Supply Chain Transparency and Blockchain Design

Abstract

Companies are investing in blockchain technology to enhance supply chain transparency, but face challenges in creating collaborations with others and in deciding what information to share. On the one hand, transparency over actions of supply chain partners can improve operational decisions, but on the other hand, sharing own data on the blockchain can create opposing forces. In this paper, we investigate these questions theoretically by analyzing two ways that blockchain can enhance supply chain transparency: (1) making the manufacturer’s sourcing cost credibly transparent to the buyers (i.e., vertical cost transparency) and enabling the manufacturer to charge dynamic wholesale prices; and (2) making the ordering status of buyers transparent to each other (i.e., horizontal order transparency) and changing the ordering policies of buyers. We find that blockchain increases supply chain profit only when the manufacturer’s capacity is large: 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, but otherwise the manufacturer needs to compensate the buyers to facilitate a blockchain implementation. When the manufacturer’s capacity is small, blockchain reduces supply chain profit: in this case, horizontal order transparency mitigates the buyers’ over-order incentive to compete for the manufacturer’s capacity and increases double marginalization. To solve this problem, we show that a blockchain that only enables vertical cost transparency should (and can) 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, dynamic pricing

JEL Classification: C72, D21, D45, O31