Blockchain
has emerged as a digitized,
decentralized, public ledger that allows market participants
to monitor
cryptocurrency transactions. Created as the accounting method
for the
virtual currency Bitcoin, it has been considered one of the
most
revolutionary inventions since the Internet itself. With a
range of
potential applications that go way beyond the financial
sector, this
innovative technology promises to make it easier and safer to
conduct
business, potentially generating major efficiency gains. This
is
especially true for complex and intricate operations, such as
those
that integrate the modern supply chain.
The present article will
discuss
how distributed ledger technology can fundamentally change
supply chain
management, helping companies from various industries enhance
efficiency and respond to ever more intense demands for
transparency.
It will also present the R&D tax credit opportunity
available to
support companies engaged in deploying blockchain technology
to create
innovative supply chain management solutions.
The Research & Development Tax Credit
Enacted in 1981, the
now
permanent Federal Research and Development (R&D) Tax
Credit allows
a credit that typically ranges from 4%-7% of eligible spending
for new
and improved products and processes. Qualified research must
meet the
following four criteria:
- Must be technological in nature
- Must be a component of the taxpayers business
- Must represent R&D in the experimental sense and
generally includes all such costs related to the
development or
improvement of a product or process
- Must eliminate uncertainty through a process of
experimentation that considers one or more alternatives
Eligible costs include
U.S.
employee wages, cost of supplies consumed in the R&D
process, cost
of pre-production testing, U.S. contract research expenses,
and certain
costs associated with developing a patent.
On December 18, 2015,
President
Obama signed the PATH Act, making the R&D Tax Credit
permanent.
Beginning in 2016, the R&D credit can be used to offset
Alternative
Minimum tax for companies with revenue below $50MM and for the
first
time, pre-profitable and pre-revenue startup businesses can
obtain up
to $250,000 per year in payroll taxes and cash rebates.
Understanding Blockchain Technology
Blockchain is a type
of
distributed ledger technology (DLT). It represents a new
approach to
database structuring that uses independent nodes to record,
distribute,
and synchronize transactions in their electronic ledgers
instead of
keeping information centralized. This groundbreaking
record-keeping mechanism creates a database in which "blocks"
of
organized data are connected to one another, as links in a
chronological chain. By recording and adding blocks, it
generates a
permanent and incorruptible information trail. While users are
allowed
to access, inspect, and add data, they cannot alter or delete
information. In other words, blockchain technology creates a
database
of indelible and immutable records whose authenticity can be
verified
by the entire community of users instead of just one
centralized
authority, as it is the case for most conventional ledgers.
Blockchains can be
public, public
permissioned, or private. IBM's Blockchain blog highlights
that all of
them are peer-to-peer, append-only ledgers of digitally signed
transactions. They all offer guarantees of immutability and
give
participants access to replicas of the data, which are synced
through
consensus mechanisms. However, there are important differences
regarding who is allowed to participate in each type of
network. While
a public blockchain, such as Bitcoin, for instance, is
completely open,
public-permissioned and private networks implement certain
restrictions
to participation, which often require invitation or validation
through
a set of rules.
Blockchain could
revolutionize
accounting and payment networks considerably by simplifying
operations.
It can generate major cost savings due to lower maintenance
costs and
reduced labor needs as well as fewer errors and delays
commonly
associated with the reconciliation of records and the
implementation of
international transactions. Additional benefits include
enhanced
transparency and ease of auditing, which could also reduce
compliance
costs. According to a recent Goldman Sachs report, blockchain
could
help capital markets save as much as $6 billion a year in
reduced
personnel and IT improvements.
Though originally
designed as an
accounting method for the virtual currency Bitcoin, blockchain
can be
utilized to record, monitor, and verify transactions of
virtually
anything. Beyond the financial sector, blockchain is an
interesting
alternative to face various challenges related to both
security and
efficiency of operations. Potential applications include
insurance, the
Internet of Things, voting systems, medical records, weapon or
vehicle
registration systems, among many others.
DLT could enhance
security,
flexibility, and efficiency of a very diverse range of
operations. The
diversity of potential applications points to a considerable
expansion
in the near future. According to Accenture's projections, the
blockchain services market should experience a compound annual
growth
rate of more than 60 per cent, amounting to around $7 billion
in 2021.
