As the name suggests blockchain can be simply explained as the chain of blocks storing digital information in a database. So, when a block stores new data, it is added to the blockchain. This technology allows the digital information to be recorded and distributed assembling into an immutable ledger or records of transaction without destroying or tampering.
What is blockchain and how it is functioned?
The manufacturing industry spans across a whole network of machine, parts, products and value chain associates including machinery providers and logistics companies, they usually face the challenge of securely sharing the data within and outside factory walls. Blockchain technology minimises the entire overplay and secures the integrity of a distributed system through a consensus algorithm, which elicits the benefit of real-time transparency. The consensus algorithm is the agreement of digital ledger users for the addition of blocks to the blockchain system.
This technology was first proposed as a research project in 1991 and its first widespread application was used for cryptocurrencies in 2009 and thereafter this technology exploded in various other sectors including decentralised finance (DeFi) applications, non-fungible tokens (NFTs) and smart contracts.
For instance, a company owns a server farm with over some thousands of computers which maintains database holding its overall client’s account and information. And since, the company is responsible to hold all the information and data securely, it can many a times fail to do so owing to any kind of data breach physically or virtually.
Blockchain comes here as a rescue, as it allows the data in that database to spread out among several network nodes at various locations. This not only creates redundancy but also maintains the fidelity of the data stored therein. If somebody tries to alter a record at one instance of the database, the other nodes would not be altered and thus would prevent the worst case scenarios. This system helps to establish an exact and transparent order of events. This way, no single node within the network can alter information held within it.
Trump card of blockchain technology
Manufacturing firms with blockchain technology can develop a new market platform with intermediate goods suppliers and no intermediaries. This new market platform under a blockchain system achieves lower transaction costs by bypassing intermediaries and renders the manufacturing firms within the blockchain system more competitive than the off-chain manufacturing firms. Furthermore, the manufacturing firms in the blockchain system can achieve the benefits of network effects. The more that intermediate goods suppliers engage in the blockchain system, the more the in-chain manufacturing firm’s benefit from the excess market information. Thus, the effective use of blockchain technology allows a manufacturing firm to provide its true financial status (real-time accounting) to the supplier, therefore saving a significant amount of verification costs.
The real-time transparency of blockchain technology allows investors to more easily supervise managers, and markets can form more efficient prices, as information asymmetries among managers, investors, and other market participants are resolved. Along with it, it also allows a manufacturing firm to provide its true financial status (real-time accounting) to the supplier. This functionality also reduces surveillance, remittance, verification, and networking costs. Because of these advantages, manufacturing firms can produce at smaller marginal costs when they incorporate blockchain technology.
A successfully structured consensus algorithm allows a blockchain system to remain a trusted transaction system. A malicious peer must manipulate this consensus algorithm to corrupt the system. However, manipulating the whole consensus algorithm is very costly because of the complexity of finding the nonce, which is an answer for hash values/codes. Hash values are random digits of specific lengths that symbolise the transaction information. Once a blockchain system successfully structures a consensus system, the distributed system becomes dependable. Moreover, during the process of structuring a blockchain system, real-time transparency can be secured. When a new block with new transaction information is uploaded to the blockchain system, all participants can review the information through the shared digital ledger. Thus, users can check the current state of accounts, the quality of goods, and other information in real-time while preventing attacks by malicious peers.
Blockchain technology may require substantial start-up costs because significant costs are required for IT-related preparations, as it is envisioned to increase the transparency of not only transactions but also an enterprise’s internal systems. Thus, it may increase the expected profit of a firm. Thus, owing to real-time transparency and cost savings of blockchain technology, manufacturing firms can be better off by implementing this technology, which would finally lead them to the sustainability of firms in the manufacturing industry.
