Why implement a “digitalized industry” with Blockchain? Part 2
If you haven’t read Part 1, click here…
Now, I would like to discuss more specific opportunities to create value that we can expect with the “digitalized industry” on Blockchain.
3. Practical traceability solution
Giving visibility to commercial, logistics and financial flow
To reflect on what we have discussed in the previous article, let’s look at what the DX Report 2.1 envisions for the future of the digitalized industry. The report envisages two-folds;
A) Industry Platforms
B) Common platforms as a functional axis that crosses the industries.
In the context of supply chain, common platforms can be divided into three categories: (1) Commercial flow, (2) Logistics flow, and (3) Financial flow.
(1) Commercial flow refers to the flow of commercial documents such as purchase orders and invoices, etc exchanged between suppliers/buyers.
(2) Logistics flow refers to the flow of goods and products, which is recorded based on the fact that they have been shipped or delivered.
(3) Financial flow refers to the flow of financing and payment that occurs in conjunction with the fact of commercial and logistics flow.
In the “digitalized” supply chain, the information for (1) to (3) will be visualized as traceable data. Now, what value can be created in this world?
4. Financial value proposition that lies ahead.
Digitalized Industry x Commercial Flow
We’ll start by looking at the commercial flow.
Purchase orders, invoices, and other documents generated in the commercial flow are still in paper or PDF format. Today, we have EDIs, but papers and PDFs will never be obsolete. Nothing wrong with papers, but it is the “evil” in the digitalized industry. Printing, copying, signing (or stamping), scanning, attaching to e-mails, waiting for approval… these are all factors that cause fragmentation in business. What will happen if these flows are to be digitalized?
All tasks previously handled on paper including approval can now be completed on the screen. This allows enterprises to review documents and execute contracts swiftly. Since the other party of the contract is on the same platform, workflows can be run and agreements can be tracked without delay. However, if this is the only benefit, maybe it’s something the existing electronic signature service can handle. When the commercial flow is multiplied with financial flow, an unprecedented value is created.
Digitalized Industry x Commercial Flow x Financial Flow
What makes digitalization by Blockchain different from others is that it can create unique set of data. Although the data being electronic, it will be able to own the trait of an original document like paper. If data is original, it retains its authenticity even after it is passed on to someone else.
Imagine that you are in a business flow. Data such as purchase orders, invoices, and contracts are in front of you. Do you think that a third party (such as a financial institution ) which is not directly involved in the transaction are able to handle the data as if it were received on paper, don’t you? This would create an opportunity for financial institutions (FIs) to provide financing based on the data and not paper.
Supply chain finance can be considered as a concrete solution. Commercial data on Blockchain cannot be changed only at someone’s convenience. If it were to be changed, a discrepancy should arise with the contents of the accompanying digital signature. There is no incentive to change the data without permission. If this anti-tampering commercial data can be shared with FIs as needed, supply chain finance is possible. The rest is up to credit screening by banks.
However, it seems that such a system can be achieved without Blockchain. For example, Amazon offers a transactional lending service. Transaction data on Amazon are all stored on its servers. They are managed by Amazon, and their reliability is not questioned. So it can provide financing service backed by the transaction data. No need for Blockchain. But that doesn’t mean that only the platform provider like Amazon can offer transaction lending. The point is that the data provided by corporates should be reliable. With Blockchain, a third party can verify whether the data has been tampered or not. Everyone doesn’t need to be a platform provider. Suppliers that have had no choice but to go with “My way or the highway “ will be freed from the “high platform fees” that they are forced to pay. For FIs, it opens up the possibility of providing finance to customers that they could not reach before due to their low credit ratings, hence creating a new ecosystem. This is one type of the digitalized industry.
Digitalized industry x Logistics flow
Next, we would like to put the delivery information that are distributed among companies in the digital world.
This means that the distribution history is recorded in a form that cannot be falsified. In other words, traceable data will be generated. Well, even if Blockchain has not yet been implemented at scale, companies are managing logistics information as a matter of course, right?
Inventory information exists in ERP or WMS. Looking at PLM, there’s more to offer such as design drawings including BOM (Bills of Materials), sourcing information (where the parts were procured from), etc . Altering the BOM? No, they won’t. Then, why do we still need Blockchain? Can we really ensure traceability without Blockchain?
For instance, in order to confirm the reliability of raw materials (RMs), we have quality inspections (sampling tests). A major player might outsource the audit of the supplier’s factory to a specialized external agency. (SMEs just trust and employ the factories audited by big players). This approach has been and will continue to be effective. However, in today’s digital society, we can weave trust with trust in a different way through data linkage. For example, inventory information in WMS and BOM-related information can be linked to companies to the extent that it does not touch on confidential information. For suppliers, RMs are input while Work in Process (WIPs) are output. However, WIPs are input and Finished Goods (FGs) are output to the buyer. This way, the manufacturing process across supply chain can be represented in data (so-called Digital twin). This is not just an analog representation in data, but the method of maintaining the same level of reliability in data as the actual goods.
However, if fraudulent data enters the point of input, it defeats the purpose. Like in football, you can’t just receive a through ball without looking at it. So syncing up goods and data by setting checkpoints. For example, each time a product passes through the gate in a warehouse, goods and data can be confirmed to be in sync. Buyers can also check a sample. With this system built in, when data is different than the actual, it will be immediately discovered at the next checkpoint. No one will dare to input illegal data knowing that it will surely be found soon. In addition, the suppliers with such malicious intentions will be eliminated naturally, and as a result, only the suppliers who do it right will thrive. In this way, the incentive to fraudulent data input can be significantly reduced by design. If data is recorded on a consensus, traceability data is reliable.
Even if traceability can be achieved, sales figure will not suddenly increase . Then, where does “it come into play”? it’s when defects occur. With traceability, the distribution process across a supply chain becomes a chain, and the linked data is in the buyer’s hands. Then, at the touch of a button, it is possible to narrow down the scope of the defective product in question (target suppliers, lot numbers, manufacturing period, etc.). No need to call the supplier and shout, “Look into it immediately!”. The yelled at supplier doesn’t have to cry out to their own supplier “The buyer is telling you to Investigate ASAP!”. If traceability can really be confirmed at one push of a button, it will lead to a significant reduction in investigation costs. That world could be called a digitalized industry.
Digitalized industry x Logistics x Financial flow
If traceability is applied, not only goods are stored in the warehouse, but the “history” associated with the goods also arrives in the form of data. Only the necessary part of the supplier’s BOM information is to be used as input to the BOM in the buyer’s PLM. These are all data that can easily be incorporated. You can find out how many and which goods are currently in the warehouse at any given time. The amount of inventory is constantly changing, but with incoming and outgoing data being accumulated, it will become easier to predict demand/supply forecasting by AI. What if these inventory data could be referenced by FIs on a need-to-know basis? This creates new opportunities for FIs to provide financing based on the inventory value.
To be more specific, inventory finance is the solution. You don’t need to read between the lines from inventory and financial statements to make predictions, resorting to your “gut feel”. FIs are able to capture accurate financial needs based on the data as “facts” at any given moment. Inventory data complements the traditional credit system which is based solely on a company’s credit rating. If it even changes the way credit decisions ought to be, new value will undoubtedly be created.
In closing…
Now, were you able to get the picture of how value being created with the digitalized industry and a system that can circulate commercial, logistics, and financial data among companies? They are just examples of an idea. Do not turn to what you can do today, but think about what you can deliver with the power of digital technology tomorrow. Companies who thinks this way and actually implement it will play a leading role in the digital society of the future.
