The automotive industry is the quintessence of the industrial age. The cars we casually see on the street are called finished vehicles. As the term indicates, it takes tens of thousands of parts and components to assemble a car. In the automobile industry, those supplying parts to an auto manufacturer are called suppliers. Assembly plants are supplied by first tier suppliers. Second tier suppliers supply the first tier suppliers with parts and components. Here, the quality of a finished vehicle is indeed determined by suppliers, not assembly plants. Thus, how well auto manufacturers manage their supply chain holds the key to sales success.
This white paper takes an in-depth look at what blockchain is, how it can be applied in SCM, what values it can create and how it will transform markets.
What is Blockchain?
Understanding of Blockchain
Blockchain was first conceptualized in 2009 by Satoshi Nakamoto, the pseudonym of a developer whose real identity has remained unknown. He noticed that digital currencies used in electronic transactions are managed by a centralized server. If a hacker attacks the server and duplicate or falsify transaction records, the same single digital token can be spent more than once, which is called double spending. To prevent double spending, Satoshi proposed a peer-to-peer network in which all participants keep records of all digital currency transactions. In other words, the idea is that if each individual has all transaction records, it becomes virtually impossible for hackers to attack because they would need to hack into millions of networks simultaneously.
Enabling all participants to keep and share transaction records is called Distributed Ledger Technology1). Using blockchain technology which makes it possible to store encrypted data in a decentralized way, Nakamoto proposed Bitcoin, a tamper-proof digital currency that can be used in electronic transactions.
1) Distributed Ledger Technology: A technology that enables all participants to store and maintain a ledger of transaction records in a distributed network instead of a centralized server
Smart Contracts / Hyperledger
Vitalik Buterin suggested a smart contract2) which lets users run any code they want. With this smart contract, blockchain has become a great tool that helps increase not just reliability in transactions but also overall productivity in business processes. Later, in the Hyperledger projects hosted by the Linux Foundation, the idea of permissioned blockchain came up. In permissioned blockchain, only a restricted set of users have the right to access the network. Hyperledger also offers the ability to create channels, allowing a group of participants to create a separate ledger of transactions.
Now, hyperledger is a platform many businesses use for their blockchain proof of concept (PoC). Unlike bitcoin blockchain, it generates new blocks based on consensus algorithm. Since it doesn’t require much resources and time like Proof of Work, transactions can be recorded faster. Moreover, it shares data which has been agreed by all participants.
2) Smart Contract: A smart contract can execute the contract automatically if certain conditions (expiration date, call option prices, etc.) being written into blockchain are met.
How will Blockchain Revolutionize Logistics?
Efficient Global Supply Chain Management
Blockchain is expected to drive innovation in B2B logistics transactions. Today, Electronic Data Interchange (EDI)3) is mainly used for B2B logistics transactions. While EDI makes things easier for businesses, it has some drawbacks. It requires users to follow strict communication rules and use standardized data formats. The data also needs be sent in accordance with the receiver’s detailed requirements.
Unlike EDI, blockchain doesn’t require participants to follow such strict rules. Once consensus is made among participants on data exchange, it can be done without having to do some extra work on the data. Also, it is the data receiver that processes data in ways it needs them to be. Thus, exchanging data using blockchain technology is more efficient and secure compared to EDI.
As pointed out earlier, it is challenging to manage global sourcing network efficiently. With the help of blockchain technology, however, it can be solved quite easily. For instance, UK blockchain startup Provenance has presented a case showing how it used the blockchain technology to track the origin of a canned tuna sold in a supermarket in the UK such as which fishermen in Indonesia caught the fish and when it did.
3) Electronic Data Interchange (EDI): It is the computer-to-computer electronic exchange of business documents such as purchase orders, invoices, shipping notices, etc., using standardized record formats based on agreed communication network.
Greater Supply Chain Visibility
One of the biggest values blockchain can offer in logistics is visibility, which means it shows members of a supply chain which process their transactions are going through now. All transactions on global supply chains are concluded when payment is made. Yet, financial institutions handle trade finance processes based only on the documents from an exporter. This often results in crime in which one submits fraudulent documents to a bank and takes money from it. This kind of trade fraud can be easily prevented if there’s a way for you to check what logistics processes your container has gone through.
Enhanced Trust in Transactions
In addition, blockchain increases trust among all transaction members in a global supply chain. It helps create a transparent and trustworthy platform, ensuring reliable transactions in logistics for participants such as relevant agencies and organizations. This solves a number of issues caused by a lack of trust in the current shipping transactions. For instance, it reduces costs spent on risk prevention measures in case of breach of contract by either the exporter or the importer. In addition, since it takes less time and money to set up a data exchange system, you can now add smaller suppliers to your supply chain.
Until the 1980s, the market was dominated by companies that survived competition. In the 1990s, competition was about how efficient one’s supply chain was. Thus, companies that established an efficient supply chain were able to achieve a consistent growth.
Now, in 2018, with the fourth Industrial Revolution emerging, Digital Transformation5) has become all the more important. In this regard, companies should be able to meet different requirements of their supply chain members and create new values by adopting digital technologies. And in today’s ever more competitive world, how quickly one adopts blockchain to effectively respond to customers’ needs will become a decisive factor in its survival. In order to prepare for the future, companies should be a step ahead of what customers want and be equipped with capabilities to provide solutions based on digital technologies and knowhow they’ve accumulated.
Many companies including IBM today are rushing to develop blockchain-based supply chains. The competition has already begun. In the future, one’s growth and survival will be determined by how fast you respond in an ever changing environment. Even at this moment, Blockchain technology is evolving and will create new values in supply chain management in ways we haven’t seen before.
To find out more about Blockchain of Samsung SDS, visit Cellologistics.com and download the white paper.