Effects of blockchain technology in supply chains
Supply chain is an integral and critical part of manufacturing industry. An efficient system always comes handy to ensure the smooth functioning of the manufacturing business. Applications of blockchain technology to supply chains are being actively developed. Blockchain technology can be adopted in the supply chains of various industries, such as the manufacturing industry, agri-foods, consumer packaged goods, aerospace, defence and pharmacy. Firms seeking to apply blockchain technology to their supply chains expect to enhance their systems through two advantages. First, they can cut costs because no additional surveillance on the quality of goods is needed owing to the real-time transparency of blockchain technology. Second, the quality of goods can be guaranteed as it enhances transparency, authenticity and compliance to product and contractual requirements thereby reducing the duplication of goods and also counterfeit goods.
Casting the exact focus on how blockchain technology is activated in supply chains system- when the ownership of a product being processed is transferred from one party to another, the new owner becomes the only party who can update the product’s status. When the new owner further processes the product, and updates the product status, this new information becomes a block and is uploaded to the shared ledger (blockchain). However, for this information to be uploaded to the shared ledger, the next recipient of the product must agree with the information. If the receiver agrees, then the correct product status is uploaded to the shared ledger. The recipient of the goods does not agree to the update if the data are inaccurate because they are directly related to his or her profits.
Blockchain technology applied to a supply chain effectively reduces the verification costs of manufacturing firms and prevents distortions of the quality of goods through real-time transparency. Another application of blockchain technology in the manufacturing industry is found in supply chains of composite materials. Blockchain technology’s characteristic of ownership transfer allows the provenance of materials to be traced, thereby reducing verification costs and providing an exact status of the quality of composite materials throughout the long supply chain. Components and structures made up of composite materials are generally utilised in the aerospace and medical industries. Thus, proves the actual state and quality of the composite materials, this can be ensured by blockchain technology, is important for safety reasons.
Spanner in the works
Despite the positive arguments described above, blockchain technology is not a silver bullet that does not have any obstacles. This technology has some technological and legal issues. To begin with - blockchain technology has an inherent flaw around the choice between transaction speed and retaining security. For example, the consensus algorithm may ensure more secure transactions as the percentage of user consensuses increases. However, waiting for consensuses from too many users reduces blockchain technology’s advantage of simple and fast transactions, offsetting the benefits of cost reductions of blockchain technology.
Another technological problem of blockchain technology is the confidence in the consensus algorithm. That means, in the future, if supercomputers with much faster calculation speeds are developed, the nonce (the answer for hash value) of transaction can easily be hacked. This issue would destroy the integrity of blockchain technology, in turn, rendering the technology useless. These technological drawbacks of blockchain technology can threaten the applicability in the manufacturing industry.
In addition, blockchain technology is considered to be tricky by some central governments, regarding legal issues such as the possibility of tax avoidance and criminal uses. Blockchain technology also allows transactions without bank intermediations, which can make it difficult for central governments to utilise banks to track tax avoiders. These illegal uses of blockchain technology may dull the implementation of the technology.
In a nutshell
This study investigates the implications of blockchain technology relating those to the sustainability of firms in the manufacturing industry, which is ensured by benefits in terms of real-time transparency and cost savings. Primarily, blockchain technology helps to secure the integrity of a distributed system. At the same time, it enables real-time transparency and cost savings through the use of a consensus algorithm. Furthermore, blockchain technology is being developed in a wide range of industries. These applications of blockchain technology in the financial industry are expected to reduce the surveillance costs and remittance fees incurred as part of the business of manufacturing firms. Manufacturing industry supply chains are expected to be reformed by blockchain technology, which may reduce the verification and surveillance costs of manufacturing firms and enhance the quality of goods. Examples of supply chains that may utilise this technology include the composite material and agri-food supply chains.
Applying blockchain technology to the manufacturing industry is expected to decrease manufacturing firms’ networking costs and have network effects through the construction of new market platforms in the manufacturing industry. Furthermore, when the profits of manufacturing firms before and after adopting blockchain technology are compared, the results show that manufacturing firms can increase their profits through two features of blockchain technology: real-time transparency and cost savings. In addition, owing to the real-time transparency and cost savings of blockchain technology, the profits of a manufacturing firm can exceed those of its rival firm. Thus, the effective adoptions of blockchain technology in a manufacturing firm are suggested. Altogether, blockchain technology could support firms to sustain in the manufacturing industry through real-time transparency and cost savings.