Industrial Blockchain Applications – Where and Why

By Ralph Rio

Category:
ARC Report Abstract

Executive Overview

Industrial applications have begun to emerge to improve revenue or operational performance by sharing immutable data among companies, government entities, and trade organizations.  This report focuses on industrial blockchain applications in which visibility to trusted data benefits the members of a consortium of industrial companies and associated organizations.

Blockchain technology has been proven viable and sustainable as a public and permissionless platform with the 10-year history of Bitcoin and other cryptocurrencies.  Newer versions of the technology – particularly private and permissioned – have emerged that are appropriate for business applications with a much higher volume of transactions. 

ARC Advisory Group has identified and reviewed 26 different industrial applications for proof of concept and pilot consortia.  The main objectives for these consortia include:

  • Improving supply chain visibility for recalls or reverse logistics
  • Automated document sharing to replace email, fax, etc.
  • Trust selling to increase revenue by identifying origin

After examining blockchain industry trends, technology, associated consortia, and inhibitors, the key findings include:

  • Blockchain technology provides clear business benefits; and industrial organizations should join an appropriate consortium when available
  • Suppliers should examine the total cost of ownership of their solution and give particular attention to reducing the application development costs
  • Consortium leaders should recognize that the people who are recruiting members need sales and marketing skills to highlight the business benefits and simplify the explanation of the technology

Blockchain Business Benefits

Blockchain became well known as the software infrastructure for the Bitcoin cryptocurrency.  Industrial applications have begun to emerge to improve revenue or operational performance by sharing immutable data.  Blockchain applies where visibility to trusted data benefits the members of a consortium. 

Reduce Cost of Recalls

Access to data and analytics have empowered governments and non-governmental organizations (NGO) to identify issues in the supply chain.  For example, the US Centers for Disease Control and Prevention (CDC) has vastly improved its ability to use technology to identify foodborne illnesses.  This enables greater regulatory oversight and stronger enforcement.  Data collection and analysis have vastly increased the CDC’s ability to identify issues, even those that might affect a relatively small number of people within the overall population. 

Incident Affecting One in a Million People Triggers a Recall

In one recent example, with electronic access to health trends and improved analytics, the CDC found just 100 illnesses among 100 million people – that is, one in a million.  This triggered a recall in 2018.  Those 100 people were spread across 33 states with 30 people hospitalized and (luckily) no reported deaths. 

$3.5 Billion in Recall Costs in US

The supply chain from farm to table has come under more detailed scrutiny by the US Food and Drug Administration (FDA) and other regulatory bodies due to improved access to healthcare data and analytics.  With weak tracking and slow tracing, the typical recall dramatically increases in scope as the product is traced back through the supply chain.  In 2017, a total of 456 food recalls were recorded in the US, which cost over $3.5 billion.   That is, an average direct cost of $7.7 million per recall.  Another source states that the average cost of a food recall is $9.5 million.   Companies have responded by adopting blockchain for track and trace to identify the source of contamination and limit the size of the recall to reduce cost. 

Brand Protection and Impact on Revenue

Outbreaks that harm people can be devastating for those affected and cause significant brand damage and lost sales for the responsible companies.  According to a Harris Interactive Poll, consumers indicated the following after a food product recall:

  • 55 percent would switch brands temporarily
  • 21 percent would avoid purchasing any brand made by the manufacturer
  • 15 percent would never purchase the recalled product again 

A recall leads to a significant reduction in a firm’s revenue with a negative and long-lasting impact on shareholder value. 

Enable Resale of Returned Pharmaceutical Products

The 2013 Drug Supply Chain Security Act (DSCSA) outlines steps to build an electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the US.  It enhances FDA’s ability to help protect consumers from exposure to drugs that may be counterfeit, stolen, contaminated, or otherwise harmful. The system also improves detection and removal of potentially dangerous drugs from the drug supply chain to protect consumers. 

Starting November 27, 2019, all prescription medicines returned to distributors must have their unique product identifiers verified with the manufacturer before being resold.  Drug returns have grown in cost and now exceed $15 billion annually worldwide.

Reduce Friction from Trade and Shipping Documents

Shipping documents include letters of credit, invoices, inspection certificates, and more.  The TradeLens consortium replaces the siloed electronic data interchange (EDI) systems and manual systems using fax, email, or postal with automated business processes.  It now has more than 90 members including shippers, shipping lines, freight forwarders, port and terminal operators, inland transportation and customs authorities like the Dutch Customs and the US Department of Homeland Security. 

