logo

The Operations Science of Blockchain: Benefits and Challenges Explained

Welcome to another round of the wild west. The advent of blockchain technology is ushering in a new era of innovation and change. Managers are facing unknown terrain but it is terrain that contains a wealth of value for manufacturing, services, supply chain and project management. This month we have a Q&A session with Dr. Ben Amaba PE, CPIM®, LEED® AP BD+C, IBM’s Chief Innovation Officer for Industrial Sector, Watson & Cloud Platform, covering a quick overview of Blockchain, the operations science of blockchain technology and its implications for operations managers.

First for Dr. Amaba, what is blockchain technology and how is it different from Bitcoin?

Ben: Blockchain is often confused with Bitcoin and cryptocurrency but cryptocurrency is only blockchain’s most famous incarnation to date. Blockchain technology is a way to create a system of record with three important characteristics:

1)    Blockchain creates a ledger, a system of record, that is shared among participants in a transaction.  The participants’ view of data can be filtered as needed. For instance, all tiers of manufacturers of parts for an automobile engine do not see what each other is paid for their part. At the same time, all participants may be granted access to see when their part was produced, when it was shipped or received and when it was assembled into an engine.

For Bitcoin and other cryptocurrencies, Blockchain’s ledger technology provides a single unit of account showing the value of Bitcoin currency and all associated transactions. In contrast, the unit of account value for the US dollar is currently managed through the US Federal Reserve system.

2)   Provenance of the information is clear and transparent. Everyone with permission sees the same information at the same time. If an automaker wants to see when the pistons for an engine were produced and shipped from the Tier 2 supplier, e.g. a piston manufacturer, to the Tier 1 supplier, e.g. the engine manufacturer, the blockchain transaction contains that information. The automaker does not have to go to the Tier 1 supplier who then may have to go to the Tier 2 supplier before getting back to the automaker. The ledger data is updated automatically as changes are made to a part’s record.

3)   All transactions are immutable. In other words, once a transaction is entered into the ledger it is final and unchangeable. Of course, this is backed up with powerful cryptography to ensure that all transactions in the ledger are secure. Both the blockchain technology, infrastructure security, and strong cryptography provide very high levels of security and privacy.

Ed: Ok, that takes a little of the mystery out of it. From an operations science perspective, I really like the capital projects blockchain illustration you provided at the June Digital Manufacturing and Design Innovation Institute's ("DMDII") supply chain conference in Chicago—

This is a nice visual showing the effects of blockchain technology. Industry would go from current state widely-distributed networks of information, sequential and sluggish in terms of response time, (as shown on the left) to a future state compact, parallel and highly responsive single network of information.

An operations science view of that transformation provides quick insight to the foundation of blockchain benefits. The key here is to view information requests as work-in-process. Once that perspective is taken the benefits become obvious. For basic operations science insight, we use the VUT equation:

Cycle time in queue (CTq) is affected by variability in the process, utilization of resources in the process and the underlying processing time of information while at resources in the process. For more information on the science behind this relationship, see Factory Physics for Managers, pp 72 - 80.

As shown in the capital projects illustration above, blockchain technology blows up the extended, intertwined networks of information processing that is typical in many supply chains.

1)    Information is all in one place so variability (the "V" term) is reduced through standardization of information.

2)    Requests do not have to flow back and forth up and down a supply chain which reduces overall information request WIP and thereby reduces overall utilization (the "U" term) of resources, e.g. planners, accountants, engineers and operations managers, in supply chain operations. This has a huge impact on reducing queue time.

3)    With information for a part all in one place and easily accessible, the time to complete a request (te, the "t" term) is greatly reduced.

By Little’s Law, WIP is visible cycle time. All of these benefits accumulate to massively reduce the information request WIP in a supply chain. So, the tasks and products associated with the information requests get completed much more quickly. This is basic operations science and it quite often leads to higher revenue and lower costs.

These information requests are usually tied to the rate of throughput of products through the supply chain. The end products and services of each echelon of a supply chain generate revenue for that echelon. Have you ever had a product shipment or service completion wait on resolution of paperwork?... It’s pretty common. Implementing blockchain technology reduces information request WIP which reduces the time required to process information which reduces operations costs.

Shorter processing time at a resource increases resource capacity which means more throughput (revenue) for less cost. For standard manufacturing this means more profit and shorter response time for given resources and demand. For capital projects, the potential effect is to reduce waste of capacity of resources and WIP, shorten response time and complete projects faster for less cost.

