Manufacturing and Blockchain: Prime Time Is Yet to Come

Maja Vujinovic, a member of CoinDesk's advisory board, is the CEO of OGroup LLC and a former Chief Innovation Officer of Emerging Tech & Future of Work at General Electric.

The following article originally appeared in Consensus Magazine, distributed exclusively to attendees of CoinDesk's Consensus 2018 event.

Since the Industrial Revolution in the 18th and 19th centuries, manufacturing has exponentially increased in volume and demand; supply chains have grown ever more complex, and industry has progressively required less direct manual labor.

To add even more complexity, we now have a need not only for supply chain management (SCM) but also for business process outsourcing, as well as for corporate social responsibility and sustainability. To succeed, one must continuously innovate and keep up with a rapid technological change.

One outcome of this radical uncertainty for businesses is that they face an increasingly wide and diverse cast of counterparties, which is forcing them to rethink their trust infrastructure. Existing, time-consuming approaches to compliance and on-boarding can't keep up.

Blockchain technology, with its decentralized, consensus-based approach to proving the veracity of each users claims and statements, offers a promising solution - with the added bonus that it might also foster a more equitable world. Manufacturers cannot depend on blockchains alone to make their operations more manageable -- no one technology or business model will singlehandedly solve these issues - but they should all be looking closely at their potential.

If we applied the 20th-century logic of the corporate bottom line to the current outlook, it would seem bright, with population growth pushing the manufacturing industry into a constant quest for efficiency, reliability, seamlessness and speed. Some 27% of manufacturers across the globe estimate an increase in revenues of 10% or more per year in the next five years, according to Industry Week. Thirty percent of manufacturers expect revenue growth between 5 and 10%. The problem is that this growth comes with major challenges, especially in the face of resource shortages and environmental and efficiency imperatives.

Companies are catching on to the fact that their SCM must be anticipatory, adaptive, and environmentally aware to achieve business sustainability. And even then, there is still friction and waste from time lags, price arbitrage, and opacity. All these challenges must be solved within the context of an ever-widening array of possible business relationships as supply chains become increasingly complex in a dynamic, rapidly changing environment.

Businesses that can't adapt will be surpassed as their competitors deploy new tools, such as the Internet of things, predictive analytics, satellite data, and blockchain itself. These technologies drive efficiency but are also forcing transparency. And change is happening fast.

IHS forecasts, for example, that the IoT market will grow from an installed base of 15.4 billion devices in 2015 to 30.7 billion devices in 2020 and 75.4 billion in 2025. Fleet management in transportation, security and surveillance applications in government, inventory and warehouse management applications in retail and industrial asset management in primary manufacturing will be the hottest areas for IoT growth. All of this will require faster, more transparent processes and transactions throughout the supply chain.

Today, manufacturing companies are investing heavily in trusted supply chain networks, which involves on-boarding new suppliers through a laborious due-diligence and compliance process. They do this to meet some of the core needs in any manufacturing supply chain, including the responsiveness of chain partners to changing production needs, the traceability of goods and processes along the chain, surveillance of counterfeiting, and protection of IP and assets. In investing in these exclusive relationships, companies develop strong bonds of trust and centralized asset control based on individual enterprise solutions.

These relationships provide a sense of security, and yet that security is typically only as reliable as the firewall each partner has in place.  As demonstrated by data breaches at Home Depot and JP Morgan, all firewalls are eventually hackable - both your own and those of your business partners - which means your business is still at risk. There's a dire need to find additional, comprehensive enterprise solutions to security, ones that go beyond simply building an ever bigger wall to keep the attackers out.

Blockchain technology seeks to address these problems via a common data architecture that lets non-trusting parties more securely share information. Blockchains are designed to permanently record transactions - not merely currency transactions but, importantly, also in exchanges of data - in such a way that the record cannot be tampered with. This stands in contrast to centralized databases, which can be altered after an entry has been made.

This unique design means that blockchains can enhance trust among organizations and add another layer of security and reliability to a supply chain's information system.  By deferring questions of trust to a decentralized algorithm that no one party controls, they promise to both advance transparency along existing supply chains and allow for more fluid, dynamic supply chains in general. For producers and consumers alike, the gains could be manifest in improved traceability of goods and work processes and, ultimately, in greater efficiency and lower costs.

A much-discussed facet of blockchain-based SCM is that tamper-evident distributed ledgers can potentially improve traceability and establish the provenance of goods from start to finish. Tracking of the sourcing of raw materials, the countries of production, inspections, transit methods, duration and environmental factors can all be updated instantly to a blockchain that is transparent and trustworthy.

For the potential benefits consider just one problem facing the global economy: that of pirated goods, which the Organization for Economic Cooperation and Development (OECD) estimates account for nearly half a trillion dollars a year. In the automotive industry alone, it has been estimated that counterfeiting costs $12 billion dollars in lost sales annually, impacting up to 200,000 jobs. And in pharmaceuticals, there's an epidemic of drug overdoses that is in part attributed to counterfeited drugs.

But the potential benefits go beyond provenance. Blockchains may also become a vital enabling component of moves to enhance automation along supply chains, since they can directly help to automate the agreements upon which automated transactions will be based. Here the answer is likely to lie in blockchain-based "smart contracts," which ensure that pre-agreed obligations can be executed in an entirely programmable manner.

Under a smart contract, all parties to an agreement can be satisfied that payouts are delivered legitimately without the adjudication of a time- and cost-consuming middleman. And since blockchain-secured smart contracts trigger transactions only after prescribed criteria are met by signatories to the agreement, they can mitigate the risk of relying upon other parties to deliver on their commitments.

