For part one of this article with an introduction to these verticals, click here.
The enterprise ecosystem has deployed thousands of pilots over the last few years. Many real-world live deployments are projected for 2019. The following sections review key applications and use cases of enterprise blockchain technology.
Supply Chain Management (SCM)
Global supply chains are responsible for the creation and distribution of most products that are manufactured today. Some of the most complex supply chains, for example for cars or airplanes, include hundreds of thousands of individual parts and span thousands or tens of thousands of companies. The total value of all products in supply chains is currently valued at 2/3 of Global GDP annually (>$50 Trillion).
The key actors in supply chains include materials providers, suppliers, logistics providers, manufacturers, warehouse managers, distributors, and end customers. Each of these actors usually stores its own information in an ERP system. These ERP systems are rarely linked with the other actors due to privacy and security concerns. Each actor usually only has information about the group just before and just after their step in the chain. As a result, data across the supply chain is fragmented and siloed so each stakeholder has little visibility to the overall state of the chain.
Not only is data siloed within the chain, but also data quality, accuracy and integrity are not optimized. Many ERP systems copy information from spreadsheets or rely on data entry from paper-based systems which is error-prone and unsupervised. Each hand-off in the supply chain rarely institutes checks on products or information. Ports, for example, are a well-known weak point. The result is that data within centralized supply chain systems is often unreliable and can be easily compromised or hacked by bad actors. The total value of counterfeit products within supply chains is projected to exceed $4.2 trillion by 2022.
As noted earlier, the largest US supply chain players (i.e. Amazon and Walmart) have spent many billions of dollars to internalize the entire logistics chain and apply custom technology solutions so that they can cope with the challenges above. This approach, however, is untenable for most players as the capital and operational costs are too high. Supply chain players can embrace enterprise blockchains as they provide a much lower cost solution to the same challenges.
Enterprise blockchains provide:
- A secure shared ledger that can provide visibility across the whole supply chain
- Smart contracts to enforce agreements and validate data for each transaction
- Accurate, immutable information that makes it possible to quickly find bad actors
The business case for blockchain is clear: higher revenues, lower costs, more efficient processes, reduced fraud, plus elimination of bad actors.
Key Blockchain Use Cases for Supply Chain
As noted above, permissioned blockchain systems can provide visibility and better data across supply chains. Common applications include:
- Product traceability
- Product provenance & authenticity
- Process transparency
Let’s look at each in turn.
The ability to quickly find the origin of a product is important in different contexts. For example, consider food traceability. Mass food disease outbreaks from foods infected with Salmonella, E. coli, Listeria, or parasites generally create widespread panic. Food scares can lead to huge losses for food producers and distributors when specific products (i.e. spinach, lettuce, beef, etc.) are pulled from shelves en masse and destroyed both in store and back at the farm. As many food-borne illnesses are eventually traced back to a single farm or even a single batch of product, finding the source of contamination quickly can save millions of dollars.
With current supply chain systems, food traceability often takes a week or more since data is fragmented and siloed and each part of the supply chain needs to be contacted directly. A week may seem like a short time, but as the media reports on illnesses and deaths mount, retailers and farmers are forced to destroy products quickly to regain consumer confidence. US food safety outbreaks lead to 48 million illnesses, 300,000 hospitalizations and 5000 deaths annually. They also cost the US economy more than $93 billion each year. Globally the numbers are much larger, 600 million illnesses and 420,000 deaths annually from food contamination. Smaller retailers and farmers are especially hard hit since they have to absorb the losses and some are usually forced into bankruptcy.
As noted above, blockchain-based supply chain systems can provide an accurate and immutable record of all transactions across the chain. These systems assign a unique ID and unhackable decentralized tagging system that tracks food at the batch or lot number. Often the unique ID is based on a global standard to ensure that all stakeholders are using the same approach for identifying their products. Since all nodes have access to this record, traceability becomes routine.
