Real Time Inventory Visibility Through Blockchain

Abstract

 Globally, blockchain is revered as being the most revolutionary technology advancement since the advent of the internet; however, the maturity of this technology leaves industry leaders apprehensive to apply it to one’s enterprise information systems, even though studies have quantified the problems in current solutions to be upwards of $3.1 trillion a year (Redman, 2016). In 2018, there have been the applications of this technology on various industries; ranging from healthcare, finance technology (FinTec), and supply chain. The most prominent application of this technology is to a firm’s supply chain, as the technology would greatly increase the traceability of a product’s provenance, This paper is written four months after Wal-Mart sent their suppliers information regarding the Food Traceability Initiative Fresh Leafy Greens; developing a user-friendly, low-cost, blockchain-enabled traceability solution to enable a leafy green farm to table (Walmart, 2018). There has been a surge in literature covering this topic; however, they have failed in concisely communicating the feasibility of the application and the far-reaching benefits of the application. More notably, the impacts of the technology during a product recall. This paper aims at addressing the issues in the current supply chains, evaluating characteristics of the current blockchains, and identifying the requirements needed to create and apply a Decentralized Application (DApp) to increase the visibility to a supply chains; enabling a real time inventory visibility.

Keywords: blockchain, supply chain, provenance, transparency, hyperledger fabric, product recalls, risk mitigation, collaboration, smart contracts, IBM, global network optimization, technological integration, customer integration, strategic sourcing

Real time Inventory Visibility Through Blockchain

 In the past few years, there has been an exponential increase in both the impact of recalls to business firms, as well as the increase of regulatory laws put into practice. The most prominent impact of recalls is on the food and beverage industry; impacting the industry, the firm, and all of the upstream suppliers. The time speed in which a firm can identify the impacted products contributes the largest variable playing into the financial impact; mitigating the elapsing time window will increase the likelihood of decreasing the overall risk to the firm. Furthermore, the process in which a firm tracks their inventory will ultimately determine the accuracy and speed of their identification of these products. In the current state, most companies currently utilize the traditional bar code system or Universal Product Code (UPC) system; however, this method yields a fraction of data storage as other coding systems available today.

  Furthermore, the technology being used for inventory management are cumbersome, prone to errors and bad actors, and hinder any members in the supply chain to react quickly to unforeseen events. The advent of blockchain is relatively new; although, the largest benefit of this technology is on the process of storing and sharing information among the collaborators of the database. Currently, these Centralized Database (CDB) stores all of the information in one location and does not allow for flexibility during supplier integrations; Blockchain uses a data infrastructure called Decentralized Databases (DDB), which encourage the sharing data among all users of the database.

 Moreover, through the adoption of this technology a firm would enable the following, but not limited to: increased risk mitigation throughout their supply chain, technological continuous improvement, quantify and track the processes in their supply chain, decrease the time needed to integrate customer and supplier infrastructures. Many case studies have been conducted on the application of this new technology onto a firm’s supply chain but failed to capture the deep-rooted benefits it could yield to a firm’s profit margins; especially in the case of product recalls. This paper will analyze the impact of applying blockchain technology to product recalls, since recalls pose the most inertia to significantly impact a company; however, this paper will also analyze the feasibility of this integration to benefit residual aspects outlined in the book Diagnosing Greatness: Ten Traits of the Best Supply Chains” written Chuck Poirier and Morgan Swink.

Method

Product Recalls

 Recall Overview

  The United States Food and Drug Administration (FDA) was established in 1906, with the passing of United States’ first regulation on both the food and drug industry called the 1906- Food and Drugs Act (FD). However, it was not for another 29 years when the 1938-Food, Drug, and Cosmetic Act (FDC) was signed did the FDA receive jurisdiction to enforce the laws embedded in the act (FDA, 2018). The FDC remained as the national guideline to industry overseen by the FDA; however, it received a much-needed revamping to the laws, which needed to encompass the expanded distribution of products offered to Americans. This led to the fortification of the FDA’s justification, with the passing of the Food Safety Modernization Act (FSM) in 2011. The FSMA gave the FDA authority to conduct an investigation on a firm’s records if they had reasonable doubt of a potential defect of a food product, where the previous FDC required the FDA to have substantial and credible evidence to conduct a like investigation. With the passing of the FSM came the increased risk to the food and beverage industry; especially to a firm’s liability to their supply chain and suppliers. In the FSM era, Supply Chain Mangers were continually looking for new and innovative ways to increase their supplier collaboration, improving their operational processes to increase quality control, and standardizing the data flow in and out of their supply chain infrastructure.

 The FDA describes recalls as a process in which a firm decides to voluntarily remove their product from the market; however, this could be initiated by the firm, by the FDA, or through the statutory authority of the FDA (FDA, 2018). The most prominent catalyst for a food recall, is either from consumer complaints; ranging from complaints of foul smell to death of a person. Through these complaints, the FDA investigators will compile information, conduct sampling tests, and publish the results to the food product’s owning firm.