In oil & gas, blockchain is used for trading oil from well to refinery.  The chemical processing and precious metals industries also use blockchain to reduce trade friction.

Grow Revenue with Trust Selling

Driven by government regulatory compliance requirements or end user consumer interests, the ability to provide proof of materials’ origin can improve the value and margin of the end product.  Examples include:

  • In the food & beverage industry, blockchain provides proof that the food has wholesome sources, so it can be sold at a premium price. 
  • Blockchain is used in the mining industry for rare earth minerals to prove conflict-free and ethical sourcing.  Also, diamonds can be identified as natural, rather than synthetic. 
  • In the aerospace industry, it’s important to know that parts are not counterfeit. 
  • The automotive industry is considering “digital birth certificates” that provide a trusted history for a vehicle.

What Is Blockchain?

Blockchain has recently gained notoriety as the software infrastructure enabling cryptocurrencies. It has proven successful as a means to manage ownership of assets among independent entities without a central authority. 

Industrial applications have begun to emerge for self-governing business processes that extend across a consortium of stakeholders.  Blockchain enables independent entities with shared pain points and related interests to form a consortium.  The typical objective is to improve revenue or operational performance by sharing trusted data with rapid visibility.

Blockchain technology enables a secure distributed ledger (database) for sharing immutable data among members of a consortium to achieve operational improvements in the supply chain or other business process.  It applies where fast visibility to trusted data benefits the members. 

Industrial Blockchain Applications Blockchain%20Replaces%20Central%20Silos%20and%20Manual%20Processes.JPG

Blockchain Key Capabilities

Blockchain provides several key features that make it a valuable technology for industrial companies.  These include:

  • Rapid visibility among participants with near-real-time recording of transactions and data sharing
  • Data integrity among partners and sometimes competitors who normally would not be trusted sources.  Also, multiple layers of cryptography and automated rules prevent hacking.
  • Self-governance using a distributed database and embedded logic for data sharing and transactions i.e., no central authority.
  • Smart contracts embedded in a blockchain provide business process automation. A blockchain transaction can initiate predefined logic and business steps to execute commercial transactions and payments.

Blockchain Strengths

Blockchain is a secure distributed ledger providing visibility, an audit trail, and faster transactions at reduced cost.  Blockchain uses a combination of multiple layers of encryption, a distributed database, and enforcement logic for data integrity and secure transactions.  Trust is decentralized and rests with the blockchain protocol without a central authority or broker such as a government or bank. Blockchain enforces trust in complex processes, helps automate existing business processes, removes middlemen, prevents fraud, and provides transparency. 

Blockchain Assures Immutable, Trusted Data

Blockchain is a decentralized database that stores a ledger of transactions on multiple nodes across a network.  For a predetermined cycle time, transaction data associated with each step in a supply chain or other business processes are accumulated into an encrypted “block.”  Bitcoin, for example, enters all coin exchanges worldwide into a new block every 10 minutes.  Every 10 minutes, a new block is added to the existing string of blocks to make a “chain.” 

Each new block is created concurrently by each node.  Since there are network timing delays, the transactions are not synchronous, and some of the new blocks on some nodes will differ.  A complex set of statistical and business rules drives consensus among the nodes to agree on a specific set of transactions for the block. 

To assure continued data security and immunity, each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.  Also, the multiple blockchain files across the network are compared to determine if one has been tampered with and only the consistent blocks continue to be used. 

Immutable Data

Each block provides a “single version of the truth” about transactions and activities occurring across an ecosystem of a complex business process.  While participants in a blockchain may access, inspect, and add to the data; multiple layers of encryption prevent them from altering or deleting existing data. The original information “stays put,” leaving a permanent and public information trail of transactions. 

Visibility with No Central Authority

The decentralized governance in blockchain removes the need for a central authority or third-party intermediary like a broker.  These types of entities typically silo the data with limited access by others and require manual methods for sharing (fax, email, or letter). 

Blockchain provides immediate electronic access with high visibility among the participants.  The multiple layers of encryption, logic, and a distributed database assure validation and data integrity so shared information can be trusted, even if some of the participants may not be trustworthy (i.e., industry competitors). 

