted, you can share information in a selectively visible fashion, so that only the people who are supposed to see the data see it, and you can do a better job of managing the flow of goods, the flow of money and the flow of information.”
SAP Ariba Takes the First Step
In March, SAP Ariba became one of the first companies to leverage blockchain across cloud-based applications and business networks to upend the way goods and services are traded.
Joe Fox, senior vice president of business development and strategy at SAP Ariba, reports the move made sense because “blockchain facilitates greater visibility and trust. By embedding it across our applications and network, we can enable supply chains that are smarter, faster and more transparent from sourcing all the way through settlement.”
SAP Ariba sees the first application in procurement and supply chain in the tracking and tracing of goods. “One of the biggest issues that companies face right now is tracking and tracing goods before, during and after shipment,” says Dana Gardner, president and principal analyst at Interarbor Solutions. “All too often, a seller will ship something to a warehouse where it is swapped for a knockoff without the buyer knowing. The distributed ledger capability of blockchain provides buyers and sellers with increased visibility and control from shipment to receipt, which ultimately reduces the risk of fraud.”
SAP Ariba moved into blockchain through a partnership with Everledger, which will extend blockchain capabilities to the Ariba Network. “By harnessing the best of disruptive technology, we built a global platform of provenance by connecting records of authenticity to a physical object and its certification as it moves throughout the supply chain,” says Kemp. “We know the impact this can have. Integrating our technology with SAP Ariba’s business network can not only lead to a reduction of risk and fraud for stakeholders, but additionally help to reshape a new era of global trade focused on the pillars of transparency, sustainability and ethics.”
According to Fox, the technology is a natural fit within SAP Ariba’s solutions. “If you can track and trace diamonds, you can track and trace anything,” he says, noting SAP Ariba does $1 trillion in commerce annually. “There are a lot of assets that flow based on that trade and spend, not just physical assets, but the payments for the assets.”


IBM and Maersk Partner


IBM and Maersk Line also see great potential for blockchain in supply chain and logistics. The two companies recently partnered to use blockchain technology to help transform the global cross-border supply chain. This blockchain solution is based on Hyperledger Fabric, an open technology framework for distributed ledger solutions from The Linux Foundation, and was built by IBM and Maersk for the shipping and logistics industry. The solution is designed to manage and track the documentation of shipping containers by digitizing the supply chain process from end to end to enhance transparency and allow for the secure sharing of information among trading partners. When adopted at scale, the solution has the potential to save the industry billions of dollars.
The new technology can vastly reduce the cost and complexity of trading by using blockchain to establish transparency among parties. The solution can also help reduce fraud and errors, decrease the time products spend in the transit and shipping process, improve inventory management, and ultimately, minimize waste and cost.
The technology’s potential is already demonstrated through IBM and Maersk’s work with a number of trading partners, government authorities and logistics companies. For example, goods from Schneider Electric were transported on a Maersk Line container vessel from the Port of Rotterdam to Newark in a pilot with the Customs Administration of the Netherlands under a European Union (EU) research project. The U.S. Department of Homeland Security Science and Technology Directorate, and U.S. Customs and Border Protection also are participating in this pilot. Damco, Maersk’s supply chain solutions company, supported origin management activities of the shipment while utilizing the solution. The international shipment of flowers to Royal FloraHolland from Kenya, Mandarin oranges from California and pineapples from Colombia also were used to validate the solution for shipments coming into the Port of Rotterdam.
“As a global integrator of container logistics with the ambition to digitize global trade, we are excited about this cooperation and its potential to bring substantial efficiency and productivity gains to global supply chains, while decreasing fraud and increasing security,” says Ibrahim Gokcen, chief digital officer at Maersk. “The projects we are doing with IBM aim at exploring a disruptive technology, such as blockchain, to solve real customer problems and create new innovative business models for the entire industry. We expect the solutions we are working on will not only reduce the cost of goods for consumers, but also make global trade more accessible to a much larger number of players from both emerging and developed countries.”
IBM has high hopes that this new supply chain solution will be a transformative technology with the potential to completely disrupt and change the way global trade is done. Bridget van Kralingen, senior vice president of industry platforms at IBM, says, “Working closely with Maersk for years, we’ve long understood the challenges facing the supply chain and logistics industry, and we quickly recognized the opportunity for blockchain to potentially provide massive savings when used broadly across the ocean shipping industry ecosystem. Bringing together our collective expertise, we created a new model the industry will be able to use to help improve the transparency and efficiency of delivering goods around the globe.”