Why implement a “digitalized industry” with Blockchain? Part 1
DX Report 2.1 was released by METI (Ministry of Economy, Trade and Industry in Japan) on August 31, 2021. The report outlines how “existing industries” can be transformed into “digitalized industries” to realize a digital society. It is a new industry that leverages the power of data and digital technology to pursue new value for customers and partners in an interconnected network. Described as the future of existing industries after achieving the digital transformation. In this piece, I would like to discuss whether Blockchain can play a critical role in the core of this “digitalized industry”.
What should the digitalized industry look like?
First, let’s take a look at how DX Report 2.1 sees the structure of the existing industries.
The report points out the harmful effects of the so-called multi-layered subcontracting supply chain structure, taking a typical master-servant relationship between end users and IT vendors as an example. This structure is relevant not only in the IT industry but also in groups of companies that constitutes a supply chain, such as manufacturing, construction, and retail industries.
On the other hand, the ideal structure of the digitalized industry is shown below.
In the digitalized industry, the relationship differs from existing industries. Instead of a fixed pyramid structure, a more horizontal and on-a-equal-footing relationship is the way things should be. This is because new value cannot be created from the traditional hierarchical control.
The report insists that the relationship between vendors (or should we call them partners from now on?) who provide technology and end users who use them is the source of value creation. Data and digital technology will be capitalized as the basis for the collaboration. Is this story really feasible? Can digital technologies really help create any values at all ? In the following, I would like to consider these questions step by step with the Japanese supply chain landscape in mind as a springboard.
- Challenges in existing industries
- What kind of digital technology is required?
- Practical traceability solution
- Financing value proposition that lay ahead.
1. Challenges in existing industries
The supply chain is not being connected at all.
Needless to say, digital initiatives towards greater efficiency have been around for several decades. Most large corporations have implemented an ERP to integrate their internal data. Transaction data generated therein usually goes through the ERP when contracting. Ordering and purchasing data is managed in the Sales & Distribution (SD) module. Product data is centered on Product Lifecycle Management (PLM) system, while inventory data is kept at Warehouse Management System (WMS). For SMEs, neither ERP nor peripheral systems are affordable. They just do their best with “manuals”.
As stated earlier, digitization in the supply chain space has been around for years and decades. However, buyers and suppliers are not connected digitally. The supply chain in a digital world remains in isolation without a data link.
Buyers and suppliers are separate companies, so they have their information separately. A business relationship doesn’t come with seamless data coordination in nature. Any matters arising here? In the DX report, the factor that draws the line between digital and existing industries is “whether they can create new value”. Is data linkage necessary to create new value?
Until now, it was enough for suppliers to deliver high quality products at low cost. From now on, we are facing an era in which companies compete as a whole supply chain to create value. For example, can the company explain whether their product is manufactured without child labor in the course of distribution? Can they prove the amount of greenhouse gas emitted by tracing the commercial flow back to the source? Can they justify their product for not containing hazardous substances that might pose a regulatory problem? Can they establish a mechanism to quickly recover from supply chain disruptions (how resilient it is)? Now, can these siloed islands bring up with solutions to these challenges without data collaboration?
2. What kind of digital technology is required?
The entire supply chain is one company!?
There are two classical challenges in the supply chain industry to fight for.
- How to reduce the inventory?
An inventory increases when you purchased a product. Purchasing = Paying for it. In other words, when inventory builds up, it means you just paid and it hasn’t been sold. So you’re glad when inventory is minimized. - How do we reduce the sales opportunity loss?
Sales won’t be recorded without inventory. So it’s not “less inventory, the better”, but you’re glad if the right amount of inventories are being kept in the warehouse.
This inventory optimization and reduction of the sales opportunity loss are both critical. However how do we control? It is quite challenging because we heavily reply on our suppliers and buyers to control them. So, what should we do?
One thing is to share inventory data between companies in real time. This makes it possible to grasp the inventory status of each company. Inventory is information of the present (past). It will make our life much easier to achieve a balance between supply and demand if predictions, such as production plans, can also be shared.
The other thing is the ability to quickly place and receive orders while keeping an eye on inventory levels and production plans. This eliminates sales opportunities loss due to inventory shortages. If demand increases in the low end, you can quickly execute order transactions and move inventory (goods).
If the above can be realized, different companies will be able to work closely and fight against as a “supply chain” rather than as an individual company. It is as if the entire supply chain becomes “one company”.
OK, let’s share data via EDI…
Now, data sharing seems to be beneficial, so we want to get started on it right away. However, the story is not that simple. Let’s go back and check the challenges of data managed by different companies.
In-house data is managed separately by an in-house system. While data sharing has its merits, but you can’t just say, “Hey, here you go, bro!” and spread the internal data to outside. Because they are confidential obviously. But, if they’re parties involved, then you can pass on the data for sure. Actually, existing technology can cover this mechanism: EDI, or Electronic Ordering System (EOS), which is typically provided by a buyer. There are many suppliers who may be using WebEDI.
But, EDI has its own issues.
- The supplier needs to do an extra effort: use RPA to automatically download the data from the web portal and throw it into their ERP. If a purchase order arrives by fax for some reasons, ouch!
- While EDI is attractive to anchor buyers, suppliers need to use multiple web portals, which spells more complications. The automation targets for RPA will go on growing (and that makes money for RPA vendors).
- If you look at this situation across the supply chain, there are a number of one-to-one supplier/buyer relationships, which adds up to a fair amount of integration costs overall.
OK, let’s introduce a common system…
So ideally, we should introduce one common system together (and force people to use it).
With this system, goods data can be managed centrally and orders can be placed and received quickly, thus avoiding silos. However, there is a risk of data being concentrated in one place. For example, cost information may be leaked. In this respect, it has recently become safe. Only the app should be common, while the database being separated. But this decentralization causes another problem; the incentive for companies to tweak the data deliberately. Buyers and suppliers are not friends. Their interest runs counter one another. Buyers want to take away “zero” while suppliers want to add “zero”. With conflicting incentives, you can’t just trust the other party and hope that the data at hand is to be held in the same state by the other party. The entire supply chain will easily lose data integrity.
OK, let’s use the Blockchain!
However, this is also changing these days. We have Blockchain. What is a blockchain?Define in a nutshell.
Technology that gives data originality and trust to be shared between companies
Data, unfortunately, has no singularity. “All you can rewrite and copy”. So, if data is being shared, you can take it as “one opinion”, but never claim it as “fact”. Blockchain comes in to help address this very part of the problem. If the data is tamper-proof, it cannot be changed by one party at their convenience. Any changes must be agreed upon by parties involved. In other words, with blockchain, companies will be able to maintain data as “facts”. In addition, since it is handled as data rather than paper, it can be transferred real time.
In summary, blockchain makes it possible for companies in a supply chain to share data in real time and secure manner. As a result, the entire supply chain will be able to act as if it were one company and compete with other supply chains.
Now that we know what it means to implement a digitalized industry with blockchain, let’s think about what kind of value we can create next!
To be continued…
