Values of Traceability in Supply Chains

Problem definition: This paper provides a theoretical investigation into the value and design of traceability-driven blockchains under different supply chain structures. Methodology/results: We use game theory to study the quality contracting equilibrium between one buyer and two suppliers and identify two fundamental functionalities of a traceability-driven blockchain. In serial supply chains, the ability to trace the sequential production process creates value by mitigating double moral hazard. In this case, traceability always improves product quality and all firms’ profits and naturally creates a win-win. In parallel supply chains, the ability to trace the product origin enables flexible product recall, which can reduce product quality. In this case, traceability can benefit the buyer while hurting the suppliers, creating an incentive conflict. Managerial implications: Firms operating in different kinds of supply chains could face unique challenges when they adopt and design a traceability-driven blockchain. First, in serial supply chains, any firm can be the initiator of the blockchain, whereas in parallel supply chains, it may be critical for the buyer to take the lead in initiating the blockchain and properly compensate the suppliers. Second, in serial supply chains, a restricted data permission policy where each supplier shares their own traceability data with the buyer but not with each other can improve the supply chain profit, whereas in parallel supply chains, it is never optimal to restrict a firm’s access to the traceability data. Third, the suppliers’ incentive to enhance the governance of data quality is more aligned with the supply chain optimum in serial supply chains compared to parallel supply chains.A new version of the paper is titled “Value and Design of Traceability-Driven Blockchains” and can be found here: http://ssrn.com/abstract=3291661