In one example, the shipping company Maersk it testing a blockchain-based approach through a partnership with IBM to put all documents involved in bulk shipping into a single template based on workflow; this workflow is then triggered when a producer submits the packing list for whatever commodity or good is being delivered to the shipper.

As subsequent steps in the supply chain are sequentially completed, the documents are obtained and distributed, allowing all participants in the process to see what has been submitted, who submitted it, and when it was submitted. No one participant can alter a record without consensus from other parties on the network.

Another exciting supply-chain advantage of blockchains lies in how businesses can manage ever-more-valuable data. In today's 4th Industrial Revolution, where data is becoming the true gold, it will increasingly need to be exchanged in efficient and collaborative ways.

Much of it will be generated by automated devices, ensuring that the Internet of Things will need an accompanying "Ledger of Things" to keep track of machine-to-machine exchanges of valuable information. In other words, it will need a blockchain.

When information is protected through this secure, multiparty system, "data collateralization" is made possible, giving lenders and big companies the confidence to inject financing and other forms of liquidity into supply chains. This could in turn help smaller suppliers overcome their persistent working capital challenges.

In a related field, blockchain systems could also enhance predictive analytics, by which firms can collect data, model it, generate statistics, and then use those statistics to make data-driven business decisions. Since blockchains record each point in a process, they can provide verifiably accurate data to determine statistical patterns in anything from customer behavior to risk exposure.

When combined with rapid developments in IoT, this technology will eventually lead to full transactional autonomy for machines. They will manage their own digital wallets, loaded with cryptocurrency or specialized supply-chain tokens - something I got GE to do in a pilot during my tenure there.

Consider this scenario: A machine could run its own predictive analytics, conclude that a replacement part is needed by a certain time and then automatically place an order and pay for the part through a pre-established smart contract with a parts supplier. Imagine the cost and time savings that would afford.

So far, much of the potential for blockchain solutions for SCM remains theoretical. The jury is still out on whether blockchain technology actually is the fix it promises. We're awaiting the results of pilots by IBM, Maersk, GE and others. Blockchain advocates talk enthusiastically about reducing waste, increasing efficiency and providing greater control over supply chains, all because the technology can boost business partners' capacity and willingness to share information.

Yet while SCM experts often decry the fact that supply chains are overly complex and inefficient, many companies tend to view the status quo as acceptable, repeating the mantra, "If it's not broken, why fix it?" In reality, the problem is that innovation is difficult for established players, especially when it threatens to disrupt existing work processes in which many jobs and incomes are connected.

So, regardless of what evidence the pilots provide, a challenge will continue to lie in enticing firms to use it. Several practical considerations will dictate how quickly companies adopt this technology and transform their processes. It is easier to implement blockchain for intangible goods then for material ones, for example. And for tangible goods, it's relatively easy to apply the technology's provenance-tracking where a single material - such as diamonds or fish - is being traced along a chain.

But as my colleagues and I discovered with GE's highly complex supply chains for large industrial assets such as airline engines and wind turbines, it's much harder to track the iterative delivery, processing and assembly of raw materials and parts into intermediate goods that eventually become finished products. Paradoxically, although a blockchain could make information-sharing much easier across such a complex set of actors, overcoming the trust challenges across so many parties makes it hard to implement the technology in the first place.

We should also note that blockchains, which depend upon multi-computer networks, are inherently slower than centralized databases. As such, some argue that a distributed ledger that feeds into a centralized database is all that is needed to maximize a supply chain. This overlooks the public verifiability, integrity and transparency that blockchain provides, but it also argues for nuanced decision-making around technology choices.

The bottom line is is that blockchains are best suited where robustness, disintermediation, security, proof of source, and proof of the chain of custody are priorities. If speed is a greater priority than any problem of mistrust in the database manager, a blockchain may not be the best fit, at least within the technology's current state of development.

Still, as the cryptographic layer advances, with new "off-chain" solutions such as the Lightning Network promising to greatly improve transaction speed, processing capacity and cost-effectiveness, and as new IoT solutions improve the security and speed of machine-to-machine communications, blockchain solutions will become increasingly more viable. And the more that big IT service providers such as IBM and Microsoft implement blockchain business solutions, the more scalable and necessary the technology will become.

According to a recent report published by Tractica, enterprise applications of blockchain across the globe will see growth in annual revenue from $2.5 billion in 2016 to $19.9 billion in 2025. 

Separately, A 2015 World Economic Forum Report stated that approximately 10 percent of GDP will be stored on blockchain technologies by 2025. Are these forecasts too optimistic? Too pessimistic? It is, of course, impossible to answer those questions in a multipolar world that makes it ever-harder to predict the future.

What we can say is that widespread adoption of blockchain ledgers could have widespread benefits for the global economy, especially if it helps establish new standards in trade and manufacturing.

We could achieve much higher levels of security protection for sensitive data, with a model that's superior to both firewalls and non-disclosure agreements. And, by extension, if we can create a more secure environment for communicating with each other, greater cross-business collaboration and engagement become possible, which accelerates innovation and opens up new business opportunities.

What's also certain is that there is an unprecedented speed of change in this and other technologies aimed at the manufacturing industry. The question for any company leader confronting this environment is: how to ignite urgency within their organization and incentivize their employees to be entrepreneurs within, so that they keep up with technological and business changes.  

Customers today are requiring faster, safer delivery, consistency, security, reliability, accountability and quality and if not received, they will go somewhere else? Blockchains have significant potential to help businesses comply with those demands.

Manufacturing image via Shutterstock

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