Blockchain’s potential to solve supply chain problems

During my first week at the MIT Sloan School of Management, we faced a challenge that would incite panic among students anywhere: a beer shortage. (Stay with me, I’m using this as an analogy that also represents real life supply chain problems – something that can be solved with Blockchain technology!)

Luckily for us MIT students, not a literal beer shortage. The beer game is a simulation of the complex problems and complications that can arise in a multi-stage supply chain. All management students have to play the beer game in their first week at Sloan, and it’s often an eye-opening experience.

At least four people are needed to play the beer game, taking the roles of manufacturer, distributor, supplier and retailer. The goal is to meet customer demand for beer with minimal expenditures. So far, so good, right? The trick is, there’s a two-week communication gap of orders going upstream, and a two-week lag for product moving downstream. Communication between the players is limited, and so as shortages, backlogs and gluts of inventory accumulate, tensions and frustrations are likely to rise.

Those feelings of uncertainty, largely borne from a lack of transparency, create the bullwhip effect. Some participants in the supply chain will have huge amounts of inventory while others have nothing. Then, say, when the retailer continues to place orders, frantically trying to meet customer demand, they end up overwhelmed with stock, out of cash and depleting the supplier’s holdings. The manufacturer and distributor might assume demand has risen substantially and massively ramp up their production. And so the oscillation and overload just become more and more amplified.

The game is simplified, of course, but it represents real-world supply chain problems — problems that could be solved with enterprise blockchain solutions.

Blockchain could directly tackle two major challenges highlighted by the beer game that trigger the bullwhip effect: transparency and over-ordering.

Understandably, individual companies don’t want to broadcast their inventories, forecasts and expenditures to the world. But the lack of an overview of the entire supply chain, and the lack of a single source of truth, directly leads to the panic that amplifies problems across the entire ecosystem. Blockchain provides a single source or truth across participants in a supply chain. Enterprise blockchain solutions are exploring end-to-end visibility with selective disclosure to increase efficiency while protecting each player’s autonomy.

Smart contract rules within a blockchain ecosystem could be written to prohibit over-ordering, hence mitigating excessive backlogs and periods of oversupply and undersupply. Members could share the demand signal throughout the chain in a way that helps every player accurately manage their forecasts. And if a participant already has a certain level of orders pending, they could be prohibited from placing another order because it goes against the smart contracts policy.

At Cisco Live events this year we’ve been showing off a blockchain simulator of the beer game. We’re seeing that without blockchain, players experience the classic troubles of the beer game, but with blockchain you can much more accurately manage the network to mitigate supply chain inefficiency. Check out our upcoming events, and you can try to manage the beer supply chain yourself. Cheers!