October 25th, 2018 How Blockchain Could Change Manufacturing By Linda Marie Pearson, CPA, CFE, Principal You’ve likely heard of bitcoin—a new type of money known as cryptocurrency or digital currency. Bitcoin is a worldwide payment system that operates without a central bank or administrator. Bitcoin is being used by a growing number of businesses and individuals, and as of May 2018, millions in bitcoin were being exchanged daily, with payments made by computer or smartphone. Blockchain, the technology behind bitcoin, is a secure database spread across multiple computers, allowing consumers and suppliers to connect directly. Using cryptography to keep exchanges secure, blockchain provides a decentralized database of transactions visible to everyone on the network. For the manufacturing industry, blockchain has the potential to streamline the entire supply chain, creating an auditable account of products. The technology can assist manufacturers by addressing counterfeiting, certificate tracking, and supply chain visibility; protecting intellectual property (IP); and streamlining contracts. Tracking Materials According to the Blockchain Research Institute, manufacturers and other consumers of raw materials face more than $300 billion in global supply chain fraud every year. With blockchain, each product can be registered with a unique ID, and each supply chain partner can update the status of the item as it travels from a raw material into its next stage. This creates transparency and a powerful competitive edge for manufacturers seeking differentiation. With blockchain, manufacturers can prove the nature of their materials—where and how they were sourced, for example—with the information available for their customers to see. This level of transparency can be a game changer in terms of speed to market for some manufacturers such as those in the defense industry that must show a certain level of quality or condition of parts. Improving Security Another benefit of blockchain involves security. Blockchain and its decentralized ledger technology can help protect one of the key assets for manufacturers and distributors: IP. IP theft, especially by foreign or rogue competitors and their agents, has plagued the manufacturing industry. A blockchain ledger leaves a digital trail, with every user identified and logged. This can help prove and enforce a manufacturer’s legal rights as the owner of the IP with a high level of reliability. Blockchain also allows device manufacturers to distribute updates and patches with a higher level of security. Because each device has a cryptographically protected identity, manufacturers can ensure communication with the right device. Smart Contracts Blockchain smart contracts can replace paper or digital contracts, taking the form of a computer program executed by the entire blockchain network. Because its terms and conditions can’t be altered, a smart contract provides a level of accountability and trust that audits now enforce. Unlike a paper contract, a smart contract can monitor inventory levels or automatically, dynamically negotiate prices, reducing costs and improving transaction speed. With this technology in place, any buyer on the blockchain can find the contract, verify the manufacturer’s quality and reputation for on-time delivery, and see the product definition, quantity, price, availability, shipping, and payment terms. This means no purchase orders, no banks—cryptocurrency rules!—and generally fewer people involved. Blockchain adoption is certainly accelerating, with giants like IBM and Maersk already well into testing blockchain projects. How it will be used by smaller companies is yet to be seen. Industry experts expect some resistance from traditional players such as banks, for example, and new platforms will need to be developed to integrate blockchain technology into existing workflows. That said, blockchain is likely the way of the future, so it’s wise to stay current on its application in the manufacturing and distribution arena. For more information on Sansiveri’s Manufacturing Specialty Group and further insight into blockchain’s application on your operation, please contact Linda Pearson at 401-752-0566.