Supply Chain Transparency and Blockchain Design

Abstract

Companies that are investing in blockchain technology to enhance supply chain transparency face challenges in fostering collaborations with others and deciding what information to share. Transparency over the actions of supply chain partners can improve operational decisions, but sharing own data on the blockchain can put firms at a competitive disadvantage. In this paper, we investigate the resulting questions of when blockchain should be adopted in a supply chain and how it should be designed by analyzing two ways that it can enhance supply chain transparency: making the manufacturer's sourcing cost transparent to the buyers (i.e., vertical cost transparency), and making the ordering status of buyers transparent to each other (i.e., horizontal order transparency). Given such transparency, firms can design a smart contract that automates transactions contingent on the revealed information and enables them to realize better equilibrium outcomes. We find that blockchain increases supply chain profit only when the manufacturer's capacity is large and decreases supply chain profit otherwise. If the capacity is sufficiently large to eliminate the buyers' competition, blockchain leads to a win-win-win and the incentives of all participants are naturally aligned. If the capacity is only moderately large, the manufacturer needs to compensate the buyers to facilitate a blockchain implementation. However, if the capacity is small, horizontal order transparency enabled by the blockchain mitigates the buyers' over-order incentive to compete for the manufacturer's capacity and increases double marginalization. For such cases, we show that a blockchain that only enables vertical cost transparency should (and can) still be adopted in a range of small capacity cases and we propose an access control layer for the logistics data to implement such a blockchain.

Keywords: blockchain, supply chain management, information sharing, rationing games, smart contracts

JEL Classification: C72, D21, D45, O31