Manufacturing managers should embrace blockchain – here’s why

As manufacturers have struggled to improve the efficiency and profitability of their supply chains, one of the main obstacles has been the sheer number of parties involved. Each additional process and interaction increases the risk of human error, miscommunication or fraud. And with labor shortages increasing across the manufacturing industry, organizations cannot afford to let these issues hamper productivity.

A promising development here is blockchain technology. Although blockchain has mostly been associated with cryptocurrency, the immutability and transparency of a blockchain-powered network is actually perfectly suited to the complexities of supply chains. By enabling manufacturers to quickly and seamlessly share accurate supply chain data with their many partners, blockchain can help businesses simplify a number of important processes, reduce operational hazards and ultimately meet demand with greater ease.

Transparency between partners

The first step towards supply chain optimization is to make information more accessible. A major operational hazard with supply chains is that information is often dumped in internal departments or with external partners such as distributors, suppliers, retailers, etc. Instead of obtaining information from a single source, different departments and organizations store their own data, often in their own format. As a result, data must be shared manually and more frequently, increasing the likelihood of miscommunication as well as the accidental sharing of outdated information.

However, blockchain technology eliminates the likelihood of inaccurate data by logging the entire life cycle of a manufactured product in a secure, yet public database. This creates a single source of valid information for all supply chain partners. And once a block of information is logged on the blockchain, it cannot be changed or deleted. So not only can each party access the same information at all times, but they also have no reason to doubt the accuracy of the information. This dramatically reduces the risk of miscommunication, especially errors arising from outdated information.

Moreover, the ability to share new information in real time enables manufacturers to practice just-in-time production, responding to real demand. When demand for a particular item suddenly increases, the company’s supply chain partners can simply access the blockchain’s real-time data to quickly distribute needed materials and resources. Consumers will receive their purchases on time and the manufacturer will have avoided ordering unnecessarily large quantities of inventory and reduced profitability.

End-to-end traceability

As the sole source of information for the supply chain process, the blockchain digital ledger can record data from all parties involved. For example, when a particular material is purchased to be used in production, the general ledger will record the sales slip. So, in the event of a regulatory audit, manufacturers can log into the network to verify the origin of their raw materials, even if the data belongs to or comes from another party. Similarly, blockchain can clearly show the manufacturer’s compliance with various environmental regulations through its records of each party’s use of fossil fuels and important resources such as water or electricity.

Under normal circumstances, each party would compile and provide its own data, which would be virtually impossible to verify. Since blockchain data is immutable, manufacturers don’t have to worry about suppliers altering data for fraudulent purposes or counterfeit materials unknowingly entering their processes, both of which are surprisingly common.

When supply chain data is shared between different parties, such an arrangement creates a culture of mistrust where each party is motivated to prioritize their own interests and find their own paths to success. In many cases, the parties are separated to such an extent that they don’t necessarily care how their actions affect the success of their partners. Blockchain has the opposite effect: it builds trust between parties by uniting them around shared information and a common goal.

Automation through smart contracts

Blockchain can also maximize operational efficiency through smart contracts, which are self-executing processes with built-in rules that codify agreements between parties. For example, a smart contract can be programmed to automatically send a payment to a supply chain partner when the specific parameters of an order are met, such as the delivery of raw materials or finished goods. There is no need for human workers to issue an invoice, get the invoice approved or initiate the payment manually.

Likewise, a smart contract can be programmed to send new price requests or fees to supply chain partners when production reaches and exceeds a predetermined purchasing threshold. A smart contract can also include automatic triggers for corrective action when a delivery occurs outside of a predetermined schedule or a member of the supply chain delivers an incorrect amount of inventory.

Given the aforementioned labor shortage, smart contracts can automate many of the tedious administrative tasks involved in a complex supply chain. Managers can focus entirely on adding value to supply chains, instead of constantly communicating with various partners or correcting errors in documentation.

Encourage blockchain adoption

Admittedly, blockchain represents a major departure from traditional supply chain practices. The widespread use of blockchain in the manufacturing industry comes with several obstacles, starting with the lack of familiarity with how the technology works. Blockchain’s applications in supply chains must become mainstream industry knowledge before manufacturers can consider implementing blockchain technology.

Another obstacle to blockchain adoption is the technology’s common association with cryptocurrency. Businesses need to understand that blockchain is no more endemic to crypto speculation and market volatility than phones were during the Great Recession of 2008. Yes, blockchain was involved in the hype and subsequent financial fallout from cryptocurrency, just as speculative bankers used phones during the process leading up to it great recession. But none of them were necessarily the cause of financial problems.

Also, manufacturers and their partners may not be comfortable with the transparency of blockchain’s digital ledger. In a blockchain network, all participating partners will be able to see information that would normally be confidential, such as contractual agreements and financial data. In order to establish agreed standards and other important components of a blockchain network, all parties must strengthen their mutual trust and accept their direct connections to each other’s success. Finally, manufacturers must ensure that they only share relevant data that adds value to the blockchain network, as opposed to carelessly giving away personal or sensitive information, such as trade secrets.

Supply chains are currently under enormous pressure to make improvements in efficiency and productivity. To meet unprecedented levels of demand, supply chains must reduce opportunities for miscommunication and fraud. If manufacturers fail to recognize blockchain’s potential to mitigate these challenges, the complexities that are already hampering the growth of their organizations will only worsen in the years to come.