 The FDA currently classifies recalls into four main categories of severity: Class I; event which has a high probability that the product could cause dire health consequences if exposed to or consumed, Class 2; event which has a likely chance to cause temporary or irreversible medical implications if exposed to or consumed, Class 3; event which high unlikely chance to medically impact a person’s health if exposed to or consumed, and Market withdrawal; event that violates one or more of the FDA’s regulations and the firm is to remove the item before legal action is taken (FDA, 2018).

 In addition to the classification of a recall, there are multiple levels of complexities of recalls, which the FDA classifies as Consumer, Retail and Wholesale Level; classifying the complexity involved with a recall, as an effect of the product’s distribution (FDA). The extent in which the product’s must be accounted for, disposed of, and ultimately destroyed, is dependent on the FDA’s classification of the recall’s depth. Consumer level requires full supply chain accountability and retrieval of the product from the consumer; receiving the most complex scenario, as it requires a mature and disciplined Warehouse Management System (WMS) The Retail level requires the product to retrieved from all downstream retail locations offering the impacted product; receiving the moderate level of complexity, as the downstream retailers should have accountability of historical Purchase Orders (PO) and in-store inventory levels. The least complicated depth of a recall is the Wholesale level, which requires the retrieval of the impacted products from wholesale distributors; requiring minimal effort, since the fulfilled POs would’ve been is bulk and this minimizes the impacted stakeholders needing contact by the firm’s product compliance department.

 Supply Chain Implications of Recalls

 Since the FSMA was signed into law the food and beverage industry has seen an exponential increase of FDA actions; rising over 90% since 2011 (Beech, 2018). Each recall event yields both short- and long-term impacts for the impacted firm, where the companies with a smaller supply chain and operational footprint are unable to withstand the costs associated to the indirect costs (impact to the firm’s Customer Lifetime Value (CLV), increased public relation costs, and re-vamping of the supply chain to increase inventory visibility)  and direct costs (fees associated to the FDA’s investigation, lawsuits from the impacted consumers, disposition of current stock, and customer refunds) associated a recall (Good, 2017).

 Moreover, both the indirect and direct costs associated to recalls, when combined, can equate between $35 to $75M; depending on the severity and depth of the recall (Tyco Integrated Security, (2012). Recall severity, is the FDA’s classification; depth of the recall identifies the impact to the firm’s supply chain; although the most prevalent recall severity and depth, is a Class I- consumer level Recall. In a Class I- Consumer level recall the food product is actively harming the consumers currently being exposed to the product, and a large quantity (over 50% of the circulating stock) is distributed among consumers.

 An example of a food recall’s impact on the food industry occurred in 2006, when 195 consumers became sick and another 5 consumers died, between 25 states; resulting from the bacteria named Escherichia coli (E. coli). As a byproduct of this recall the spinach industry experienced a direct cost of $45M within eight days. A year after the recall was first initiated, the industry reported a sales reduction of 20% reduction; equating ~$300M loss. Unlike the Spinach recall of 2006, most recalls average $10M in direct costs and last an average of 55 days; costing the recalling firm $182K per day that the recall is open with the FDA (Heneghan, 2016). Of the various components, it is estimated 25% of a firm’s time is spent tracking down inventory; accounting for the impacted units and reporting to the FDA (FDA, 2018). In the event the recall followed the industry trend of an average $10M direct cost impact and lasted 55 days; implications of inventory visibility yield a cost-association of ~$2.5M. Supply Chain Managers are continually seeking to adopt a technology that will capitalize on this entitlement, where many are seeking the application of blockchain to fill this void.

Blockchain

 History of Blockchain

 Blockchain was first introduced in a white paper, which was published by Satoshi Nakamoto in 2008, which is a concept of having a publicly distributed ledger to store and verify data between all of the participants. This would allow all users to share data without the verification from a third party and these transactions (or transferring of data) are immutable in nature; mitigating the risk of data manipulation or tampering.

 Blockchain is revolutionary, since it chains data components together called chaining. Chaining is the concept of chaining data together starts with a parent transaction of a select asset (Perboli, Musso, & Rosano, 2018). All of the succeeding transactions are chained together through hashing, where a transactions identification is comprised of the previous transaction’s identification; enabling a person to track the transaction upstream to the parent traction of a select asset, as seen in Figure 1.

Figure 1. Illustration of Chaining. This figure demonstrates the chaining of data capturing through a high-level supply chain. When a product is getting ready to leave a farm (1), the blockchain would capture it as the parent transaction. The product would then be transported (2) to a processing plant (3) and would ultimately end at the retail location (4). A firm would have the ability to identify the origin of a product (A); decreasing the risk or the firm.

