Blockchain technology has been featured for years in discussions of Bitcoin, Ether, and other “cryptocurrencies”. But at its heart a blockchain is a ledger of transactions that relies on distribution for trust and security. The ledger is copied to many independent computer systems and the records are verified by comparing multiple copies. This makes a blockchain very difficult to falsify and creates what internet scholar Kevin Werbach calls “trustless trust.” As Werbach explains, because the blockchain offers transparent and reliable verification, “it is possible to trust the outputs of a system without trusting any actor within it”.

Thus blockchain technology allows the creation of a digital marketplace linking vendors, shippers, and purchasers all along the supply chain with a web of trust that enables them to do business with one another. Such a system offers many advantages:

Streamlined Procurement

“Smart contracts” are computer code controls embedded in the blockchain that can take in information and authorize the release of assets. Users agree on the conditions, and the smart contracts automatically execute their terms: payment on delivery, shipping authorization and so on. The tamper-proof electronic ledger means less paperwork and manual verification at every step of the process.

Improved Security, Accountability, and Quality Control

The blockchain record can include a unique tag or label for every product in a transaction. As the tagged product proceeds through the supply chain the ledger creates an automatic record of the product’s origin, authenticity, chain of custody and storage, transportation and any other desired information in a single verifiable ledger. This can even be automated with sensors, RFID, and other Internet of Things (IoT) technology.

The blockchain ledger also offers quality control with a record of every process and potentially every hand that affected a product from the factory to the final user. This allows stakeholders to track and address the source of any problem.

Decentralizing economies of scale manufacturing

Conventional supply chains rely on various central “trust authorities,” such as banks and similar institutions, to verify records and reduce risk. This centralization creates barriers to entry, since smaller companies often can’t afford the necessary services, and small contracts aren’t worthwhile to those who provide such services.

The blockchain ledger opens the supply chain to companies and transactions of all sizes. The low cost and streamlined processes removes barriers to entry and allows small and medium-size companies to compete more efficiently as designers, vendors and purchasers.

Laying the Groundwork for Smart Factories and “Industry 4.0”

All of this is leading us to the Fourth Industrial Revolution, or “Industry 4.0.” IoT, data analytics, blockchain, automated manufacturing and smart contracts come together to create a system in which the entire supply chain is automated and recorded at every step in both directions.

A purchaser posts an RFQ for a new order to the blockchain and every manufacturer in the marketplace is able to bid. The manufacturer’s production lines can include up to the minute information on capacity and costs as part of the bid.

Manufacturing begins as soon as the winning bid is chosen and the funds have been committed. The vendor and manufacturer are both able to track each stage of production, shipping, and final delivery, all with maximum flexibility and minimal cost.