Blockchain Technology: A Key Enabler of Future Smart Supply Chain Management

Increasing attention has been drawn to the concept of smart cities in many countries as they undergo rapid urbanization, and Cambodia is no exception.
Earth. Kiripost via Pixabay
Earth. Kiripost via Pixabay

By Sopheap Ing and Vatana Chea

The Cambodian government has been promoting urbanization while ensuring that the cities are not only operated with smart technologies but also with sustainability and inclusiveness. The current administration has even chosen Phnom Penh, Battambang, and Siem Reap to partake in the ASEAN Smart Cities Network (ASCN).

This regional platform encourages collaborative efforts among ASEAN countries in accelerating the development of sustainable urbanization. This initiative has shown how committed the government is to achieving its goals even though progress has been hindered by various practical challenges, including implementing blockchain technology in the supply chain management system.

Supply chain management is a multi-echelon and complex process that entails different stakeholders. Yet, it depends on a centralized management system that requires all supply chain parties to place their trust in one organization to keep records of all the valuable and sensitive information.

But such an information management system also contains the risk of a single point of failure whereby a fiasco in a part of the system can cause the rest of the system to be dysfunctional, thereby increasing the entire system's susceptibility to cyber-attacks, errors, or corruption.

Any disruptions along the supply chain could result in a substantial loss of revenue or raise the cost of products for end consumers since the companies can now produce less than before or cannot supply enough goods or services to the market.

In a possible scenario, it can even harm the well-being of consumers if the products, especially food or pharmaceutical goods, are somehow contaminated due to supply chain failure.

On the other hand, there has also been an increasing demand from businesses and consumers for data about products’ quality, originality, authenticity, and sustainability.

Hence, blockchain technology is proposed as a solution that would transform the supply chain management to be smarter since it can act as a distributed database, allowing for better efficiency, transparency, and traceability to resolve the problems above.

Using desk review and systematic reasoning, this paper critically investigates the potential applications of blockchain technology in transforming conventional supply chain management mechanisms, which constitutes one of the core areas of smart cities formation as these cities’ operations are anchored in interactions and cooperation among local stakeholders, companies, and end consumers.

Additionally, we discuss challenges in implementing blockchain based supply chain management in the context of Cambodia, followed by policy recommendations to capitalize on the opportunities that such technology has to offer.

What Is Blockchain Technology?

Blockchain technology is a digital distributed ledger that permanently stores information about transactions on the network and is accessible to all relevant stakeholders.

The difference between a blockchain and a typical database is how the data is stored and structured. While a database structures data into a table with many rows and columns, blockchain gathers, groups up, and stores all data in a block with a certain storage capacity.

Once a block is filled with information, it is then chained with other blocks that were also saturated previously, forming a large chain of blocks or a blockchain. In addition, any new blocks filled with data will be chained with the existing blocks.

Blockchain is also differentiated into two types: private/permissioned blockchain and public blockchain, designed based on network participants and the rules governing the blockchain itself.

In the private blockchain, all parties are aware of each other’s identity, and permission or invitation is required to partake in the network. In addition, access control is usually in the hands of multiple members or an organization. Alternatively, in the public blockchains, all the transaction data is available and transparent to the public while participants’ anonymity is maintained.

In the case of Bitcoin, all information, including the owner’s real identity stored in the block, is also encrypted and can only be decrypted by the owner. Another most important concept of blockchain is its high security. It should be noted that besides data/information, each block in the chain has a unique hash (a 256-bit number that will be changed if information in the block is mined) and a hash of the previous block.

Any attempt to tamper with any block must re-mine that block and all the blocks that come after it. Moreover, mining a block is not an easy task. It is extremely difficult for a large chain, as miners must find an accepted hash called the Golden Hash out of approximately 4 billion combinations for a block.

But even though a miner manages to find a way to work on the hash duties, the blockchain has another trick to secure the data by distributing a full copy of the blockchain to all nodes at various locations connected to the chain. Nodes are computers or users involved in the network who will evaluate and verify when a new block is sent to them to ensure that it has not been tampered with.

Simply put, when a new block enters a chain, nodes will evaluate its consistency with the history and rules. Once the majority of the nodes (more than 50 percent) reach a consensus and acknowledge the block's validity, the new block will be added to the chain.

Otherwise, it will be rejected. In blockchain-based supply chain management, the verification process is performed by a smart contract. This computer protocol embeds pre-determined approved rules and/or penalties in the computer system and enables the automatic execution of contracts.

