Blockchain in Manufacturing, the Reality after Hype and Hope!
Roy Amara (1925–2007) was a scientist, futurist and president of the Institute for the Future. He was perhaps best known for coining his 'law' on the effect of technology:
"We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run."
His ‘law’ is very often right as our series on new technologies impacting manufacturers and distributors shows. Earlier posts have included IIoT, 3D Printing, Generative Design, 5G, Artificial Intelligence, Digital Marketing with CAD, and this one is on Blockchain.
Like most new technologies Blockchain had plenty of hype, especially in its role as the underlying technology to Bitcoin! Then people separated it from the earlier Bitcoin association with much hope for great dividends as a distributed ledger for other applications. It’s still early days in adoption of Blockchain but here’s the current reality for industrial suppliers?
What is Blockchain?
In business terms it’s a more efficient way to rapidly, securely and efficiently record and exchange data.
In technology terms, it’s a distributed ledger, or database, shared across a public or private computer network. If ‘ledger’ makes you think of financial transactions then think of it as a ‘database of records’ for any type of transactions. Each computer node holds a copy of the Blockchain so there is no single point of failure because it is decentralized. Each piece of information is mathematically encrypted and added as a new ‘block’ in the chain (hence the name Blockchain). Various consensus protocols are used to validate a new block with other participants before it can be added to the chain and prevents fraud in the Blockchain (but not outside it – more on that later).
Fundamentally its core advantages are efficiency of decentralization, trust through cryptographic security and transparency, and dependability through immutability. Collectively these enable information to be aggregated, verified and value exchanged without having to rely on a third-party authority and, as a database, it can be configured in multiple ways to meet different requirements. For example, ‘smart contracts’ enabling machine to machine transactions can be created such that once a set of conditions are recorded on the Blockchain, some other transaction (like payment) is automatically triggered.
What are the Uses of Blockchain in Manufacturing?
Perhaps the greatest benefit to manufacturers is to seamlessly aggregate information. Early adopters are using Blockchain for supply-chain monitoring, materials provenance and counterfeit detection, engineering design, identity management, asset tracking, quality assurance and regulatory compliance. Let’s focus on the first of these.
Manufacturing relies on supply chains - how does Blockchain improve them? By helping achieve frictionless cross-border trade. In a simple case, the origin of the goods determines if they can cross the border and what duty must be paid. The sender needs confidence that the buyer will pay for the goods. The buyer needs assurances regarding provenance, sourcing and suitable transportation (such as maintaining the cool chain). Multiple parties are involved, buyer, seller, producer, transporter, customs, banks, etc. This is where the Blockchain advantages described above can help make supply chain processes more efficient and less costly.
For example, Maersk is tracking containers in the shipping process register certifications and transactions and Moog Aircraft Group is securing provenance and authenticity of 3D printed aircraft parts on a per part basis. The key purposes are to reduce costs through greater efficiency and increased reliability of supply in a frictionless, fully traceable, closed loop, end-to-end supply chain that encompasses all raw material suppliers and supply chain tiers, and all factories (including contract manufacturers).
According to Gartner, by 2023, 30% of manufacturing companies with more than $5B in revenue will have implemented Industry 4.0 pilot projects using Blockchain, up from less than 5% today. According to Capgemini, manufacturers have the most at-scale deployments of Blockchain today, leading all industries included in their study (see chart at top of this post). The following graphic from the Capgemini study illustrates manufacturer's priorities for Blockchain - gaining greater cost savings (89%), enhancing traceability (81%) and enhancing transparency (79%) are the top three.
Manufacturing is mostly physical goods - Isn’t Blockchain for digital goods?
It’s true that Blockchain is especially suited to exchanges of digital products so it can obviously be applied in manufacturing where digital products/services or data are exchanged. It’s also true that manufactured products are typically physical products, though many now have digital components. In the case of physical goods with no digital component, Blockchain can still be useful for most of the purposes above, though it adds a degree of complexity to using Blockchain – see the next question.
Digitization, including digital design and manufacturing processes as well as creation of new digital services are occuring rapidly in manufacturing. Blockchain can help support this process, for example, recording of IIoT device transactions to increase product safety, tracking, traceability, warranty, maintenance, repair & overhaul (MRO). Leading technology players are investing substantially, for example, IBM has more than 1,000 staff and $200 million invested in the Blockchain-powered Internet of Things (IoT).
What are some practical manufacturing examples?
Here’s an aerospace industry one. Planes, depending on their size, have a range of individual parts from hundreds of thousands to the millions. A Blockchain generates a digital certificate for every part installed in a plane from the onset (sometimes called a digital birth certificate). Every time a part is serviced or inspected by a technician, the when, where it was done, and the identify of each technician is logged. The digital certificates are critical because a Blockchain solution can also control access, one stakeholder might be able to view that part from birth to current day, another might not be able to see proprietary information or trade secrets. For example, an airframe manufacturer or airline implementing such a solution might be able to see the condition, usage, installer and manufacturer of all parts on each of its planes, but a parts manufacturer could only see aircraft in which its products are installed, but not those installed with a competitor’s product.
Combating counterfeiting and piracy is another. A major steel company was found to have falsified inspection certificates for steel quality and this created a ripple effect felt by global supply chains. With a Blockchain solution, manufacturers could track the origin of materials and their journey throughout the supply chain. Today’s very slow manual (and potentially error prone) process would be replaced with a very fast, accurate and highly trustworthy process. You and your customers would also know that every component was genuine because fake products could not be added to the Blockchain.
