Manufacturing is one of the biggest drivers of global economies. According to JP Morgan, the industry is currently on a healthy uptrend, with rates of growth slowly surpassing pre-2011 levels. With a value of $1.8 trillion and accounting for 12.3% of total GDP, the United States is expected to be the top manufacturing nation by 2020 (knocking China off the no. 1 spot). Why then are local manufacturers not reaping the benefits of this huge market right on their doorstep? And can the blockchain help local manufacturers get back into the supply chain?
- 1 What does manufacturing look like today?
- 2 Can the blockchain disrupt the manufacturing market?
- 3 Analysis of current blockchain-based projects in the manufacturing industry
- 4 Conclusion
What does manufacturing look like today?
Manufacturing across the globe is going through a technical revolution. Also known as “Industry 4.0,” there’s an increasing focus on smart manufacturing that has a bigger connection between the physical and digital operations.
Advancements in technologies such as artificial intelligence, robotics, big data, sensory equipment, and remote operating capabilities have meant that time-saving, resource optimization, efficient scalability, and robust security is a must-have in every supply chain network.
Manufacturers need to embrace the concept of IoT (Internet of Things) and, in order for companies to stay competitive, systems need to be interoperable, provide technical assistance to human operators, and make efficient automated decisions for increasingly autonomous production.
Who are the current market participants?
There are four main market participants:
- The purchasing companies that order goods from the hardware manufacturers to either use in their own assemblies or sell to end-users.
- The manufacturers themselves that fulfill the orders from the purchasing companies. Manufacturers will also order materials and other production goods from suppliers.
- The suppliers that supply materials to manufacturers for their assemblies.
- Manufacturers will often use procurement brokers to search for parts and source suppliers that will be able to produce these parts.
There are a host of auxiliary services that form part of the manufacturing industry such as logistical services, distribution, consultation services, etc.
Needless to say, within the manufacturing cycle there are bound to be a number of inefficiencies that new entrants to the market can exploit in order to bring about fresh innovation, especially if we look at the increasing pressure for established players to digitize their manufacturing processes and adopt Industry 4.0 practices, including the application of IoT.
What is the economic model behind a supply chain?
A basic definition of a supply chain is the process where a company turns raw materials into usable products for customers. It extends past the manufacturing process and typically has four phases.
The process would start with the raw materials (or commodities) that need to be turned into usable products by manufacturers. Once the manufacturers have assembled the products, it needs to be distributed to the different retailers, who will then sell it on to the consumer.
Every entity that comes in contact with the product as it moves along the production process becomes part of the supply chain. And each of them might have their own separate supply chain for the part that they provide.
Supply chains can, therefore, become complicated systems with many integrated processes, each adding a markup along the way.
It can sometimes be difficult to see where manufacturers make their money. As such, supply chain management (SCM) is essential. It helps manufacturers identify where they can save on costs (cost reduction) along the supply chain, rather than simply looking at revenue growth.
[bctt tweet=”Every entity that comes in contact with the product becomes part of the supply chain. Who’s guaranteeing its integrity?”]
This will include which materials provide a good balance between cost and quality, which suppliers to use, storage optimization, manufacturing process optimizations (to minute detail such as electricity cost savings), distribution, and logistical efficiencies, and more recently, how information technology and automation can make the whole process more cost-effective.
Calculating the earnings
The costs in a supply chain will directly affect the bottom line of a hardware manufacturer.
So if you sell a manufactured product for $100 and your net profit is 5%, it will equate to $5 for every product sold.
But because of this inverse correlation between costs and profit margin, if you can decrease your supply chain costs from say 15% to 10% or 12% to 7%, you can effectively double your net profit without touching the sales price (all else being equal).
This is the power of supply chain management and the economic model behind it. It is more about finding opportunities to optimize processes and systems within the line of production, rather than purely increasing the sales price to the purchasing companies or end users.
And as it stands, there currently are a lot of opportunities along the supply chain (as well as the industry as whole) that manufacturers can exploit to reduce costs and improve profit margins.
What are the current issues within the industry?
Many processes are outdated and are the number one reason for the Industry 4.0 revolution we mentioned earlier.
Industrial Internet technology spending is expected to grow from $20 billion in 2012 to $514 billion by 2020 (2,570% increase in 8 years).
The value created is expected to be far greater, growing from $23 billion to $1.279 trillion over the same time period (a staggering 5,560% increase).
Outdated systems and processes also give rise to many of the other bottlenecks within the industry.
