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Pumping the Brakes on Blockchain for Procurement

Blockchain, like artificial intelligence, machine learning, and cognitive technology, is one of the hottest buzzwords in the tech industry today, and the excitement has spread to supply management. In fact, Blockchain was a major topic at SAP Ariba LIVE in Las Vegas in March, particularly since SAP Ariba has joined the Blockchain gang and is endeavoring to bring it to procurement.

The last article on this subject defined the concept of Blockchain and what its future implications are for supply management – including use cases for procurement, sourcing, accounts payable, and other constituents. Given all the hype and buzz about Blockchain, industry analysts, professionals, and technology developers may be getting a little ahead of themselves regarding its potential. Like most innovations, it is worthwhile to slow down and consider not only Blockchain’s applications, but its limitations and weaknesses. But first, let us back up.

Blockchain, Version 1.0

The concept of Blockchain continues to be operationalized, particularly for specific industries; and the race is on to develop Version 1.0 for procurement. To this end, SAP Ariba has partnered with Everledger, a London-based Fintech digital ledger company that tracks and protects diamonds and other valuable items in transit. Founded in April 2015, Everledger figured out how to apply Blockchain to the diamond trade and, as a result, has successfully traded more than a million loose diamonds on the chain. A follow-on article will go further in depth on this partnership, and what both companies envision for Blockchain on the Ariba Network and for procurement, in general. In the meantime, a critical analysis of Blockchain for procurement is needed.

As was discussed in the previous article on this subject, a Blockchain is a digital database or system of record that automatically creates a new record (or block) for every digital change made to a widget’s record – like when someone places, ships, or receives an order. But there often remains a physical disconnect between the Blockchain and the widget. At some point, these physical widgets will have to change hands; unless this too is digitized, connected, and automated, human hands will have to touch the product. The “Internet of Things” (IoT) can bridge this gap by automatically sending transactional and logistical data to the Blockchain, like when the widget moves from the point of origin to a warehouse, from a warehouse to a shipping container, or from a shipping container to its final destination. However, IoT is not always the answer, nor is it always possible to collocate or embed it within a widget.

Pumping the Brakes on Blockchain for Procurement

According to Joe Fox, Senior Vice President of Business Development and Strategy at SAP Ariba, many commodities, like diamonds, simply cannot be IoT-enabled (click here and here to read our analysis of how connected devices and IoT may impact procurement). Thus, humans will need to interact with commodities and widgets at some point — and potentially at each point — along the supply chain, leaving them and trading partners vulnerable to counterfeiting, fraud, tampering, or theft. Therein lies Blockchain’s first vulnerability: the human factor. And it is a point that Fox seems to have echoed. “The quality of the chain is based on how well it’s designed for inheriting trust,” he said. Put another way: a Blockchain is only as trustworthy as those in the supply chain — as those who have maintained “custodial management” of the widget.

To build trust between trading partners on the Blockchain, SAP Ariba is looking to build upon Everledger’s early success of applying Blockchain to the diamond trade because, as Fox said, “if you can track and trace diamonds, you can track and trace anything.” According to Leanne Kemp, Everledger’s Founder and CEO, the company digitized industry certifications, relationships, and transactions onto the Blockchain to transform an industry that for more than a century had been driven by gentlemen’s agreements and handshakes. Now, stringent certification bodies and methods, a narrowed industry pool, and increased customer demand for authentic, ethically-sourced diamonds have combined on the Blockchain to create a trusted network of diamond traders and drive visibility into what was once an opaque industry. Everledger and SAP Ariba have now set their sights on driving visibility and trust to procurement in an effort to not only “Know Your Supplier,” but to “Know Your Object.”

To this end, the two companies appear to be staking a lot of Blockchain’s value on its ability to digitize, build, and monetize trading partner trust. But it is unclear how they will develop and implement verification processes and tools to confirm the authenticity and origin (or “provenance”) of commodities or widgets — indeed, to “know your object” — at each point in the supply chain.

  • Does it involve sensor technology? Are these commodities and widgets bugged? Do they have sensors in their packaging, pallets, or shipping containers that transmit logistical and security information, like when they arrive and if they have been corrupted? Without bridging this digital and physical gap in the supply chain, it would seem that trading partners would still be vulnerable to counterfeiting, diversion, fraud, sabotage, or theft at each point in the supply chain.
  • What about the certifications, themselves? Even if they are tamper-proof once they are on the Blockchain, can they not still be issued fraudulently? Criminals would be willing to bribe, blackmail, or otherwise coerce certifying officials to fraudulently certify counterfeit goods or unethical commodities as the real deal.
  • Also, the supplier may have a sterling reputation among its partners and peers, but how about the supplier’s suppliers? What happens when you look beyond the first- and second-tiers in the supply chain? Relationships and business practices often become murkier the farther down the chain one goes.

Indeed, what is the verification regime, process, or technology that can ensure the fidelity and integrity of the supply chain from end-to-end?

Second, it logically follows that humans can also attempt to hack Blockchains, either by entering through the front door (by infiltrating as legitimate, trusted users) or through the backdoor (by technical means that are not obvious to the average user). Although Fox described Blockchain as “tamper proof,” and that it will drastically reduce fraud, practically no system is impenetrable, and there is fierce debate among IT professionals about Blockchain’s security. Likewise, criminals and criminal organizations tend to be able to quickly identify and exploit the inherent flaws and vulnerabilities of digital networks and their users. Frequently, it is the users that are the weakest links in the chain and most vulnerable, either by social engineering, phishing, malware, or lax security practices.

Like their physical peers, cyber criminals tend to be determined and motivated, especially for the right price. In its current form, Blockchains are open databases/networks, leaving further opportunity for exploitation. In its infancy, Blockchain likely has yet to meet its match and prove that it is tamper proof. Until then, it is prudent to assume that it is not, just like every other database, network, system, or technology.

Final Thoughts

Blockchain has a lot of potential to add usability, efficiency, visibility, fidelity, and value to supply management teams up and down the source-to-settle process – from sourcing and procurement to AP and finance. But as technology developers, like SAP Ariba and Everledger, embark on developing Version 1.0 for procurement, there are important variables to consider and challenges to overcome before it is a trusted, usable, and verifiable system of record for enterprises.

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