Managing Ownership with Blockchain

Blockchain provides the infrastructure for software applications to manage ownership.  This common business process includes:

  • Identify the asset
  • Identify the owner
  • Secure transfer of the asset from one owner to another
  • Visibility by all participants

 

Blockchain Variations

The version of blockchain used with Bitcoin is public and permissionless. 

  • Public means anyone can join to read which implies the participants have various levels of trustworthiness
  • Permissionless allows every participant to write to the blockchain regardless of their trustworthiness

The complex design of blockchain with encryption, logic, and distributed database allows for untrustworthy participants without compromising the trustworthiness of the data.  As previously mentioned, to assure data immutability, blockchain software encompasses three major components:

  • Multiple layers of cryptography that prevent altering and enables trust
  • Distributed ledger with multiple copies to identify any alteration
  • Logic for decentralized governance with no central authority or broker

Overhead Causes Delayed Transactions

Unfortunately, this complexity translates into overhead – a bitcoin transaction can take a day or more to complete.  This delay would be unacceptable for most commercial applications.  Particularly for those that involve thousands of participants in a relatively rapidly moving supply chain with much higher transaction volumes than bitcoin.  Though there are millions of bitcoin accounts, bitcoin experts believe that only 10,000 or so are active and thus the volume does not even approach that of transactions in a typical supply chain. 

Blockchain Architectures with Low Overhead

To lower computational overhead and improve speed for completing a transaction, other versions of blockchain have emerged.  The changes involve restricting participation to only trusted participants.

  • Private: Using an approval process to read which is a trade-off between open public visibility and privacy for the consortium members
  • Permissioned: Involves an approval to write which is a trade-off of some security and data immunity for transaction speed

Currently, four approaches are available (refer to the chart).  Bitcoin is public and permissionless (#1).  Nearly all commercial applications of blockchain are private and permissioned (#4).

Track and Trace Includes MES

A supply chain includes both the processing nodes and transportation of materials between those nodes.  The transportation portion of the supply chain is relatively straightforward from the viewpoint of logging the transaction into a blockchain via warehouse management systems (WMS) and transportation management systems (TMS).  Often, the supply chain has multiple processing steps, such as grain becoming flour and then flour becoming bread.  To provide effective visibility, track and trace must go beyond just transportation and include the activities in the processing steps.  In the processing nodes, tracking gets more complex and requires integration with the manufacturing execution system (MES) application. 

Processing Nodes of the Supply Chain

The processing nodes of a supply chain transform the input materials into either an ingredient for another process step or the final product.  For traceability, tracking must occur through these processing nodes.  In the discrete industries, this will involve metal cutting, stamping, assembly, or other manufacturing steps.  In the process industries, there are a wide variety of mixing, separation and transformation steps, such as the grain-to-flour-to-bread example mentioned previously. 

MES Involvement

Among the many functions of an MES application, the portion that most applies here involves materials tracking for managing work in process (WIP).  The MES application knows what materials went into which product and when.  To effectively reduce recall-related losses, this information must be logged with the blockchain (the finer the resolution the better) for traceability. 

For example, as materials are placed in a vat for mixing, the MES application would log the source of the raw material.  As the system switches to another source, the MES would now log the new source.  When an issue is discovered, it can be traced to the specific source, rather than expand to all sources.

Weakest Link Takes the Highest Liability

Currently, most supply chains have relatively weak track and trace solutions, which leads to massive recalls or use of out-of-spec or counterfeit components. But, blockchain pilots are proving to provide vastly improved traceability both in speed and detail.  Blockchain participants will limit exposure by quickly identifying issues in their operations.  If the issue is with a supplier, they pass the liability to that supplier. 

Those slow to adopt blockchain will be defenseless.  Companies not participating will be left “holding the hot potato” and unable to defend themselves from liability for substantial costs.  The company that cannot trace back to its suppliers will be vulnerable to broad liability. Avoiding this liability provides an incentive to invest in configuring the MES, WMS, TMS, and cold chain applications for blockchain.

Table of Contents

  • Executive Overview
  • Blockchain Business Benefits
  • What Is Blockchain?
  • Blockchain Variations
  • Track and Trace Includes MES
  • Current Blockchain Consortia
  • Blockchain Challenges
  • Recommendations

 

ARC Advisory Group clients can view the complete report at ARC Client Portal 

 

If you would like to buy this report or obtain information about how to become a client, please Contact Us     

 

Engage with ARC Advisory Group