Updating systems to modernize manufacturing processes requires a huge investment. The problem is that small to medium-sized manufacturers simply don’t have the capital to invest in these new technologies. This means, realistically, that it’s only available to massive enterprises who can actually afford the expenditure, meaning the market is largely inaccessible for smaller companies.
There are a number of inefficiencies in the manufacturing supply chain:
- Manufacturers will often hire procurement managers or procurement brokers to search for and source supplies, resulting in additional expenses such as finder’s fees or commission bonuses.
- Inefficient procurement processes waste more than 30 million man-hours per year as employees struggle to find the right suppliers with inadequate software, costing companies in North America $1.5 billion.
- The large amount of time spent finding the right suppliers results in manufacturers looking for high-minimums (the minimum amount of products to produce) in order to safeguard their investment in regards to time-spent.
Purchasers and manufacturers lack the visibility into the sourcing and production capacity of their supply chain. According to KPMG, only 13% of manufacturers have complete visibility past their Tier 1 suppliers and into Tier 2 suppliers (i.e. the suppliers of their suppliers). Information across the supply chain should be readily available in order for manufacturers to optimize their supply processes and mitigate the risk of supply chain failure.
Real-life use case: How did Intel become a supply chain leader?
Intel is a well-known manufacturer of computer processors, but a lesser known fact is that they are one of the world leaders when it comes to supply chains. They are consistently featured in the top 10 of The Gartner Supply Chain top 25, competing against other global conglomerates such as Apple, Amazon, and Unilever.
Here’s a quick look at how they do it:
Technology – In the last few years, Intel has made significant advancements in adopting IoT technologies. They’ve developed RealSense, for example, a camera that uses 3D scanning for logistics, thereby reducing measuring times and it can even be used to optimize packing space. They discover and improve processes by testing it out in their own supply chain first.
Being ethical – Intel works with local governments to source materials from audited mines only. They hold their suppliers to the same high ethical standard and also run a program to reduce climate change in supply chains.
Agile supply chain – Intel uses real-time analytics to fulfill millions of orders every year in hundreds of countries. Their supply chain is simple, responsive, and more visible, and by being able to access up to date data within a matter of seconds, they’ve created a smart supply chain that can identify threats and respond to it quickly in an efficient manner.
Can the blockchain disrupt the manufacturing market?
In 2017, manufacturing was one of the top industries when looking at blockchain adoption.
At its core, the blockchain is a trustless ledger of transactions with distributed security and transparent verification. It is as close to impossible to falsify transactions and information flow on a blockchain that you will get.
As such, it provides the perfect foundation for disrupting current manufacturing supply chains where suppliers, purchasers, manufacturers, and distribution companies can connect directly with each other in a secure ecosystem.
Decentralizing the manufacturing industry
Moving a manufacturing supply chain onto a blockchain platform could potentially destroy a number of innovation barriers:
- It facilitates a public P2P (peer-to-peer) network where manufacturers, suppliers, purchasers, and innovators can take back control over the quantity, quality, and delivery of their products.
- Going beyond just connecting manufacturers directly with purchasers, the blockchain provides a solution to potentially manage the entire process, including streamlining the procurement process, automated quality control, and supplier accountability, calculating machining capabilities, executing orders, etc.
- Decentralization removes barriers to entry for smaller local businesses by making necessary services (such as financial support) more affordable, while streamlined, low-cost processes make it possible for companies of all sizes to compete in the market.
- Participants are rewarded through a native currency that doesn’t just serve as a method of payment for services delivered but also has the potential of appreciating in value as the ecosystem grows.
Putting a number on the potential benefits
It’s all well and good to see what the blockchain can bring to the industry in theory, but how does this translate into cold, hard numbers?
One of the biggest benefits to decentralizing the manufacturing supply chain is lowering the barrier to entry for smaller manufacturers and innovators.
According to the World Economic Forum, reducing supply chain barriers to trade could increase the global GDP by almost 5% and actual trade by almost 15%.
In actual numbers, this means an increase of $2.6 trillion in the global GDP and $1.6 trillion in global exports.
[bctt tweet=”For manufacturers, moving their supply chain onto a blockchain network can save them millions of dollars!”]
The potential for individual participants in supply chains (i.e. manufacturers, suppliers, purchasers, distributors, etc.) is, therefore, huge as it saves millions of dollars and increases trade by moving their supply chain onto a blockchain network.
What are some of the issues with the blockchain in the manufacturing supply chain?
