The supply chain is an ideal domain for applying blockchain technology. There’s a critical need to build trust and facilitate consensus among multiple stakeholders, from manufacturers and suppliers to shipping firms, government agencies, customers, and third-party service providers. There’s also a critical requirement to provide a secure record of transaction history that can be shared among all supply chain network participants.
Blockchain can enhance the supply chain by serving as an immutable ledger for recording transactions between members of a supply chain ecosystem and by facilitating visibility (for all permissioned members) into the exchange of information throughout overall supply chain operations.
Dr. Horst Treiblmaier, professor and head of the School of International Management at Modul University, Vienna, Austria, and Cutter Expert Curt Hall recently spoke with Michael Marus, CIO of the Forest Stewardship Council (FSC). The purpose was to learn more about FSC’s experience with developing a blockchain-based supply chain application designed to facilitate its mission of ensuring the sustainability of forest-based materials and enabling better forest management. This article is based on their interview.
Horst Treiblmaier (HT): Before discussing how FSC is using blockchain, please provide us with some background about your organization and its mission.
Michael Marus (MM): FSC is an international nonprofit founded in 1993 to enable sustainability with forest-based materials and support forest management in becoming more responsible and sustainable in its practices. We are a standard-setting organization. Our standards are set up to ensure that forestry is practiced in an environmentally responsible and socially beneficial manner while being economically viable.
For us, responsible management means safeguarding biodiversity and benefiting the lives of local communities and workers. Our goal is to ensure safe conditions and create an environment where economic viability is possible for all of those who work in and rely on our precious forests. So our certification focuses on three pillars of sustainability: social, environmental, and economic.
Companies that meet our standards through certification are licensed to use our trademarks to claim and promote the FSC materials they trade across the chain of custody. More than 55,000 companies worldwide have joined us in promoting sustainable forest management. You’ll find the FSC label on many forest-based products, from furniture and paper to honey, nuts, and milk cartons. The FSC label is widely recognized as assuring that the materials come from sustainably managed forests and have legal and sustainable origins.
I joined FSC about six years ago. I saw that FSC needed to invest in technology to better achieve its mission through timely information and knowledge management. So what technology does that mean today? Blockchain.
HT: How is FSC applying blockchain, and how does it benefit your business model?
MM: Integrity is fundamental to FSC’s system. That’s why we went with blockchain. For example, we take seriously and investigate allegations of supply chain problems reported to us. I know from our investigations that our certification and our assurance system are very strong. But we understand that systematic checks of the use of our trademarks (I’m not just talking about the use of the label or the language; I’m talking about the day-to-day trades when companies claim that they are selling or purchasing FSC materials) are also important. We know that verifying trade claims helps reduce the risk of nonconforming materials entering FSC supply chains. One fundamental reason for our blockchain is to be able to more systematically check compliance with our rules.
At the same time, FSC-certified companies and license holders want to use FSC certification to support demonstrating compliance with the legal authorities — for example, when importing or exporting across borders. There are lots of regulations. The new EU deforestation-free regulation (dubbed EUDR) is a good example. But even in the US or Australia, where demonstrating the origin of the materials is fundamental, there are lots of legal requirements when trading across borders.
We believe blockchain can help because it can account for the certified materials (from us to the final product) along those supply chains and ensure the data is protected. It’s really the spot-on technology to meet current needs, both for checking compliance with our rules and supporting certified companies that need to demonstrate legal compliance.
FSC introduced blockchain through a set of pilots. In 2021, we developed a beta version. We tested that platform in 2021 and 2022 in Ukraine (before the war began) and China. We tracked where the source materials were coming from in these countries.
The beta version provided some easy-to-use interfaces and ways to input transaction data from companies regarding their claims about the inputs they were receiving from their trading partners and what they were outputting as a trading partner. Those claims were verified, based on matching claims among trading partners and by an algorithm that we developed to relate certification data to claims in order to verify their veracity.
The beta platform encouraged companies to consider what kinds of analytics and reporting capabilities would be possible, beyond what we were delivering, assuming traceability of the materials being purchased and without revealing any business-sensitive information.
