I am fortunate to know and spend time with many people who are shaping how The Provenance Chain Network is being designed and built. One of the most influential is friend, author, and futurist Steve Brown. Steve has advised us from the very beginning and is instrumental in how we think about provenance and the future.
In anticipation of us publicly sharing what we are doing, Steve has agreed to share with us an excerpt from his recent book: “The Innovation Ultimatum” which is being released on February 5th. Enjoy. It will provide some insight into how to think about provenance.
Here is an excerpt on Supply Chains and Origin Stories:
“The Innovation Ultimatum”
by Steve Brown
Excerpts from Chapter 13: Cheap, On-Time, Safe, and Genuine—What every business needs to know about the future of supply chains
Consumers now expect to track the location of online purchases as they make their journey to their front door. Increasingly, they also want to know where products are sourced and how they are made.
The brands that we purchase accrue to our own personal brand, whether in our own minds or in the minds of the people we care to impress. Educated by a series of investigative journalism reports, many consumers have an elevated awareness of the impact of consumer culture and want to buy responsibly. In the future, consumers will demand to understand the true cost of their purchases so they can make informed choices.
Since a product is the sum of all its component parts, consumers will expect rigorous transparency that spans the entire supply chain, right back to raw materials. In the early 2010s, the semiconductor industry underwent a massive effort to eliminate conflict minerals from their supply chains after unflattering media reports resulted in sustained pressure from buyers. As consumers become more sophisticated, their buying criteria will evolve. Consumers will demand to know a product’s carbon footprint and the amount of water, energy, and other resources used to make it. They may require details on the labor, sustainability, fair-trade, and safety practices of manufacturers before voting for them with their wallets. And they will want audited proof of all claims. Brands caught making false claims pay dearly in the market. PepsiCo was caught making false claims that their Naked Juice products were “all natural” and “non-GMO.” Customers were awarded a substantial settlement.
Beyond understanding origin, consumers want to be told the story of the products they buy. People will pay more for products that come with an origin story, and research shows that people actually perceive this story in their brains. Tests with fMRI machines show that if you tell a group of people that the wine they are drinking was made at a small family winery in a remote French village using methods that were handed down for generations, the pleasure sensors in their brains will light up far more than a control group given the exact same wine and told that it’s local supermarket plonk served from a box. People can literally taste the story.
Modern supply chains are complex. The tracking of materials, piece parts, and goods through the supply chain is only partly digitized. Many transactions are still tracked with paper, particularly toward the front end of supply chains, before piece parts are assembled into finished goods. Paper-based tracking systems reduce traceability and increase the risk of fraud. For some more unscrupulous brands, a flaky paper trail and a sea of dodgy middlemen offers plausible deniability when their suppliers are revealed to have unsavory labor practices.
Brands are generally at a major disadvantage. As well as diversion and counterfeiting, they must also deal with “shrink,” the polite industry term for stealing. Shrink occurs throughout the supply chain: from shoplifting in retail stores, through products “falling off the back of a truck” during transportation, to deliberate shorting of goods. This is where a supplier marks a box as containing 100 items, but only ships 98.
Goods are constantly counted and recounted as they move through a supply chain. Even with electronic product codes and barcode scanners, items are miscounted. Some retailers take advantage of this, deliberately miscounting incoming goods from brands. They order 500 pieces, receive 500 pieces, but report they only received 489, and bill the brand for the 11 “missing” items. Brands have long known they are being taken advantage of by a leaky supply chain, but there was little they could do about it. They wrote the issue off as the cost of doing business, built the losses into their business model, and passed the price on to consumers. In some sectors, the combined forces of counterfeiting, diversion, shrink, and dubious bill backs from retailers have become untenable. Brands urgently need to regain control over their supply chains. That all begins with transparency.
As consumers demand more transparency around the products they buy, and brands grapple to control costs and quality, more will be demanded of the supply chain. Blockchain technology improves transparency and ensures compliance throughout the process.
To establish the provenance of a product, we need to chronicle every step of its journey—from raw materials to finished goods—and record that origin story in a tamperproof database. The immutability of a Blockchain makes it the perfect technology to underpin a supply chain platform that records and guarantees provenance. As a shorthand, let’s call this a provenance chain. A provenance chain stores all the information needed to establish the origin story of a product. This information will vary depending on the category of product being tracked. For example, temperature and humidity information is relevant for the storage and transportation of fresh food or temperature-sensitive medicines, but not for plumbing supplies.