The potential benefits to decentralizing the manufacturing supply chain are clear, but it won’t come without its initial problems:
- Adoption: To see real progress and reap the rewards of a blockchain-based supply chain, all participants within a particular supply chain need to adopt the solution. This could be a problem for enterprises that are not used to disclosing proprietary information on a public ledger.
- Change: Moving to a blockchain-based solution is very different to traditional supply chain networks and would require significant (if not complete) changes to existing systems.
- Security: A blockchain solution would increase the visibility of supply chain information and data. Although this data (capacities, prices, demand, margins, etc.) is secure on-chain, how will companies be protected if some network participant decides to take this information off-chain and use it for their own advantage?
Analysis of current blockchain-based projects in the manufacturing industry
These projects provide a platform where users or participants in a supply chain can either plug into or build their own supply chain solutions on top of an existing network.
SyncFab aims to connect hardware manufacturers directly to purchasing companies through a smart manufacturing blockchain that will allow entities in a supply chain to streamline procurement processes, protect intellectual property, and track parts production in real time.
It’s the first peer-to-peer Industrial Internet of Things (IIoT) manufacturing blockchain network that reduces the barriers to entry, allowing smaller companies, as well as manufacturers, to compete in a supply chain against more established players.
Manufacturers will be able to list their machining capabilities straight onto the SyncFab platform where hardware buyers can then place orders directly with them (eliminating expensive procurement middlemen). Smart contract capabilities will be used to guarantee production standards, protect IP, and guarantee payments to make the supply chain more efficient and cost-effective. Users can get access to and participate in the network through the SyncFab utility token, MFG, which will also serve as a medium of compensation and the fuel that runs the ecosystem.
- For manufacturers, the token brings a number of benefits including the elimination of marketing costs by having buyers directly connect to the manufacturing facility and guaranteed payments through the Smart Contract capabilities.
- For buyers, on the other hand, it means accessing a network of vetted manufacturers with cheaper, high-quality quotes directly from the source.
The project is targeting a large market (supply chain management) which, on the one hand, is good, as it provides a lot of opportunity for disruption. They will face stiff competition over time as more players will be looking to get in on the high-value marketplace. However, being one of the first companies to provide an end-to-end blockchain-based supply chain solution, they will have an advantage over competitors who have yet to enter the market.
A consumer-driven, multi-party network system that connects companies with all their trading partners for a better solution at a fraction of the cost.
An Application Platform as a Service (aPaaS) enables users to build their own highly scalable supply chains on top of their blockchain with multi-party application plugins.
Designed from the ground up for the creation of network ecosystems that supports various different entities to the same transaction and supply chain in real-time, by providing an SDK that enables applications to function securely on the platform and take advantage of the OneNetwork business grid.
They might be spreading themselves too thin. By looking at the company, there are thousands of little solutions within the one big solution. It’s unclear exactly what they are trying to achieve, and that is not good for potential users looking for a focused solution.
Omnitude is a smart platform focused on making the online retail marketplace more transparent, secure, and profitable by connecting blockchain technologies and e-commerce platforms with enterprise systems in end-to-end supply chains.
Omnitude’s integration layer and platform applications facilitate the fast adoption of blockchain technology for any solution to become manageable, viable, and functional, with a fast route to market.
Omnitude has a number of different solutions in the e-commerce space, but the supply chain solution specifically will allow items to be tracked as they move along it. Smart contracts will track the item’s progress and release payments to shippers as “milestones” are reached.
In connecting traditional enterprise technologies with new blockchain systems, it will be difficult to integrate and reconcile physical real-world goods with the digital system for mainstream adoption.
Effective supply chain management is an area that affects most manufacturers. The SCM market itself is worth more than $13 billion, showing just how much importance companies are placing on running a streamlined supply chain.
[bctt tweet=”Current supply chains are plagued with a lot of inefficiencies, and the need for disruption in this area is rife”]
Looking at the above analysis, an effective blockchain-based supply chain solution is not too far off. In fact, it’s closer here than in any other industry (outside of finance).
This, in a large part, is because of the SyncFab network. The project already has a working platform and existing partnerships with manufacturers and governmental agencies, including initiatives that support civic development. This is a major benefit when looking at the potential success of a project.
They have expert knowledge in the industry they are operating in, and they know what works and what doesn’t. As such they are leveraging blockchain technology to expand and capitalize on that which does work, while at the same time looking to disrupt and revolutionize that which doesn’t.