After completing those pilots, with tens of thousands of transactions taking place on those supply chains, we gathered and considered all the feedback and what we learned. We used that knowledge to define what would be most valuable for FSC and for companies trying to use FSC certification as a tool for demonstrating compliance.
Based on the feedback, we created a next-generation FSC blockchain platform that is designed to cater to the analytics and data-related needs of FSC and companies. That includes having a bird’s eye view of which claims are being made across supply chains while providing tools to certified companies that will support them with documenting their compliance with, for example, cross-border trades. We are finishing development of the new blockchain in Q4 of this year.
With the conflict in Ukraine, it’s been difficult to continue the beta platform. However, we gathered all the feedback and are still connecting with companies there to take what we have learned and apply it to make the new blockchain something that can go beyond China and Ukraine.
HT: Which features of blockchain technology did you find especially useful for your purposes?
MM: It’s an interesting time for blockchain. I think privacy is among the main features that show promise for the purpose of establishing traceability and trusted, verified supply chains. Blockchain enables private, confidential transactions; the details of those transactions are only visible to those participating in the transaction. Blockchain’s auditability is another important feature: we can examine the transaction blocks for private transactions, and only those companies involved would be able to see the details of that data.
I also think that performance, and the launching of cloud services infrastructure, means that blockchain can be constructed as a set of cloud services with the focus on throughput and latency, so that you can provide the necessary network and permissions management. This is an important feature that we look to benefit from by using blockchain. Leveraging cloud services with consensus mechanisms means that blockchain doesn’t have to ruin the environment, as it often is seen as doing.
Data hashing (the process of converting data such as text, numbers, or files) into a fixed-length string of letters and numbers is another important feature. The cryptographic hash produces immutable records that not even a system administrator can change. These are the main features that help establish a solid, trusted supply chain–traceability platform.
HT: I started researching blockchain in 2016. In 2017, there was a lot of hype around the technology. Then there was a blockchain “winter,” with some people saying you don’t need a blockchain for anything. So it’s great to have these real-life examples. You mentioned energy consumption and environmental destruction. But FSC is using a private consortium blockchain. I assume that you’re not using a proof-of-work (PoW) mechanism, meaning that energy use is not much of an issue in your case. Is this correct?
MM: Correct. It’s a distributed ledger application. The protocols are permission-based because it is a consortium private blockchain. It includes parties that are already working with each other. We also have algorithms to help determine the veracity of the claims being made and, therefore, what’s actually written to the blockchain. So there is no PoW mechanism like you might find in a public blockchain application.
HT: Did FSC develop its blockchain on its own? Or did you use an existing platform like Hyperledger Fabric?
MM: We’re using cloud services that allow us to use Quorum, an Ethereum-based distributed ledger. We have partners that are helping us develop these cloud services in a way that that meets our needs. But you could also say that we’re doing it on our own. However, before constructing our first version of blockchain and running our pilots, we examined many different potential options.
You characterized the period from 2016 through 2017 so beautifully: it was a period of lots of hype. Today, in terms of supply chains, you do find some general examples of blockchain in use — in agricultural food supply chains or diamonds, or precious metals, or similar items. But when it came to the options for wood supply chains, those that would meet our needs and be very much no-nonsense about what you can put on a blockchain, we didn’t find a lot of great options at the time. That’s why I believe that cloud services that can be constructed in a way that meets our needs are so important. They don’t create a lot of hype or burden around what you can actually do and are a good fit for what we need to do.
HT: Did you encounter any disadvantages from applying a blockchain solution?
MM: The biggest disadvantage I find with using blockchain is interoperability. The supply chain–related ecosystem of blockchains emerging right now hasn’t yielded any kind of solid standardization and well-defined interoperability. And when I look at FSC-certified companies, many of them are handling more than just forest-based materials. Consequently, they’re looking at sustainability for all the materials they’re handling, and they don’t want to be overtaxed by having to input or connect to multiple systems.