A caveat though for capital projects and all blockchain applications—I have worked extensively with the Project Production Institute (PPI). In general, Engineering, Procurement and Construction ("EPC") project managers and capital project owners are poorly informed on operations science as it applies to project management. Click here for a blog post and more info on that topic. For operations management in any industry, no blockchain application is going to be effective if underlying management practices are set in opposition to the fundamental relationships of operations science.

Dr. Amaba, would you share a few examples of the benefits of implementing blockchain technology and also describe a few major considerations for implementing blockchain technology?

Ben: Sure, IBM has implemented blockchain technology for supply chains in aerospace, agriculture and electronics industries. Those industries have similar challenges and solutions. IBM’s blockchain technology application in the electronics industry was focused on documentation traceability and was set up between the manufacturer supplying parts, transportation companies and regulators. The result was faster delivery and service of new or repaired devices, faster maintenance of individual components and improved trust among all parties.

At IBM, we decided we should practice what we preach and applied blockchain with our back offices and key clients on invoicing and payment processes. The result was much faster processing of invoices on the both the payable and receivables side and fewer disputes around invoicing. Benefits included:
-  Reallocation of resources and time previously spent on data gathering, chasing, validating invoices to more productive activities
-  Savings in audit expenditures via immutable transactions and data

Switching to considerations for blockchain implementation, I’ll describe three:
1)  There has to be a business network where the participants are looking to gain mutual benefits and outcomes through consensus.
2)  There have to be assets with variability that parties are trying to better manage. The assets can be logical or physical like inventory, machinery, personnel, skills, software, and/or currency.
3)  Trust has to be established throughout the network of blockchain ledger users. The parties have to know that their information is secure, private, and that the blockchain technology is not going to inappropriately provide their information to other parties in the network.

Ed: Ok, thanks to Dr. Amaba for that succinct explanation of blockchain technology. There’s no doubt that blockchain technology provides a gold mine of opportunity for companies around the world. From an operations science perspective, it’s easy to see the benefits. We could even model those benefits using CSUITE Operations Analytics (see CSUITE in the menu above for more details). Make sure that your company uses blockchain technology for the right reasons. Operations science can lead you through this new terrain and ensure your company mines the benefits of blockchain as effectively as is possible.

For more information about IBM’s blockchain and other advanced technology solutions for your company, contact Dr. Ben Amaba at baamaba@us.ibm.com Ben is responsible for managing the innovation process that identifies strategies, business opportunities and new technologies and then develops new capabilities and architectures with partners, academics, new business models and new industry structures to serve the industrial market with the IBM Watson and Cloud platform. He manages the process of innovation and change management for customers to recognize and benefit from disruptive technologies in artificial intelligence, data sciences, cloud platforms, Internet of Things (IoT), additive manufacturing and robotic process automation (RPA).

If you want to make sure your improvement efforts are quick and effective, give Factory Physics Inc. a call at 979.846.7828. We can train your people in practical operations science to ensure improvements last. We have worked with leading companies the world over to create and implement breakthrough operations strategies. We accelerate results using your existing efforts, such as Lean or Six Sigma, and your existing information technology. Call us if you want better results quickly or send me an email to espound@factoryphysics.com

Ed Pound is Chief Operations Officer of Factory Physics Inc. Ed has worked with major international companies such as Intel, 3M, Baxter Healthcare, Chevron and Whirlpool providing education and consulting in the practical operations science of Factory Physics concepts. Ed’s work has helped companies realize millions of dollars in improvements and make operations, supply chain management and product development easier. Ed is lead author, along with Dr. Mark Spearman and Jeff Bell, of McGraw-Hill’s lead business title Factory Physics for Managers.

Share this blog post

More Blog Posts

In our last blog we stated that there is no simple formula for calculating the safety stock required for a given fill rate if the reorder quantity is greater than one. In this blog, I’ll provide detail on correct safety stock calculation and some considerations when trying to optimize safety stock... Read more
Inventory is a great fascination for managers. Primarily because it is a fairly flexible asset that companies can use to manage their financial performance. This also makes inventory a source of poor control because short term financial reporting considerations often overrule good operations... Read more
Ever get the feeling that you as a manager or your company’s managers are driving variability and chaos in your company through uncertain decisions and conflicting goals? You’re not alone. The Vice President of Manufacturing of a multi-billion company once reported that Production had done a... Read more
  • 1 of 9
  • >