Figure 1 below illustrates how blockchain technology in supply chain management transactions works.

Figure 1: Blockchain Technology Transaction Process
Figure 1: Blockchain Technology Transaction Process

In this sense, blockchain only allows for data storing and distributing, not editing, which is almost impossible. It is in this immutable nature of public blockchain that no single party or node alone can alter the data or block, making the system more resilient to errors, deletion, frauds, or hacking.

For many developing countries, including Cambodia, which experience frequent blackouts and unstable internet connections, blockchain technology also plays a better role than databases run by multiple servers jointly.

Additionally, trusted third party or middleman involvement is no longer necessary in this sort of decentralized system. Indeed, blockchain technology encompasses several characteristics such as disintermediation, security, transparency, and automation that are crucial in facilitating credible information dissemination, coordination, and greater efficiency throughout the complicated and multistakeholders supply chain management system.

Blockchain in Smart City Supply Chain Management

The smart city concept concerns the operation system of a city that utilizes information and communication technologies (ICTs) to address public issues, improve living standards and citizens’ welfare, and promote sustainable development. Smart city databases and smart control systems allow a wide array of data to be collected and analyzed to achieve efficient resource management and allocation.

The smart supply chain is a major part of the smart city ecosystem that significantly impacts the quality of life. Before diving into blockchain application, it is useful to understand that the supply chain here refers to a system comprising activities and the flow of related information generated as products and services make their way from the supplier side to the end consumer side; and the act of managing relevant actions and information in the supply chain process, including sourcing, procurement, conversion, and all logistics, is known as supply chain management.

Noting that the supply chain management activities often generate sensitive and/or confidential information about an organization or multiple actors involved in the process, the type of blockchain technology deployed in such a system should be the private one that allows limited network participants.

The employment of blockchain can address a number of existing challenges in traditional supply chain management systems. It should be highlighted that the technology can provide complete information about products digitally since it can accommodate various types of data such as quality, quantity, date, or state of a product, etc.

Other available details that could also be displayed and directly acquired by relevant stakeholders in the blockchain system include product-specific data (product features and performance), ownership (list of the product owners in chronological order), location (past and current locations of a product), impacts on the environment (emission of carbon dioxide, energy consumption, etc.).

However, not all related parties can access all products and/or their information. Security arrangements can be carried out to ensure that only certain groups of people can gain access to particular products that match their digital keys.

Besides, blockchain guarantees fair trade, and no scamming or swindling will occur. Blockchain technology encompasses a smart contract feature that coordinates the transfer of ownership of products among stakeholders or business counterparts.

In particular, a smart contract is a digitally self-executing contract agreed upon by buyers and sellers, and it will run when predetermined conditions are met. Simply put, when stakeholders exchange products with each other or add new information to the product’s profile, they must fulfill the contractual obligations set out in the smart contract first before any real changes can happen or the trade deal can be successfully finalized.

Only when the smart contract verifies the authenticity of the agreement or the information will it authorize the actions accordingly, and details of new data would be automatically updated in the blockchain database. The smart contract reduces the need for a trusted intermediary or arbitrator to facilitate trades.

Figure 2: Blockchain in Supply Chain Management
Figure 2: Blockchain in Supply Chain Management

Presenting in figure 2 is an illustration of blockchain technology in supply chain management and how the smart contract works. Blockchain technology’s immutable information about ownership recorded over time allows real-time tracking and traceability so that companies can trace the sources of contaminated products or detect counterfeit products efficiently and quickly.

Companies can then take necessary actions to prevent the products from harming consumers. Additionally, data obtained from tracking products in all stages can be beneficial for identifying potential and minimizing risks and assessing suppliers’ efficacy and performance to manage or reduce production costs.

Furthermore, visibility of products’ information would facilitate quality assurance and quality control, especially for consumers and regulatory bodies to make sure that the goods are produced in compliance with the regulations and standards. Lastly, sustainable supply chain management needs to consider environmental impacts, so it is crucial to acquire transparent data about manufacturers’ carbon footprints, environmentally friendly inputs, or production processes, which can also be made possible by blockchain technology.

The following table provides several examples of how major multinational corporations worldwide use blockchain technology in their supply chain management or business transactions.