Implementing blockchain
technology remains, however, a complex task. Besides requiring
significant computation power, it demands advanced front and
back-end
programming and custom software design in order to guarantee
seamless
interaction between DLT and other operational processes. There
is no "one-size-fits-all" solution - optimized integration
requires careful
consideration of existing infrastructure as well as an
examination of
all partners involved. It is also necessary to deal with a
considerable
lack of understanding of what blockchain technology is. To
this end,
the creation of effective communication strategies and
innovative user
interfacing tools are key to successful initiatives.
Despite these
challenges, a
growing number of companies across various industries are
engaged in
research and development initiatives aimed at harnessing the
disruptive
potential of blockchain technology. These innovative companies
should
take advantage of the R&D tax credit opportunity available
to
support their efforts.
Blockchain and the Supply Chain
With ever more
globalized
production processes and transactions, supply chain management
has
reached unprecedented complexity. It includes a growing number
of
individuals and entities, as well as various production and
distribution stages throughout several geographical locations.
It also
generates a complicated web of paperwork through extended
periods of
time, requiring a continuous exchange of information different
stakeholders and their respective record-keeping methods.
In this scenario, it has
become
clear that traditional supply chain management solutions lack
transparency and efficiency in dealing with all the aspects of
producing and distributing goods. In order to remain
competitive,
companies need more agile supply chains capable of quickly
responding
to changing needs and demands. Through a decentralized
approach to data
management and sharing, blockchain technology emerges as a
promising
alternative.
This groundbreaking
approach
offers a shared ledger that is updated and validated in real
time,
giving supply chain participants visibility of events as well
as access
to information on asset location, custody, and condition at
any point.
Data visibility is paired with the immutability of records,
which
creates an incorruptible database of product history, from
production
to sale. In addition, comprehensive supply chain data allows
for
significant process optimization along with better demand
management
based on real-time insights.
Supply Chain 247 lists
five key
tasks that can benefit from blockchain technology, namely: i)
recording
the quantity and transfer of assets as they move through the
supply
chain; ii) tracking trade-related documents, such as purchase
orders,
change orders, receipts, and shipment notifications; iii)
assigning or
verifying certifications or certain properties of physical
products;
iv) linking physical goods to serial numbers, bar codes,
digital tags
like RFID, etc.; v) sharing information about manufacturing
processes,
assembly, delivery, and maintenance of products with suppliers
and
vendors.
A recent article by the
Boston
Consulting Group and the MIT Digital Currency Initiative
points out
that blockchain technology is "uniquely
able to resolve important issues of trust and visibility in
far-flung,
increasingly fluid manufacturing and supply networks".
It
presents different ways by which DLT can improve efficiency
and
transparency of supply chain management activities, among
which:
- Time-stamping, tracking, and automating transactions,
thus
ensuring that events can be audited in real time;
- Minimizing third-party involvement, including
bankers,
insurers, and brokers;
- Implementing self-executing contracts that automate
repetitive tasks, such as billing and shipping;
- Creating proof of quality, provenance, payment, and
performance as means to prevent counterfeiting and fraud;
- Assigning digital IDs that make it easier, faster,
and
cheaper to onboard new vendors and partners.
Other potential
advantages
include enhanced transparency, better visibility into
procurement,
reduced risks related to fraud and human errors, improved
inventory
management, lower courier costs, reduced delays due to
paperwork,
faster problem identification, and increased trust all around.
There is growing demand
for
transparency in the supply chain, particularly when it comes
to proving
the origin of products. Consumers are increasingly aware of
potential
biases that arise from opaque supply chains and selective
information
disclosure. Blockchain technology is uniquely equipped to
overcome
these biases and foster trust through more reliable and
comprehensive
access to information. As assets move through the supply
chain,
unalterable records are generated containing every event they
went
through and everyone involved. This game-changing capability
automates
product tracking and traceability across multiple supply chain
tiers. Not only does it favor consumer trust, but it
also
facilitates the detection of counterfeits and resolves issues
of
provenance, such as those surrounding conflict minerals.