As they move through the supply chain, products are handed off from one entity to another—subcontractors, manufacturers, integrators, ground transportation, warehousing, shipping, customs, and so on. At each stage, goods are counted, and quantities are recorded on the provenance chain. Counts are made by a range of different sensors. Smart cameras might use machine vision technology to count items as they move down each production line. Warehouse workers might scan barcodes with a handheld scanner as they are loaded onto trucks. RFID scanners mounted in trucks might read the RFID tags mounted on packaging. For food items, temperature and humidity information is read from sensors in trucks, loading docks, and storage facilities. All this information is stored immutably on the provenance chain.
The full origin story of a product goes far beyond details of the physical journey it took from manufacturer to end user. Sophisticated supply chains will track the amount of labor, waste, emissions, and water involved in the production and delivery of a product. Provenance chains will evolve to capture this additional information on the manufacture of a product. Connected sensors will meter the use of factory resources such as water, energy, and processing chemicals. The source of a factory’s energy will be recorded, noting the percentage that came from fossil fuels versus renewables. Audited information on the factory’s labor practices, employee benefits, pay, and working conditions will be added by independent and accredited inspectors. As goods are assembled from piece parts, all of the data on all their constituent parts is added into the provenance chain.
Transparency builds trust. By providing an immutable audit trail on the origins of a product, manufacturer claims for sustainability, freshness, and responsible manufacture can be backed up with data. Ultimately, farm equipment and other sensors might add data to provenance chains that capture how much water, fertilizer, insecticide, and herbicide was used to grow produce.
That’s a lot of data to gather and store on each product. This may sound like unreasonable overkill. Why would farmers, factories, ware- houses, logistics companies, retailers, and all the other entities involved in a supply chain invest in the sensor technology needed to gather all this data? Why would they agree to submit to additional scrutiny and audit? A few simple answers: (1) Some are already gathering this data to help them optimize their business processes. (2) Consumers and brands will demand it. (3) Added supply chain visibility quickly resolves disputes and saves money by making audits a breeze. (4) Brands will make it worth their while using token economics.
A provenance chain is only as strong as its weakest link. Any opaque stage of the journey could be a moment of spoil, adulteration, counterfeit, diversion, or shrink. To build trust, full provenance, end-to-end visibility of a product’s origin story, must be established. To build a complete record of its history, we must get eyes on the product right from when it is grown or made and follow it through every step in its life. Miss a moment, and provenance can no longer be assured.
Gathering data at every step of the journey is challenging. Enter the power of token economics. Since a provenance chain is built on top of a Blockchain or similar distributed ledger technology, it generates tokens. Tokens are used to reward participation in the chain. Those that invest in equipment to supply data to the provenance chain receive tokens. So, a cold chain trucking company that provides temperature and RFID scan data to the chain for items in transit is rewarded. So is a manufacturer that installs smart cameras on their production lines and contributes data. Warehouses that connect barcode scanning tools to the provenance chain are paid for the data they submit, too. Entities are persuaded to participate with financial incentives.
Tokens incentivize desired behaviors throughout the chain. This provides brands with leverage and a tool to align supply chain interests with the brands’ interests. Suppliers who guarantee (and prove with data) that their production lines aren’t being used for diversion get extra tokens. Logistics companies that don’t experience shrink get extra tokens. Retailers that have accurate counts and reduce bill backs get extra tokens. Such a process could go further, rewarding retailers for shelf compliance.
As brands wrestle with huge hits to their bottom line wrought by continued rises in shrink, diversion, counterfeiting, and fake retail bill backs, they will no longer be able to write these issues off as the cost of doing business. Brands will look to provenance chains to enforce good behavior and align the interests of supply chain players with their own. An effort akin to the ISO 9000 quality push of the 1990s may be needed to drive change through industries and certify compliant organizations.
Transparency on the provenance of all goods will become a market requirement. The ability to tell the origin stories of products will have commercial value. Build your supply chains with that in mind.