Table 1: Recent Blockchain-powered Initiatives Implemented by International Companies
Table 1: Recent Blockchain-powered Initiatives Implemented by International Companies

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Barriers to Implementation

Despite the positive impacts that blockchain technology can bring to the table, some challenges are likely to arise amid the introduction of the technology to the supply chain system. First, blockchain technology was only invented in 2009 by Satoshi Nakamoto, who also founded Bitcoin even though the idea of distributed ledgers was initiated in 1991. As a result, current initiatives that adopt blockchain-based supply chain systems are still in the early stage, and many uncertainties remain. Therefore, further investigations into long-term effects on governance, economy, and sustainability are still needed. Second, the willingness, commitment, and financial support from the government and private sector may be a big challenge, as the initial investment or upfront cost of building a blockchain infrastructure and developing the technology itself is huge. Not to mention the licensing costs if we go for a paid blockchain technology solution. Hence, hesitation and resistance might occur, and it might not be easy to convince businesses and organizations to opt for such technology adoption. Third, the expertise required to maintain and develop blockchain can be another issue for countries such as Cambodia that lack human resources. Thus, building a team of IT professionals who clearly understand the supply chain processes in the context of Smart Cities and have profound knowledge of blockchain development and maintenance can be difficult, if not impossible. Fourth, the private blockchain, the most common type of blockchain used in supply chain management, is less secure because the network contains much fewer nodes, unlike the public blockchain. Therefore, it is also much easier for a single node to tamper with the data. Not to mention that nodes in private blockchain are likely to know each other, leading to a higher probability of collusion to change a block. Fifth, blockchain technology allows users to ensure that no information is altered or no block is tampered with but does not prevent incorrect information from being added to the chain in the first place. Blockchain cannot prevent human error, nor can it evaluate the quality of information. Finally, the consensus concept of blockchain technology limits its scalability and obstructs large-scale implementation because it will be increasingly more difficult to gather enough agreement to reach a consensus.

Conclusion and Recommendations

As Cambodia inches toward establishing smart cities, integrating blockchain technology into supply chain management is an opportunity it should capitalize on. Applying blockchain in the supply chain would improve operational efficiency, transparency, information management, and responsiveness, further enhancing product safety, supervision, and management systems.

It should be highlighted that the benefits of blockchain go beyond the concept of supply chain management in the context of Smart Cities but into FinTech and a paperless organization concept.

Nevertheless, deploying a blockchain-driven supply chain might face obstacles such as insufficient support and commitment from the leadership level in organizations, shortage of human resources, and scalability issues. To minimize problems and exploit the potential of blockchain, it is recommended that:

The government should raise awareness about the significance of blockchain technology adoption to change people’s perspectives and encourage them to embrace new technology that can address problems in the traditional supply chain.

The upfront cost of blockchain technology should be seen as an investment, not a consumption. The government and private organizations should offer training for employees to equip them with the knowledge and skills essential for operating the system effectively.

IT professionals should be sent abroad, especially to countries such as the US, the UK, Singapore and China, currently the global leaders in blockchain technology investment, to expand their knowledge and specialization.

The government and private firms should invest in research and development to explore the possibility of incorporating blockchain-based supply chain practices in the local context and solutions to mitigate application shortcomings.

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[This article is written by Ung Techhong Luy and J.Corbett Hix. The article appears in the latest edition of Digital Insights, a collaborative project between EuroCham Cambodia and the Konrad-Adenauer-Foundation Cambodia (KAS).]

Sopheap Ing is a Business Analyst at Emerging Markets Consulting (EMC) Cambodia. She holds a bachelor’s degree in International Economics from the Institute of Foreign Languages of the Royal University of Phnom Penh. After graduating, she worked as a Research Assistant at the Cambodia University of Technology and Science (CamTech). Her research interests encompass economic development, technology and innovation, and entrepreneurship.

Dr. CHEA Vatana is Director of Research and Innovation at the Cambodia University of Technology and Science (CamTech). Prior to joining CamTech, he worked as a researcher at a policy think-tank based in Phnom Penh. He was also a doctoral fellow at the Center for the Study of International Politics (CeSPI) and Roma Tre University, Rome, Italy.

Dr. Chea holds a master and a doctoral degree in Demography from Chulalongkorn University. Apart from serving as a Secretary General of the Comparative Education Society of Cambodia, he is also as a member of the International Union for the Scientific Study of Population (IUSSP). His research interest includes population projection, migration and development, human capital development, and household economics. Dr. Chea has authored and co-authored more than twenty scientific articles including book chapters and journals in ISI and SCOPUS database.