A recent study by
Accenture
underlines that blockchain can end the "hall-of-mirrors"
effect that
haunts ever more intricate supply chains. The report points to
the
inefficiencies of having copies of documents and transactions
flowing
across a multitude of partners, which not only generates
desynchronization but also makes it very difficult to control
the
veracity of information. This myriad of "copies of copies"
favors
errors and duplicity - the study conservatively estimates that
10
percent of freight invoices in high-volume shipping companies
are
problematic. Distributed ledger technology promises to solve
many of
these inefficiencies, by storing all transactions in a
tamper-proof
platform. The "hall of mirrors" of paperwork is replaced by a
simple
trail of verified transactions.
Global innovation
blockchain
leader at EY Paul Brody expands this idea by highlighting the
benefits
of blockchain-based digital contracts and their potential to
considerably reduce the time between completing a task or
delivering a
product and being paid for it. This "analog gap" is a
widespread,
expensive problem that could be solved by DLT. In blockchain's
event-driven, smart contracts each term and condition is a
line of code
with self-executing capabilities. For instance,
payable-upon-receipt
smart clauses would integrate delivery and payment, creating a
seamless
and automated flow across supply chain participants, logistics
partners, and financial institutions. Similarly,
codified rules
specifically designed for each blockchain network can automate
trade-related documentation and inventory management tasks,
generating
major efficiency gains.
Blockchain and the IoT
Internet of Things
(IoT)
capabilities can be strategically applied to bridge the
physical and
the digital world, especially when it comes to feeding
reliable supply
chain information into the blockchain. A recent report by
Deloitte
underlines that the integration of IoT and blockchain
technologies
promises to transform the way different stakeholders in a
supply chain "capture,
communicate, and access
information on a secure, shared, and transparent platform".
IoT capabilities can
enhance
automation and precision within the blockchain network, making
sure
data is directly linked to materials and products throughout
the entire
supply chain. In other words, the combination of IoT and
blockchain
makes sure there is an accurate, unbiased connection between
data and
materials even as they are transformed, shipped, and processed
by
numerous stakeholders.
Sensors, electronic and
RFID
seals, tags, and DNA identification can be used to collect
data and
monitor objects as they move through the supply chain.
Concurrently, blockchain technology enables the authentication
of
collected data and creates a transparent, standardized, and
streamlined
platform accessible to all interested parties.
Industry Applications
Applying blockchain
technology to supply chain management can be particularly
beneficial
for certain industries in which access to provenance and
quality
information is critical. The following sections present
examples of
pioneering applications in the manufacturing, life sciences
and
pharmaceuticals, food and beverage, and defense industries.
Food
and
Beverage Industry
Supply chain visibility
and
accountability are particularly important for food and
beverage
companies, as they strive to maintain rigid food safety
standards, such
as those established by the Food Safety Modernization Act
(FSMA).
Ever more sophisticated and globalized supply chains make it
extremely
difficult for producers and retailers to guarantee product
provenance.
In fact, the complexity of food safety concerns has reached
unprecedented levels, with FDA regulated products coming into
the U.S.
from over 300 thousand facilities in 150 different
countries. Moreover, a growing number of consumers
require
reassurances of quality and proof of claims such as "healthy"
and "organic".
DLT ensures transparency
from
farm to table, facilitating the identification of
contamination sources
and enabling faster and more effective recall strategies. It
promises
to enable full digital traceability and authentication of food
and
beverage products, from suppliers to retailers and even
consumers.
Reduced wastage, lower operational costs, and greater consumer
trust
are other potential benefits.
In 2017, IBM partnered
with major
consumer packaged goods and food companies to apply blockchain
to the
food supply chain. The consortium assembles major industry
names, such
as Walmart, Nestle, Unilever, and Tyson, representing more
than half a
trillion dollars in annual sales. The goals are to improve
food safety
and ingredient transparency.
Powered by the IBM
Blockchain
Platform, IBM Food Trust aims to enhance visibility and
accountability
in the supply chain by creating a network of growers,
processors,
wholesalers, distributors, manufacturers, and retailers. By
unifying
supply chain data, the network fosters consistency and creates
a clear
audit trail in cases of tampering or contamination.
Walmart has been a
pioneer in
integrating blockchain into its food supply chain. In 2016,
the
retailer has initiated a pilot program with IBM, which focused
on
shipments of pork from China. The initiative was considered a
success
that reduced the time it took to access a product's tracking
information from nearly a week to a matter of seconds.
