“Trust but Verify”: The Promise of Block Chains

I always tell people what I did 50 years ago (as a forgerer) is now 4,000 times easier to do today.  Technology breeds crime and it always has and it always will. There’s always going to be people willing to use technology in a negative, self-serving way.  So today it’s much easier, whether it’s forging checks or getting information. …I don’t think we’ve done a lot to really protect consumers.  If they [the government] wanted to really help the consumer from being a victim, they would be doing a lot more trying to educate the consumer…Back then [in the 1960’s] when I forged checks I had to find a Heidelberg printing press.  That press was $1 million.  Today, one simply sits down, opens a laptop and says “Who’s my victim today?”

• Frank Abagnale, Jr., professional forgerer and scam artist, now working with the FBI teaching about cybercrime, identity theft, and fraud.  Abagnale, Jr. was the subject of the movie “Catch Me If you Can”.  Source:  Wall Street Journal, September 25, 2017, “It’s Easier Than Ever to Be a Swindler –and Victim”, p. R8.

The above quote, made by one of the world’s most famous forgerers and scam artists, reflects the challenges facing supply chain executives in today’s environment.  Concern about cybersecurity, counterfeit products, and authenticating everything from food to drugs to airplane parts, is becoming an increasing concern.  One of the possible solutions identified in this area is block chain technologies.

As noted in previous blogs I’ve written, block chain is a technology that is emerging but has not yet been widely adopted except in pilots.  However, multiple industries are very interested in it, including life insurance companies, aircraft manufacturers, pharmaceutical companies, food and tobacco, and electronics companies, to name a few.

One of the experts in the area of block chain and IOT, and one of the highlights of the CSCMP conference I attended two weeks ago was Shari Diaz, of IBM.  Shari is the Ecosystem and Innovation Leader at IBM, and is leading the charge on exploring how block chain will change the ecosystem within the Watson Supply Chain operating model.

What is blockchain?  It is a shared ledger, digital record of events that is immutable, and can’t be changed.  It is an append-only distributed system of record which is shared across a network.  Think for a moment, how many times do supply chain partners get into disputes over contractual obligations, rebates, invoicing.  Shari recalled that when she worked in purchasing, she would have to manually monitor transactions to ensure quantity discounts were reached.  “I negotiated a rebate with a supplier, but had to manually monitor how much we spent with them, and did we hit the threshold?  And when I thought we hit it, I called the supplier but it took 6 months to get that check.”  Block chain provides an immutable, secure, shared version of the truth to drive unprecedented efficient.  Combined with smart contract business terms embedded in transaction databases, block chain has the potential to monitor transaction execution, monitor much did we bought, and authorize the payment automatically when the quantity discount threshold is reached.  That is the promise of block chain.

The promise is powerful.  One of the most important is the promise of privacy, ensuring appropriate visibility, and secure transactions that are authenticated and verifiable.  It enables, for the first time, authenticated trust.  All parties agree to network verified transactions.  There is a high level of cryptography, as well as agreed-on consensus requirements.  Consensus requirements involves all parties agreeing that  new identities are validated.  “We agree as a block chain that someone who wants to post or publish an event must have consensus agreement, which means that half of us have to agree that that person is who they say they are.  If we know each other better through relationship development over time, we can dial that down to perhaps 30%.  But if a lot of third parties we don’t know are involved, perhaps we need to dial it up to 75%, which drives up the authenticity of the event.  Was it delivered?  Consensus requirements will become an important element of block chains.

IBM has been working on a prototype block chain for the global financing business.  Shari notes that “we built a prototype for our global financing business, largely becaue we are the largest financing company on the planet!  But we would invoice a third party, and they would dispute it, and it would go into a set of email disputes!  So we put all those events on a block chain, and there was now no question on when it is appropriate for an invoice –and disputes went down 75%!  In addition, the time to solve a dispute went down from 39 days to 10 days.  Think about the working capital savings, and in a business the size of IBM, we realized how powerful this technology could become!  We also realized that it needs to be open sourced, so we worked with Linux, and the HyperLedger project was born. Hyperledger is not a platform, it is a fabric – and we have over 900 developers working with it, and a large consortium is evolving quickly.  Fabric 1.0 came out in August.

Several pilots have begun to explore block chain applications.  Maersk is working to create a global trade digitization that can digitize customs processes using block chain.  This has the potential to improve the import/export exchanges that occur at port crossings, to speed up the movement of goods, improve the financing of freight forwarding transactions, and speeding up the supply chain. Walmart and IBM are also working to use blockchain for ensuring food safety, focusing specifically on pork imports from China.   A London-based company called Everledger has placed more than 1.6 million diamonds on a blockchain. Entries on the digital record include dozens of attributes for each diamond, including the color, carat, and certificate number, which can be inscribed by laser on the crown or girdle of the stone.

We are likely to see more and more pilots on block chain emerging.  Our student teams in the supply chain program at NC State are working on block chain research, and will have an update to present at our upcoming Supply Chain Resource Cooperative meeting.  Stay tuned!