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How blockchain, Internet of Things and smart contracts improve the supply chain

Intellectual Property and Technology News

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To improve safety, security and profitability, many industries are incorporating three key technologies into their supply chains: blockchain, Internet of Things (IoT) and smart contracts.

A blockchain is a list of digital records, called blocks, linked together to create a shared and distributed ledger of information.

A blockchain is a list of digital records, called blocks, linked together to create a shared and distributed ledger of information. Blockchain uses cryptography and access control to secure information. Every transaction is written permanently to the blockchain. Throughout the process, parties maintain a copy of the shared ledger and agree to its accuracy, ensuring consensus. When used to oversee a supply chain, a blockchain provides an immutable, historical accounting of every event and transaction in the supply-chain life cycle.

IoT is the worldwide network of physical devices able to connect to the Internet.

IoT is the worldwide network of physical devices able to connect to the Internet. IoT is another essential technology able to reduce risks for organizations and consumers. In a supply chain, IoT utilizes sensors to monitor conditions, log events to the blockchain and send notifications.

Smart contracts comprise computer code encapsulating terms of an agreement and are self-executing when specific requirements are met. Often used in conjunction with blockchain, smart contracts remove the need for many traditional intermediaries, reducing costs and increasing speed.

Smart contracts comprise computer code encapsulating terms of an agreement and are self-executing when specific requirements are met.

Our supply-chain scenario begins with a company manufacturing mobile phone parts in Malaysia. The company produces, inventories and transports components to the phone manufacturer, in China. IoT sensors on the production line ensure all parts meet specifications. If an IoT sensor identifies a defective part, it is immediately culled. Using IoT in this way reduces the likelihood of a defective part winding up in a customer's phone, shrinking waste and dissatisfaction while benefiting the component manufacturer, the phone manufacturer, the retailer and the consumer.

When the parts manufacturer ships components to the phone manufacturer's factory in China, IoT sensors monitor environmental conditions and shipment progress. Such readings are logged to the blockchain, protecting the components during the entire voyage and giving confidence in timing of the shipment and quality of the components.

Smart contracts are used to automate and protect the supply-chain process further. A smart contract for shipping components from the parts manufacturer to the phone manufacturer would state that if the parts are maintained correctly during shipping (eg, protected from heat and moisture), and the shipment arrives on schedule, then the parts manufacturer will automatically pay the shipper an agreed amount via electronic transaction, and the phone manufacturer will automatically pay the parts manufacturer. Smart contracts execute these transactions without intervention from the parties and are made possible through the combination of verifiable information (IoT and blockchain) and self-executing code (smart contracts).

The newly manufactured phone then takes a global journey to retailers and consumers. Each step of the process similarly leverages blockchain, IoT and smart contracts to securely and verifiably monitor each transaction across the supply chain.

Another significant advantage of leveraging blockchain is the concept of provenance. Because each transaction is committed to an immutable ledger, all transactions and events are auditable by approved parties. If it turns out that consumers have a problem, then the shipping and manufacturing history is fully traceable, allowing manufacturing companies to more quickly locate the cause of an issue and more effectively resolve the problem.

Whether your company manufactures electronics or auto parts or produces pharmaceuticals or food, incorporating blockchain, IoT and smart contracts into your supply chain can significantly improve profitability while reducing risk to your business.

Blockchain infographic

Find out more about the use of these key technologies in the supply chain by contacting either of the authors.

 

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