A growing number of
food-focused
blockchain startups are setting the pace for the development
and
implementation of supply chain solutions. Examples include
UK's
Provenance, with over 200 food businesses, as well as San
Francisco,
California-based Arc-Net, which focuses on food fraud, and
ripe.io,
which combines blockchain and the IoT to enable transparency
from farm
to fork.
Life
Sciences
and Pharmaceuticals
Blockchain technology
allows life
sciences and pharmaceuticals companies to monitor drugs from
development to healthcare providers and dispensaries, giving
access to
real-time information on drugs' status and location. The
technology
also facilitates compliance with growingly strict regulations,
including the European Union's Falsified Medicines Directive,
which
requires serialization of drug products for track-and-trace by
February
2019 and the US Drug Supply Chain Security Act from 2013,
which gives
the industry until 2023 to institute full, unit-level
track-and-trace
systems.
As the number and range
of
innovative therapies rise, the supply chain needs to keep up
with life
sciences advancements. Efficient and trust-worthy mechanisms
are key to
ensuring that the breakthroughs of medicine reach patients in
a secure,
timely, and appropriate way. Blockchain technology gives full
visibility into crucial information such as the provenance of
materials
and how the product was handled throughout the supply chain
(including
storage and transportation conditions, which can be crucial
for
specialty, cold chain logistics).
DLT promises to help
life
sciences and pharmaceutical companies overcome inefficiencies
and avoid
the risks that arise from exchanging information across
diverse
record-keeping ecosystems. Permissioned blockchain platforms
can be
strategically used to increase speed and foster trust within
life
sciences supply chains, making sure data can be shared while
allowing
for restrictive access to sensitive commercial information.
Besides,
product traceability can directly benefit patients,
considerably
reducing complications in cases of recall.
Blockchain technology
also
reduces the risks of counterfeits, which are a significant
threat to
public health. According to the World Health Organization, the
sale of
counterfeit drugs reached $75 billion in 2010. Leading global
logistics
company DHL and Accenture have developed a blockchain-based
serialization prototype to monitor pharmaceuticals across the
supply
chain. Lab-simulations have indicated that the technology
could process
over seven billion serial numbers and 1,500 transactions per
second.
Keith Turner, CIO at DHL Supply Chain points out that "by utilizing the inherent
irrefutability
within blockchain technologies, we can make great strides in
highlighting tampering, reducing the risk of counterfeits
and actually
saving lives."
Headquartered in Redwood
City,
California, Cryptowerk provides industry-specific,
blockchain-based
solutions targeted at pharmaceutical companies. By creating an
unalterable, tamperproof record of key events and data
throughout the
supply chain, Cryptowerk enables pharma companies to detect
when
counterfeit or inferior drugs enter the supply chain and
prevent those
components from ever making it to the retail shelf, ultimately
saving
money and lives.
Manufacturing
DLT ensures real-time
visibility
into the availability, location, and condition of supplies
thus
facilitating just-in-time planning and inventory management
tasks.
Manufacturing companies can utilize blockchain technology as a
means to
improve quality control, reduce wastage, and prevent
counterfeiting of
parts and materials.
Located in Loveland,
Ohio, Supply
Dynamics utilizes a combination of advanced technologies to
create a
digital thread across the distributed manufacturing supply
chain. The
SDX Multi-Enterprise Platform provides manufacturers
end-to-end
visibility and control over the raw materials and
off-the-shelf
components that flow into their outsourced assemblies and
parts. It
facilitates collaboration with sub-tier suppliers, enabling
manufacturers to monitor, influence, validate, and control raw
material
cost and compliance at all tiers of supply. Supply Dynamics
CEO Trevor
Stansbury predicts that "in
our
lifetimes we will see the frictionless, closed loop,
end-to-end supply
chain become a reality and blockchain will play an important
role in
that, especially when paired with machine learning, natural
language
processing (NLP), additive manufacturing and other IoT
devices. It's an
exciting time to be in manufacturing."