Pilots with Walmart and other large food retailers have already demonstrated that blockchain-based systems can determine the origin of a package of food in seconds or minutes (IBM Food Trust), as opposed to 6–7 days under current systems. Since these blockchain-based systems can rapidly find the source of food safety outbreaks they provide the opportunity to greatly reduce the scale of food borne illnesses and related supply chain economic losses.
Product Provenance & Authenticity
As noted above, the global counterfeit goods market is a multi-trillion dollar problem, and growing larger. A significant fraction of this number is fake luxury goods — the well-known brands behind handbags, high end clothes, and accessories. Many people who purchase counterfeit branded products may not be aware that the products are fake, because they may purchase them through reputable web sites, outlet stores, or replicas of the retailer’s or manufacturer’s web site.
In today’s supply chain systems there is no simple way to track the provenance and authenticity of a product. More sophisticated centralized systems, such as EPCglobal, have used barcodes, unique electronic product codes (EPC), and RFID technology to track items through the supply chain. These systems, however, rely on centralized certificate authorities and centralized databases and so are fundamentally insecure since they have single points of failure that make them susceptible to hacking risk.
Decentralized and ultra-secure blockchain systems allow product tracking to its origin (traceability) and through every step of the supply chain (authenticity). Building on this foundation, a number of blockchain projects plan to use Decentralized Apps (DApps) that use information in the supply chain to authenticate that a product, such as a luxury good, is in fact authentic. The DApp enables a user to scan a QR code on the product which provides a full trace and validation of the product’s authenticity.
Such an approach tracks the product or a product’s components through every step in the chain, for example via an embedded RFID or NFC chip. At each step in the chain, the RFID chip is scanned, a smart contract is executed, and then multiple trusted nodes verify the information is correct before it is written to the blockchain ledger. Each entry in the blockchain ledger is cryptographically signed and encrypted which deters fraud and reduces the chance of hacking. Since the entire supply chain process becomes transparent, it becomes possible to quickly and inexpensively validate product authenticity. Any product that doesn’t enable DApp-based authenticity then becomes suspect which disincentivizes fraud.
Provenance takes authenticity one step further by also providing information about ownership or history. So, for example, you could purchase a product which is not only authentic but was owned for some years by a famous person, or is a limited edition, or has some other special attribute. This type of information can increase value, but it is often very expensive to verify in most cases. Since blockchain technology reduces verification costs it will likely gain widespread adoption and so make checking product authenticity and provenance commonplace.
Other use cases can include verification of specialty crop certifications (i.e. fair trade, organic), origin and authenticity of diamonds, and provenance/authenticity of medical drugs (i.e. pharmaceuticals — covered below in the healthcare section).
Most developed countries in the world spend approximately 10% of GDP on healthcare. Despite great advances in medical technology, many studies have shown that the US healthcare system is one of the most inefficient in the world. The US healthcare system has the highest annual spending ($3 trillion) yet is one of the poorest in health outcomes when ranked against the rest of the developed world. Other global, system-wide issues in healthcare include hundreds of billions of dollars annually in medical fraud and counterfeit prescription drugs.
The high levels of inefficiency and fraud in healthcare systems arise from lack of data and process transparency, pervasive vulnerability to hacking, and data siloing in organizations. As noted previously, permissioned enterprise blockchain systems are ideal for spanning ecosystems to increase data and process transparency, reduce hacking, and improve data sharing between organizations. As a result, there is a strong conceptual fit between enterprise blockchain and the type of solutions needed for the healthcare ecosystem.
Now let’s take a look at some of the most important and pressing use cases.
Fighting Counterfeit Drugs
The global pharmaceuticals industry is big business, valued annually at $1.1 trillion. Pharmaceutical companies spend tens of billions of dollars and go through an arduous process to produce and commercialize prescription drugs. With the global counterfeit drug market valued at $200 billion annually, there is a clear motivation in the pharma sector to fight counterfeiting. What is also at stake are human lives, with adverse reactions and effects to these fake drugs, which can lead to death. In certain parts of the world, up to 50% of the drugs are counterfeit.
