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Can Blockchain and IoT Help Stem the Flow of Counterfeit Goods?

New report shows how blockchain and the Internet of Things can work together to detect and stamp out counterfeit goods in the world’s supply chains.

In studying the practical applications and economic benefits of using blockchain with distributed Internet of Things (IoT) networks, Boston Consulting Group and Cisco Systems may have found a new solution to an age-old problem: counterfeit goods in the supply chain.

Especially relevant for electronics buyers who are grappling with an influx of counterfeit goods into their company’s supply chains right now, a solution that uses advanced technologies to identify such goods could provide numerous benefits for organizations.

“Companies have been battling counterfeiters for years, investing significant time and resources to guard against the risk of defective and fake parts entering the production system and to prevent clever look-alikes and reverse-engineered goods from stealing sales,” BCG points out in its “Stamping Out Counterfeit Goods with Blockchain and IoT” report.

“For much of that time, companies have been forced to operate partly in the dark, because fragmented data, networks, and sourcing arrangements make it difficult to trace and authenticate,” BCG continues, noting that advances in blockchain-with-IoT counterfeit detection provide at-a-glance visibility, tracing, and recording of provenance data from source to sale and beyond.

“The scale of the benefits will vary across businesses,” it concludes, “but our research suggests that blockchain with IoT could be a source of significant financial and competitive advantage for many.”

$100 Billion in Fake Parts Annually

An economic problem that results in billions of dollars in lost business revenues each year, counterfeiting exposes individuals and corporations to heightened health, safety, and even cybersecurity risks from fraudulent materials and defective parts. According to BCG, in the electronics industry, fake parts cost component manufacturers about $100 billion annually.

“What makes the impact of counterfeiting so pernicious is its reach: Fraudulent parts and goods affect every stage of the product life cycle—from the manufacturing floor to the point of sale, to the servicing function and beyond,” the firm states in its report, “driving up costs, eroding revenues, and damaging company reputations and brands.”

For electronics buyers, identifying and thwarting counterfeiters require high levels of supply chain visibility, and the ability to verify the authenticity of parts and raw materials and trace materials back to their sources. This is difficult in today’s global business environment, which is characterized by long, complex global supply chains; varying data and reporting quality across the vendor base; and a growing list of regulatory and compliance requirements.

Technology may be able to help offset these challenges. According to BCG, IoT provides unique identification and traceability, while blockchain provides a tamper-proof chain of custody information. “Pairing them can create a shared, distributed ledger capable of recording the origin, location, and ownership of raw materials and products at each stage of the value chain,” the group writes, “giving manufacturers, partners, and customers the transparency and authentication they need.”

Because of its ability to immutably track and share genealogy across multiple stakeholders, the blockchain-IoT duo can inhibit counterfeiting in ways that traditional technologies cannot. For example, suppliers and manufacturers can join a single blockchain platform and then use “smart tags” (unique cryptographic identifiers such as QR codes, RFID, and digital tags) to track and confirm the provenance and location of each item.

“Although no solution can be fully foolproof,” BCG adds, “smart tags capture the complete genealogy of a product and are hard to replicate.”

Lowering Operating Costs

Because blockchain with IoT serves as a single, immutable source of provenance data, companies can prevent defects due to fake parts and cut down on the labor spent validating materials and satisfying regulatory requirements. “When a product shows up at a warehouse and when it leaves,” BCG writes, “are [both] recorded in a verifiable event log that is easily accessible to all stakeholders.”

With that immutable data in hand, electronics manufacturers and their suppliers can use the blockchain platform to authenticate items, flag deviations from agreed-upon sourcing arrangements, and prevent defective and inferior components from entering the production system. “The improved visibility safeguards customers and protects the company from the risk of recalls, lawsuits, and reputational damage,” BCG writes, “while lowering operating costs.”

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