Founded in 2016, Sky
Republic
offers a private blockchain platform built from the ground up
to
synchronize manufacturing businesses at scale. Headquartered
in
Scottsdale, Arizona, the company combines the power of
blockchain,
smart contracts, enterprise middleware, and cloud approaches
to offer
workflow automation and visibility, real-time transaction
settlement
and compliance, digital asset management, as well as
interoperability
and data sharing. The Sky Platform enables continuous,
real-time access
to supply chain events, allowing companies to accurately
predict when
and in which conditions goods will arrive. Furthermore,
traceability
ensures that manufacturers know the detailed history of each
material,
making sure, for instance, that the metal they receive
contains the
right mixture of alloys.
Military
Mission-critical
companies within
the military and defense industry can greatly benefit from DLT
solutions, particularly as it simplifies compliance with rigid
government protocols and facilitates product traceability. The
National
Defense Authorization Act for fiscal year 2018 included a
provision
ordering the Department of Defense (DoD) to conduct a
comprehensive
study of blockchain, particularly in relation to
cybersecurity. Some
pioneering applications include the use of DLT to deliver
secure
messaging to deployed troops and for protecting the digital 3D
printing
supply chain for ships at sea or units in the field.
Estimated at nearly $100
billion,
DoD's inventory relies on the purchase of parts from a global
web of
sub-suppliers. Tracking and managing this multi-tier,
sophisticated
supply chain is a highly complex task with potentially serious
implications to the safety of troops and missions. Counterfeit
parts
and inferior components, for instance, can compromise system
performance, often requiring costly and time-consuming fixes.
Even though there are
concerns
regarding potential security breaches and DoD's sensitivity to
offshore
data, it is clear that blockchain technology could simplify
supply
chain management and enable more effective anti-counterfeit
measures.
Some companies within the military industry are already
experimenting
with blockchain. Lockheed Martin has been among the first US
defense
contractors to incorporate blockchain technology for supply
chain risk
management and other developmental processes. Working with
Virginia-based GuardTime Federal, the global security and
aerospace
company aims to create more efficient and assured offerings to
the
federal government, leveraging blockchain to address ever more
present
cyber-focused threats.
Similarly, worldwide
designer,
manufacturer, and integrator of precision control components
and
systems for high-performance military aircraft and missiles,
Moog Inc.
has partnered with the National Center for Manufacturing
Sciences to
explore and develop capabilities for a smart digital supply
chain. The
collaboration aims to apply Moog's blockchain-enabled
VeriPart®
solution to additive manufacturing, while allowing DoD to
assess
blockchain adaptability to mission-critical supply chain
processes,
particularly in creating a digital thread for 3D printed
components.
Challenges Ahead
Despite the major
potential
benefits it represents, blockchain-based supply chain
solutions are
still in their early days. Whether it will be successfully
implemented
on a large scale remains an open question that will require
extensive
research and experimentation, particularly when it comes to
six
practical concerns, as pointed out by a Supply Dynamics' white
paper:
I. Difficulties in dealing with material
goods versus
immaterial;
II. The complexity of the goods (necessecity
of
inspections and verification, value-added changes, etc.);
III. Numbers of tiers of supply;
IV. Difficulties in dealing with
unstructured data;
V. Uncertainty as to the advantages and
disadvantages
of open versus closed blockchain networks (considering the
specific
needs of different business operations); and,
VI. The issue of compatibility with existing
tools.
Even though early
adopters may
have to face these challenges, they are likely to be rewarded
by
getting a head start in what promises to be a revolutionary
technology.
This can be especially true if they take advantage of R&D
tax
credits to increase their chances of success in overcoming
these
obstacles.
Conclusion
Though initially
developed
to monitor digital transactions, the blockchain is making its
way into
the world of tangible goods. There is growing indication that
distributed ledger technology could be at the basis of
wide-ranging
innovation within the supply chain. With major potential gains
in
efficiency, transparency, and security, blockchain technology
promises
to fundamentally change supply chain management applications
especially
in highly competitive and strictly regulated industries, such
as food
and beverage, life sciences, and defense. Paired with IoT
capabilities,
DLT has the potential to enable a truly smart supply chain
that bridges
the physical and the digital worlds. As with any nascent
technology,
however, developing and implementing blockchain supply chain
solutions
require extensive research and experimentation. Companies
engaged in
such activities can benefit from R&D tax credits as they
step into
a new era of smart and secure supply chains.