Blockchain networks are emerging because of new legality requirements. And with supply chains, this could lead to interoperability issues that just haven’t been addressed yet. But we’re aware of these disadvantages and the potential burden. Our next-generation blockchain platform is designed for interoperability, letting companies push and pull their transaction data through the use of standard protocols and data structures. These are the base capabilities we’re making sure can be engineered to be interoperable.
HT: Let us talk about the future. You told us about your next steps and vision. But if you think ahead, say five or 10 years, what do you envision? What would be the ideal solution for you? And what can blockchain do to help you achieve your goals?
MM: I’m not one to look for perfection, so I want to be clear on how I see this. My view is that blockchain will be one essential tool for ensuring the integrity of our system. But it’s part of a suite of tools. For example, we use wood-identification technologies; we also use geospatial analytics to help determine what’s going on in our supply chains and certification, as well as how our rules are being followed or where to investigate.
But looking at a five-year horizon, I hope that blockchain will be of such value to FSC and the certified companies that, alongside certification, it is considered something powerful and valuable. Companies that meet our certification requirements can already say they’ve been checked on environmental sustainability, worker safety, the rights of Indigenous Peoples, and social issues, among others. They have been checked and meet those standards. But at the same time, as they trade day-to-day, they are part of some very complex supply chains. I think blockchain will become something that complements their participation in verified supply chains. I see blockchain in FSC as a value proposition for companies that want to immediately demonstrate what they’re doing on a daily basis, based on the materials they’re handling and how they’re connected to companies that have met our standards.
HT: When it comes to wood identification, is it possible to take a sample and be able to tell where exactly the wood came from?
MM: That’s a difficult question because there are various types of wood-identification technologies, and they are always improving. For example, with anatomy, you look at the wood under a microscope, and you can potentially determine its species and perhaps where it came from. If you know generally where it came from, you may be able to determine its likely origin.
With composite products like paper or plywood, there may be other methods you can use. Some of those require reference samples from us. For example, stable isotope testing could help you understand something about the origin of the product, especially if you have enough reference samples, because it’s a comparative science. For instance, I could run a stable isotope test on this wooden table to establish a kind of fingerprint. If I don’t have something to compare it against, I may not be able to determine very much. But it’s definitely something that we use, especially when we have reference samples. We’re also able to use wood anatomy to determine the species and the composition of certain products.
It’s something that is part of our tool set, especially because the technology is constantly improving, along with the methods and results that help you determine geographic location.
Curt Hall (CH): You touched on some of the analytics of the FSC blockchain platform here and in your podcasts. Can you comment on the additional analytical capabilities that participants in the pilots indicated they would like to see in the next version of the platform?
MM: The pilot gave companies a very basic view of their transactions: so I’ve input these transactions, and these are the ones that have been verified by my trading partners and the FSC algorithm, and these are the ones that have not, etc.
We also provided mocked-up dashboards of what would be possible to encourage companies to consider the kind of functionality they would like to have going forward. In particular, we wanted them to consider the type of analytical capabilities they would like to see built into our next blockchain platform because the real value of blockchain for traceability is in the analytics.
I’ll give some examples of what we learned during those pilots, beginning with trading partner analysis. This means knowing which trading partners you’re using and the volumes that they’re providing you as a company, the region where their materials come from, and whether their trading partners are connected to those that have been 100% verified.
This type of information can tell a company a lot. For example: I know about my trading partner and what they’re claiming, and if they’re verified with me as a company. But I could potentially look far beyond that, to be able to understand that everything has been verified for those materials I am currently handling. A company can get a good compliance report out of that: I know that the materials I’m handling have been accounted for and verified, not just with my direct trading partner, but also with all of those connected to my trading partner all the way back to the source.
This type of provenance analytics can support a focus on source countries and regions. We also have a product-classification system that can include detailed species information of materials. All this information is captured, which is another important feature of blockchain, and this is valuable when it comes to know-your-trading-partner compliance. You usually trust your trading partner, but, that said, you don’t know who your trading partner is connected to and who they are connected to, and so on. Understanding whether or not your trading partner is 100% verified like your own company is fundamental now.