In emerging markets, 10%-30% of prescription drugs are counterfeit, with issues ranging from tampered drugs to drugs with incorrect ingredients or incorrect proportions of ingredients. Most of the counterfeit drugs are being produced in China and India but sold worldwide. A very relevant example of this type of fraud, is the recent (July 2018) China vaccine scandal where a government vaccination program was found to have administered hundreds of thousands of faulty vaccines to young children.
At the root of global pharmaceutical fraud is a supply chain transparency and product authenticity problem. Without transparency in the supply chain it is very difficult to pinpoint the origin of the fraud, identify the bad actors who perpetrated the crime, or verify product authenticity. What is needed is for the entire process, from production to quality assurance to distribution, to be secured in an unhackable database with each entry cryptographically signed and encrypted. This capability and its resulting transparency is exactly what blockchain technology provides.
Like in the case of food (above), the blockchain ledger can provide transparency end-to-end for drug production and distribution, including visibility into every stage of the supply chain. The implications of this level of detail are enormous. Not only does blockchain technology improve the traceability of prescription drugs in the supply chain, it can also ensure that international standards are upheld, such as GDP (Good Distribution Practices), ensuring the integrity and quality of the medication for the end user. Additionally, it will also be much more difficult for bad actors to tamper with the process or for pharma companies themselves to market fraudulent products.
It is for this reason that the blockchain community in China has called for placing all vaccine data on a transparent blockchain system to return consumer trust. With such a system in place, healthcare professionals or pharmacists could scan a QR code on the product to ascertain authenticity and/or the dosage of the active ingredients.
Electronic Health Records Interoperability (EHR)
Electronic Health Record (EHR) systems were created to produce better patient health outcomes by providing complete patient medical information at the point of care. In a previous article, Blockchain in Healthcare: A Data-Centric Perspective, we illustrated how EHR systems are fundamentally broken since healthcare data continues to be siloed and interoperability remains a huge challenge.
One of the main reasons that health systems are inefficient is that doctors and nurses often lack patient historical health information when diagnosing a patient. Each patient’s health records are typically splintered across many EHR systems, or even antiquated paper records, and scattered across different providers (i.e. doctors, specialists, hospitals, labs, clinics, etc.). Since these systems are rarely interoperable, the patient’s records are inaccessible. Generally, the lack of medical context and the lack of continuity in a patient’s health record, exacerbated by delays in obtaining relevant information from other providers, means that doctors cannot efficiently and fully treat a patient other than for symptoms being presented. This can be a life threatening set of circumstances in emergency situations.
As noted above, Health Information Exchanges (HIEs), were conceived as the solution to these issues, with the expectation that sharing relevant patient information would provide the missing context in a patient’s health history, however the reality has been quite different. In the US, HIEs do not operate across state lines, and few systems work across country borders. In our increasingly mobile behavior, the urban population is less likely to be in one place for their life span. As most HIEs contain only a small portion of a patient’s medical record, it is time-consuming and expensive to access all the information and migrate it to a unified system. Current centralized models are expected to migrate to decentralized models by 2024.
Enterprise blockchain technology can create the missing interoperability links unifying healthcare systems so that data can be shared quickly and seamlessly across providers. The concept is that all providers would join a network of permissioned blockchains that would enable them to retain control of their data, while being able to share requested patient information to another authorized provider. This is in essence a decentralized HIE that would use smart contracts, the immutable ledger, and blockchain security to create a higher level of trust between participants leading to faster adoption.
The banking and financial services sectors, especially fintech, were the first areas to adopt blockchain technology. They are clearly massive sectors that deal with vast quantities of the world’s money. Electronic money transfers that move through the US exceed $2.5 quadrillion per year or nearly $10 trillion per day. Stock market capitalization is nearly $70 trillion across the 60 largest stock markets.