Hyperledger Sawtooth

 IBM created the Hyperledger Sawtooth blockchain to solve the problem with other blockchains, which was the concept of permission less ledgers. In the more know blockchain applications, which are being used for supply chain applications, do not have permissions for who can see the content of the ledger. This is a fundamental problem which has historically hindered firms to adopt this technology; potentially allowing competitors to unravel the competitive edge a firm has built.

 Another reason that Hyperledger is a more suitable blockchain environment for Supply Chain Managers, is the versatility the blockchain enables the user to have compared to the more known blockchains. Unlike Ethereum and Bitcoin, Hyperledger Sawtooth was modularly built with multi-tiered application; enabling the user to receive the benefits of the EVM (Ethereum Virtual Machine) for smart contracts and have both a core permission-less blockchain ledger, while keeping their strategic partners on a permissioned ledger (Perboli, Musso, & Rosano, 2018). Supply Chain Managers would be able increase the collaborative efforts by encouraging strategic partners to transmit their data through a permissioned database.

 Lastly, Hyperledger Sawtooth was created to create Decentralized Applications (DApp), which increases the mobility and usability of the blockchain; optimizing the firm’s global supply chain. This is achieved through a simplistic integration of the blockchains Representational State Transfer (REST) Application Programming Interfaces (APIs) to a mobile DApp (Youness, Abdelali, & Houssine, 2018). Since Hyperledger Sawtooth enables this seamless integration, it also has benefits to the firm’s Warehouse Management System (WMS) and the warehouse associates using it.

Results

 Building a mobile DApp built on the Hyperledger Sawtooth blockchain framework, would enable a real-time inventory management system for a firm, while enabling a firm who and when they can see the information stored into the ledger (database) (Petersson & Baur 2018). During a product recall the firm would have the ability to view real time data regarding their inventory up and down stream, without questioning the data for discrepancies, and would assist the firm in the identification of the food-defect’s defect root; resulting from the chaining concept portrayed in Figure 2. The immediate implications to a Supply Chain Manager, is the added benefit to mitigate risk to a firm’s supply chain; mitigating the potential cost impact of ~$2.5M associated to the average product recall (Westerkamp,Victor, & Küpper, 2018).

Figure 2. High-level illustration of a Hyperledger Sawtooth enabled DApp. This figure demonstrates the capability of a DApp, when applied to a firm’s supply chain. When a product is getting ready to leave a farm (1), the blockchain would capture it as the parent transaction. The product would then be transported (2) to a processing plant (3) and would ultimately end at the retail location (4). A firm would have the ability to identify the origin of a product (A), by simply capturing the product’s barcode with a mobile device.

 Utilizing this type of blockchain would enable the firm to apply the latest technological advancement, with the lowest initial startup costs of integrating their current database into the blockchain. The residual benefits of this technology to a Supply Manager far outweighs the effort needed to have complete adoption and application to a firm’s supply chain. As you can see in Table 1, the integration of Hyperledger Sawtooth into a DApp would assist a firm to adopt further traits outlined in the book Diagnosing Greatness: Ten Traits of the Best Supply Chains” written Chuck Poirier and Morgan Swink.

Table 1

Discussion

 In this analysis, there were many intricate components not mentioned; providing a conceptual feasibility of applying this technology to a firm’s supply chain. The cost and time associated to the purposed integration would need further study to quantify the implications of the development, testing, and implementation of this architecture.  The resources required were also not captured in this study, as this paper’s intent was to communicate the benefits of applying Hyperledger Sawtooth to a firm’s supply chain; especially the potential residual benefits over multiple departments of the supply chain.

 Moreover, this analysis would need require further research both quantitative and qualitative, to better understand the risks (tangible and intangible) associated with current and future stakeholders. The preliminary research showed that conceptually the application would enable a firm to leverage this technology to optimize the flow of information and traceability of products through the supply chain; however, it excluded the humanistic data collection required for an actual application of this technology. Ultimately, the technology is only as useful as the users required to use it, regardless of the benefit of a technology, so future studies would need to incorporate further research methods to better asses the adoption rate of the end users.

 Likewise, further research would need to be conducted on the requirements needed to conduct an enterprise wide integration, since this would require a phased approach for larger companies like Amazon, Wal-Mart, and/or Kroger. This would also require the approval from senior leadership, which has historically faced the most scrutiny. To achieve approval from senior leadership to apply leverage this technology to a firm’s supply chain would require extensive market, cost and industry analysis.

 In conclusion, the supply chain and logistics industry are increasingly depending on Supply Chain Managers to decrease the risk on a firm’s supply chain, while increase optimizing various other aspects of the supply chain. If a firm adopted a like application of blockchain and applied it to their current operational processes, it would have far-reaching benefits to all of the constituents of the supply chain; ultimately increasing the growth of a more sustainable and mature supply chain.

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