This holds great potential for documenting compliance. Also, during our pilots, companies asked this question: if we have all of our trade transactions in an immutable and verified ledger, can we not just share that with our auditor every year, so they have a clear registry of our inputs and outputs? The FSC chain of custody certification requires companies to maintain up-to-date records of their inputs and outputs of FSC materials. So this is the basis by which that becomes an immutable record of verified transactions.
CH: Those are great examples. In 2017, I conducted a large Cutter survey on blockchain that asked companies how they were using/planning to use the technology. We saw a lot of initial excitement around blockchain. Then it sort of plateaued. But I was always curious about what emerged during the pilots and what the end users found useful. You mentioned that you want your next blockchain to support more real-time or even forward-looking capabilities. Analytics, I assume, will play a big part in that vision?
MM: Our next-generation blockchain platform will cater to some of those very basic needs and will go quite deep. Already by connecting with your suppliers in a blockchain, we are able to also present the certification aspects of your suppliers to the companies directly that help them determine, for example, where you are getting certain types of materials that you’re transforming to become a final product. But I think the real promise is that our next blockchain will be built in such a way that we will be able to develop future analytics capabilities.
For example, I imagine that once we start getting supply chains on board, there will be even more requests to have analytics that support greater supply chain efficiency, like metrics, to help companies understand the efficiency or the carbon footprint or the sustainability impact based on the data from the supply chains they’re connected to. These capabilities could be possible if we have a good flow of data in a connected supply chain. Consequently, we’re thinking beyond our next-generation blockchain and continuing progress on the analytics front because that could prove very valuable to companies.
CH: I’m fascinated that your pilots focused on Ukraine and China. This raises another question pertaining to legality — for example, with respect to sourcing. I imagine that, with the sanctions against Russia due to the war in Ukraine, you want to make sure you don’t get anything from Russian companies.
MM: It’s just not possible to continue certification in Russia until there are conditions that will allow providing assurance and integrity under FSC’s rules. Unfortunately, there is a large area of forest in Russia that cannot be certified because of the war.
CH: You mentioned some usability concerns with the blockchain pilots. Usability is key with any application, especially those involving implementation of a new technology like blockchain. Can you comment on the types of new features companies indicated they would like?
MM: Most of the feedback was positive. Some companies indicated places we could improve or make changes. There are a couple of areas where we got very targeted, key feedback. One was on the performance of the technology platform. The usability was the least satisfactory for users because it was very basic. Users could only see a few things when inputting data into the blockchain, and they couldn’t get a lot out of it.
For me, the way to make the platform more useful for participating companies involves applying more analytics. Companies want to know something more than what they can already see on paper. As far as accessing the platform or the responsiveness of the platform, users were satisfied. They could use a Web interface or even a mobile device, it worked really well, and it was responsive.
Another area of feedback pertained to data. As mentioned, companies already are required to maintain up-to-date accounting records of all of their inputs and outputs. You’re essentially asking them to make that information compatible to put it into our blockchain, and that means having consistent formats, units of measure, and notation for volumes of materials. However, feedback on the data format was generally satisfactory.
One other area of feedback was on the time it took to verify a transaction. Companies saw they could enter thousands of transactions in bulk very easily, but seeing the transactions as verified depended on their trading partner entering the matching information, which could take days or weeks. Consequently, there was clear feedback on the importance of providing some kind of connectivity or feature so companies could understand whether their trading partner had been alerted that there were missing transactions — basically, to notify and instruct them to take action.
The last part of feedback involved the types of features and information companies would want to share with their auditors — that is, how can I share this information as I see fit? These kinds of sharing mechanisms will become part of our next platform.
The most important feedback was that companies must be able to output compliance-related information. Companies need to be able to capture this information, and the blockchain must “package” it so that when it comes to a table that could have come from five sources, the information can be aggregated and documented to support demonstrating compliance to, for instance, border control.
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