When you drop into your local pharmacy for your medication — whether it is a box of vitamins or a drug prescribed by a physician — you probably do not question the product’s quality or worry whether it will be in stock. But the fact that your medicine is waiting for you on the shelf is an organisational miracle and each box has a long journey behind it.
In most cases, this “invisible story” culminates in a happy ending: a patient who receives the right treatment. However, the journey from the manufacturing facility is long and perilous. According to the Corporate Finance Institute, a supply chain is the system used to produce and deliver a product, from sourcing the raw materials right up to to the final delivery to the end customer.
The supply chain of medicine is especially complex, however. Drugs are not only very delicate products that require special care, but delivery involves multiple stages, stakeholders, and border-crossings in a series carefully orchestrated and regulated steps with precise timing. In such a complex endeavor, many things can go wrong and when they do, it is crucial to have a transparent record of events in order to learn from mistakes and continuously improve supply chain processes.
This is where blockchain’s unique characteristics of offering an immutable and transparent record of transactions can show its strength.
The journey begins
To illustrate some of the most daunting challenges, let’s return to the journey of our hypothetical medicine from factory to pharmacy. Logistics, which concerns the physical delivery of medicines, is only a part of the entire pharmaceutical supply chain. Nevertheless, a Novartis source asserts that it can amount to nearly 40% of total operating expenses. According to the same source, a medicine usually passes through at least “ten hands” before a doctor or patient receives it.
According to Biopharmaceutical Reporter, a news outlet specialised in the biopharmaceutical industry, up to 10% of vaccines are lost in transit due to breakage or problems with cold chain infrastructure.
Once they have entered the system, faulty or damaged items are difficult to track down. Such substandard products are not only potentially dangerous to the health of patients, but also cause tremendous waste: the pharmaceutical industry discards at least $15 billion of product each year due to temperature deviations and this sum reaches $35 billion if we take into account additional costs like product replacement.
Pain in the chain
Once our package arrives at the airport, it starts the next phase of its journey and it is time for it to pass through customs control. Unfortunately, as a Harvard Business Review analysis highlighted, documentation is often manual and paper-based. As a result, paperwork piles up at each handoff and border crossing. Fragmentation of data across documents and siloed IT systems causes delays, and can lead to further errors. Regulations for transportation also differ from country to country, further aggravating the administrative burden.
When our medicine finally arrives at the wholesaler or pharmacy, one hurdle remains before it can be placed on store shelves. How can a distributor reliably check if the box of medicines they received is authentic? The question of provenance might seem trivial, but it is a significant challenge. According to Tegan Keele, US blockchain program lead at KPMG, drugs can be traced if they are packed in a box with a barcode or QR code printed on it. However, visibility decreases as soon as someone opens and unloads that box, because individual units are not yet traceable. This is a major problem: according to a Deloitte report, the pharmaceutical industry loses a massive $200 billion a year due to counterfeiting. However, the gravest cost of counterfeit drugs is their toll in human lives: according to the same report, fake drugs are accountable for about one million deaths per year, a tragedy that particularly affects developing countries.
Blockchain: always on the verge?
The pharmaceutical supply chain is ridden with fragmentation of processes and information asymmetries that make compliance with regulations and the monitoring of sensitive cargo a complex and expensive task. In short, it is an industry with multiple stakeholders with potentially diverging interests, where trust is paramount.
This is a use case for blockchain. One of its core purposes is to create a trustworthy, secure and inalterable ledger of records accessible to multiple stakeholders.
Proponents contend that if this were combined with smart contracts and Internet of Things (IoT) sensors to measure things like temperature, geolocation humidity and shocks, the entire supply chain could be made more transparent. In turn, this would lead to greater accountability and ultimately, less waste. You might even envisage a scenario where paper-based agreements like insurance policies and vendor contracts, and even payments are fully automated.
Unfortunately adoption of blockchain for supply chain management has been rather slow and mainly limited to pilot projects. So why does blockchain seem to be always on the verge but never breaking through to adoption?
One of the core issues is scalability. Managing a global supply chain potentially involves thousands of interactions between individuals and machines. Existing blockchains that rely on proof-of-work (PoW) mining can generally only process about 7 transactions per second on average. Indeed, scalability and excessive energy consumption are frequently cited by researchers as significant barriers to blockchain adoption in supply chain networks, both of which stem directly from PoW mining.
An even greater concern, however, is the technical complexity of blockchain and the degree to which it is interoperable with existing systems. Enterprises tend to want to combine blockchain with their existing back-end systems rather than starting from scratch, but this can often be an onerous undertaking involving high research and development costs. These issues are likely to be particularly prevalent in the pharmaceutical sector, due to the comparative complexity of its supply networks.
Perhaps the most interesting finding across recent studies is that security and privacy are currently regarded as a drawback rather than a benefit of blockchain.
If blockchain is to be a viable option for supply chain businesses, it needs to be flexible, upgradable, environmentally sustainable and cost effective.
The pharmaceutical industry could clearly benefit from blockchain-based networks that would enable information and resources to flow through the supply chain with less friction and waste. While blockchain holds the potential to ameliorate these issues, the theory remains far removed from practical reality. At Geeq, we are developing a technology to close this gap. We have designed a new type of blockchain network that can truly enable stakeholders to reduce information asymmetries and coordination problems, while increasing transparency.
This new type of consensus mechanism called proof-of-honesty, does not require costly mining. Unlike other public blockchains, there are no “block proposers” that win the right to validate the next block of transactions. Unlike other enterprise blockchains, there is no delegation to validate transactions to special, trusted nodes. Instead, all nodes are treated equally, follow the same rules and compete in terms of the accuracy of their ledgers.
By making ledger accuracy, rather than mining power, the fulcrum of competition, blockchains can be created that support far higher transaction throughput, even with modest numbers of nodes. This degree of scalability will be an essential prerequisite for widespread deployment of blockchain in the supply chain sector.
Stephanie So is an economist, policy analyst and co-founder of Geeq. Throughout her career, she has applied technology within her specialist disciplines. In 2001, she was the first to use machine learning on social science data at the National Center for Supercomputing Applications. More recently, she researched the use of distributed networking processes in healthcare and patient safety in her role as a Senior Lecturer at Vanderbilt University. Stephanie is a graduate of Princeton University (A.B.) and the University of Rochester (M.A., M.S., Ph.D).