Key challenges in these sectors include:
· Slow payment processing
· High fees
· Lack of transparency
· Lack of liquidity
Let’s look at three use cases where these issues are exemplified and how enterprise blockchains can provide solutions.
Cross Border Payments
Trillions of dollars of cross-border payments take place every day. Consider a pharmaceuticals company in Colombia that wants to pay a marketing firm in Chile via a wire transfer. The system works through a system of correspondent banking relationships plus centralized messaging systems known as SWIFT (Society for Worldwide Interbank Financial Telecommunication), Fedwire, and/or CHIPS (Clearing House Interbank Payments System).
Since the banks for the pharmaceutical company and the marketing company may not have a direct relationship, there are many intermediaries needed to process the transaction, which becomes complex and fees add up quickly. In the best of cases this type of complex transaction may process in 3–5 business days, but if you include holidays and weekends spanning multiple countries, the transaction may take 1–2 weeks to complete.
Enterprise blockchain solutions enable banks without an existing trusted relationship to send electronic transfers to each other directly without the need for intermediaries. Today more than 90% of large banks are piloting blockchain systems and cross-border payments is one of the primary use cases.
Live blockchain enabled production systems and many pilots have shown that transfer times can complete in minutes at a fraction of the cost of current systems. The goal is to make cross border transfers as fast as email between most major countries. One of the outstanding challenges which has not yet been overcome is the acceptance and adoption of digital currencies universally to ensure that settlement happens quickly and transparently.
Supply Chain Financing
During the course of normal operations, small and midsize businesses (SMB) within supply chains may suffer from significant cashflow shortfalls. A common cause is that a business receives a large order for goods but has insufficient funds to purchase components or services from other businesses to fulfill the order. Another case is that the SMB fulfills the order but then due to long invoice payment terms cannot meet its own operational financial obligations and cannot fulfill other orders. These scenarios are significant real-world problem for many enterprises as it is projected that there are trillions of dollars of goods recorded on corporate balance sheets that will never be delivered.
In many instances, SMB suppliers or providers in enterprise supply chains may turn to banks or lenders for purchase order financing or invoice financing to cover their cash shortfall. In purchase order (PO) financing a business receives the majority of the PO value upfront, minus fees, so that it can fulfill the order. In invoice financing a business receives a short-term line of credit equal to 70–90% of the face value of the invoice as immediate cash. In nearly 50% of instances, however, banks reject these financing requests since they often do not have a trusted relationship with the SMB or its trading partners and cannot qualify the risk.
In a blockchain-based supply chain the ledger can provide secure and immutable evidence regarding the validity of the PO or invoice as well as information about the trading partners, letters of credit, bills of lading, and other trade instruments. It can also validate that the SMB has not offered the PO or invoice to other parties for financing. The blockchain-based system can use smart contracts that trigger payments to the lender based on specific agreed milestones. Such a system enables banks and other lenders to quantify and qualify their risk, while helping enterprises to fulfill critical supply chain transactions, overcoming the major problems in today’s centralized systems.
Enterprise blockchain systems are uniquely positioned to create valuable solutions for significant challenges in supply chain, healthcare, and financial/banking ecosystems globally. These decentralized, ultra-secure systems make perfect business sense since they can increase revenues, decrease costs, increase efficiency, and deter bad actors. It is projected that enterprise blockchain solutions for the sectors covered in this article will begin initial deployments by Q4 2018. We believe the solutions will be deployed in each sector in the order that we have presented.
We are confident that 2019 will see a significant increase in enterprise blockchain adoption on a global basis. We also project that blockchain technology will be combined with AI and IoT systems to create ultra-secure and smart infrastructures. We believe that current scalability in permissioned systems is sufficient for initial deployments and will foster increased investment in enterprise blockchain.
Acknowledgements: Thanks to Jorden Woods, my colleague at DoubleNova Group, for his contributions.
For part one of this article with an introduction to these verticals, click here.