by Ed Juline, CPMR, CSP, Mexico Representation
How many times have you encountered a manufacturer’s, customer’s or government’s process and asked yourself, “Why is this process so difficult? Why is this process so bureaucratic? Why is this process making our lives more difficult?”
I have yet to dig into any broken or lengthy process and find that it exists exactly as it was designed many years before. It is always the evolution of sometimes many years of tweaks and changes to cover a perceived weakness or loophole in the original design. Sometimes peeling back the onion and trying to fix it becomes impossible because of the tangle of changes implemented over the years. Using blockchain technology may present ways to patch the weaknesses and loopholes in many broken business practices.
What do we find as the principle challenge of most broken processes? Lack of trust, transparency, and traceability. We all pay a “trust tax” every time we transact because we require trusted third parties to ensure the trust for us.
“The trust, transparency and traceability that is desired is hard to achieve in the current infrastructural environment with silo-like back offices. Each company along the supply chain has their own systems, where all transactions are handled in separate databases.” — Deloitte report on blockchain in supply chain
Blockchain technology can reduce the need not only for these trusted third parties (e.g. banks, escrow agents, lawyers) but also for accounting functions that measure, minimize or manage risk. It can also reduce the need for, and cost of, the middle managers, who now control such information. Blockchain and smart contract technology has the potential to radically disrupt the current manufacturing business model by enabling trust within the supply chains, streamlining processes and improving transactional security. But most of all it will digitize manufacturing data which can be utilized to increase the effectiveness of any manufacturing system.
The first work on a cryptographically secured chain of blocks was described in 1991 by Stuart Haber and W. Scott Stornetta. They wanted to implement a system where document timestamps could not be tampered with. In 1992, Bayer, Haber and Stornetta incorporated Merkle trees to the design, which improved its efficiency by allowing several document certificates to be collected into one block. It would require more pages than are printed in a typical issue of Agency Sales to dive any deeper into the technology of blockchain so I will try to simplify. A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks. This allows the participants to verify and audit transactions independently and relatively inexpensively. The word “blockchain” should be used interchangeably with other names of technologies such as “Internet” or “electricity.” Cryptocurrency, most notably bitcoin, is simply the first killer app of the blockchain technology much as e-mail was the first killer app of the Internet and light bulbs for electricity. For those immediately worried about privacy, there are permissioned blockchains that limit which information in the block is visible to the public and which is limited to those with permission.
Smart contracts have the ability to use rule-based intelligence to perform functions. Blockchains support the construction of smart and trusted code that is embedded securely into the blockchain. Participants can use this to specify terms, conditions and any other logic into their transactions, thus creating a smart contract.
As an illustration of how a smart contract would work, take the example of an aerospace manufacturer issuing a smart contract onto a blockchain marketplace that includes precise terms and conditions for a wing spar that is to be manufactured from aerospace grade aluminum. Along with this they have included the exact component specifications with delivery and payment requirements. Any supplier on the blockchain can bid for the contract as long as they have the correct quality credentials and machinery that is capable enough to manufacture the component. If the delivery timescale is not satisfactory then the contract can automatically distribute the requirement across multiple qualified suppliers to achieve the required delivery date. Therefore, allowing buyers to dynamically scale the manufacturing system to meet their requirements.
Once the blockchain data has confirmed that the specifications of the smart contract have been fulfilled, i.e., the parts have been delivered to the required quality standard and are on time, then the smart contract will execute the payment automatically. This will eliminate trust or compliance issues that may exist within that supply chain.
Another use case has been developed for the traceability of goods through the supply chain for ensuring authenticity. A mineral mined in a non-conflict country could be registered throughout its journey to final product on a blockchain. All parties involved would be sharing the same distributed ledger and thus falsification of that ledger would be impossible. It is understood that this still does not address the question of tampering of the goods, but with the evolution of tamper-proof packaging, using a blockchain in the supply chain at a minimum ensures that the data has not been tampered with. No more auditing the supply chain and trusting third parties as the validation could be accessed anywhere instantly.
“As revolutionary as it sounds, blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. Above anything else, the most critical area where blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.” — Ian Kahn
How blockchain and smart contracts will affect the role of the manufacturers’ agent is yet to be seen, but as a manufacturers’ representative is rarely seen as a trusted third party but instead as an enabler of generating demand for a given principal’s products, there is no immediate risk of obsolescence. Rather, the use of the technology in manufacturing could lead to more trust, more transparency, and easier traceability with contracts closing faster and more securely, and ultimately commissions being paid faster and automatically without the need of an additional processing step by the principal.
Ed Juline, CPMR, CSP, is a partner with Mexico Representation, a manufacturers’ representative firm based in Guadalajara, Mexico, helping businesses succeed when selling into Mexico. He is also a partner in the blockchain and cryptocurrency consulting firm Elementop which helps investors and businesses define their goals in using blockchain and developing and implementing strategies for success.