Product recalls could be done more simply and at lower cost whilst also ensuring customers get the product quality they bought. The spare parts market is often challenged to ensure the right replacement parts keep warranties valid. Typical product recalls cost $8M, and many could be averted with improved track-and-traceability enabled by Blockchain.
What is the Difference Between Securing Physical Goods and Digital Goods to a Blockchain?
Blockchain was initially designed for tracking digital products (e.g. Bitcoin). Connecting and securing physical goods to a Blockchain requires enabling technologies like IIoT. For example combining IIoT and blockchain at the shipping container level in supply chains increases authenticity, transparency, compliance to product and contractual requirements while reducing counterfeiting. Adding IIoT GPS tracking of the physical product can support anti-tampering and condition monitoring (such as temperature range in transit or accelerometers to detect any impact). The correct operation of the sensors becomes a potential failure point if incorrect readings get recorded in the Blockchain – remember garbage in, garbage out (GIGO). The sensors can also be a vulnerability in the security of a Blockchain ledger because while the blockchain record might be immutable, the physical item or IIoT sensor can still be tampered with. For example, tagging a part with radio-frequency identification (RFID) would increase the assurance being provided but not deliver absolute security. The multiplicative effects of combining IIoT and Blockchain to improve track-and-traceability are shown in the context of the following table from the Boston Consulting Group study, Pairing Blockchain with IoT to Cut Supply Chain Costs
What is the Difference Between Public and Permissioned Blockchains?
Public Blockchains, like Bitcoin, have no central authority and can enable disruptive disintermediation. Permissioned Blockchains are hosted on private computing networks, with controlled access and editing rights. Industrial suppliers should consider using a private, permissioned Blockchain limited to the necessary raw material suppliers, manufacturing and logistics participants, resellers, and customers to securely share data and drive operational efficiencies. For example, cost can be taken out of existing processes by removing intermediaries or reducing record keeping admin. and transaction reconciliation. A permissioned Blockchain is also simpler to update or change.
What are the risks of ignoring Blockchain?
Unless you have another way of achieving the benefits above then the risk is obviously ‘missing out on those benefits’. Imagine having full traceability and provenance in a Blockchain on:
- every component you make by having NFC or RFID tags
- on each component in day to day operations like preventative maintenance, managing recalls, managing fraud or counterfeiting, import/export tracking, etc.
Product recalls could be done simply and at low cost. Every component would be genuine because fake products could not be added to the Blockchain and the right replacement parts will keep warranties valid.
Is Blockchain the right choice for your situation?
Clearly blockchain is currently intriguing many and the hype has made a lot of people enthusiastically embrace it especially in ‘supply chain management’ and ‘legal/regulatory oversight’, which are the two most promising applications for Blockchain. In fact for most IT solutions Blockchain is rarely the best solution. This Forbes article, How to test the waters before diving into Blockchain and this McKinsey paper, Blockchain beyond the hype, what is the strategic business value are two excellent references. The former shares questions from a World Economic Forum report that executives should ask before applying Blockchain. These include:
- Are you trying to remove intermediaries or brokers? - if so Blockchain can help but it does not have to be a disintermediator to generate value, a fact that is encouraging permissioned commercial applications.
- Is a permanent record desirable? – if you need to delete information then Blockchain is not an appropriate solution.
- Do you intend to store large amounts of non-transactional data? - it’s not currently advisable to store non-transactional data on a Blockchain – you want to establish trust in transaction records (rather than the underlying data itself) – storing private data may be in conflict with local and global data-protection regulations, such as GDPR.
- Do you need to rely on a trusted party? A trusted party may be necessary for compliance or liability reasons - "If an industry has specific requirements on the use of intermediaries or trusted partners, then it may be complicated to deploy blockchain, even if other benefits of its use are readily apparent. In use cases where regulation plays a big role, it may be necessary to include regulators in the project and deliver means by which the regulators can ensure compliance with laws, such as antitrust and environmental law."
- Are you managing contractual relationships or value exchange?– if a business problem is not really about managing contractual relationships and value exchange, then there is little need for a Blockchain – a different technology could probably solve that problem more effectively.
- Do contributors know and trust each other? - if the actors/entities already know one another and trust one another, there is probably no need for Blockchain. If they do not know or trust one another and/or have misaligned interests, there may be a good reason to use Blockchain.
Conclusions and 4 Recommendations
As McKinsey puts it, “Look to harness Blockchain rather than be overtaken by it." Here are our recommendations:
1. In the short-term try to reduce costs via operational efficiencies. For example, reductions in transaction complexity and cost, administrative effort of record keeping, transaction reconciliation, improvements in transparency, and fraud controls before creating transformative business models (for example by simplifying the ecosystem, establishing standards, or addressing regulatory barriers).
2. Focus on addressing true pain points within specific use cases with permissioned Blockchain/s. Analyze who can capture what type of value from securely sharing data while automating control. The cost of implementing a Blockchain solution must be less than some higher cost of an existing centralized or shared legacy process.
3. Assess impact at a granular level on your processes to ensure you can start extracting value in the short term.
4. Start with small-scale experimentation before scaling up. Expect slow progress, as in most multi-organizational projects, especially if trust needs to be built across participants. Once it is built there shouldn’t be trust concerns since Blockchain is a failsafe system in which all inputs are visible to all parties involved and cannot be altered.
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