Originally published on IBM’s Insights on Business blog
By Quentin Samelson, Sr. Managing Consultant, Electronics Center of Competence at IBM
When you’re first exposed to blockchain technology, one question that comes up is where and how to apply it. The answer is often a variation of this phrase: “Blockchain excels at solving issues with ‘high-friction,’ multi-party processes where there is a lack of trust.”
The Electronics Manufacturing Services (EMS) industry would appear to check all of those boxes. EMS providers are inserted in their customers’ supply chains (between their parts suppliers and their distribution system), which means their processes are often multi-party (supplier, EMS, and customer plus logistics companies). That often upsets existing relationships, creating a lack of trust and causing friction in the business processes between those parties.
Blockchain technology would appear to be a perfect fit for the EMS industry, and experience seems to confirm this: In 2017 we began to see a high level of interest in blockchain, both from EMS providers themselves and from their customers. We also began to see the first proofs of concept and pilot applications developed. In 2018 I expect the number of new applications to grow, and we should begin to see some of those initial PoCs and pilots turn into production blockchain networks.
So how can blockchain be used to solve problems within the EMS industry? And who (the EMS or the OEM) should sponsor blockchain projects? The answer to those questions depends on who benefits the most, but the obvious answer isn’t necessarily the only option. To be sure, some opportunities may primarily benefit one company (which would normally make them the sponsor of the project). But some issues that are mainly experienced by OEMs may be better solved by the EMS on behalf of multiple customers, instead of just one. In those cases, the EMS may find that their OEM customers may even be willing to pay for a well-considered solution.
The nature of the relationship can have an impact as well. Our mental image of EMS providers may be high-volume manufacturing lines churning out millions of consumer electronic products, but some OEMs utilize external manufacturing to build low-volume/ high value products; others ask their EMS partners to configure or even design to order; and some EMS providers provide extended supply chain services, going as far as to handle their OEM customers’ own customer fulfillment operations.
An EMS may sponsor internal blockchain projects to take cost out of their own operations or improve performance in some way. Some potential examples include:
- Using blockchain with less sophisticated component suppliers (or with suppliers in less developed regions) as a secure mechanism to manage the entire purchase order & response/ shipment, invoice & payment process – including not only the suppliers but also their financial institutions.
- Using blockchain to build a trade finance process with its financial partners. EMS providers often operate with limited working capital. They may use innovative ways to maximize their access to cash – but those innovative ways almost always are (currently) built on manual, time-consuming and expensive processes. Blockchain can automate those processes and make it easier (and cheaper) to access critical working capital.
- Using blockchain to monitor and manage the inbound (and outbound) flow of materials and finished goods. This is truly mission-critical to EMS companies. Knowing when a crucial shipment of components will arrive at a manufacturing site is essential, as is being able to provide valid delivery dates for customers’ finished products. For inbound use, it’s even possible to build a time-stamped electronic Kanban process.
On the other hand, an EMS’s OEM customer may be motivated to solve different problems using blockchain technology:
- Blockchain can be used to provide critical data on the quality of an inbound shipment from the EMS to the OEM, so that the OEM can assess and pre-approve the shipment before it arrives. That can help to improve quality (by giving the quality department enough time to do a full review of the data), as well as reduce cycle time when the product arrives on site. This is especially important during the initial weeks of production. A tool like this can even be used to improve processes when the product is handled by another third party (for instance, a 3PL-managed distribution center) instead of directly by the OEM.
- Although EMS providers purchase many components in higher volumes than their OEM customers (and therefore often have stronger relationships with the component suppliers), there are often some suppliers which would rather work with the OEM than the EMS. Those suppliers may offer lower prices, and may be more willing to accommodate scheduling changes, when they deal direct with the OEM. Using blockchain technology to implement a virtual buy/sell process permits the physical supply chain (from component supplier to EMS facility to OEM) to be separated from the financial flow (from component supplier to OEM, potentially to the EMS and back again). This can be a win-win-win: the component supplier and the OEM preserve their strong relationship, while the physical flow is streamlined and efficient.
- Blockchain can be used as a secure delivery mechanism for sensitive data – data that may need to be incorporated into products manufactured at an EMS. (Examples may include proprietary software, private ‘keys,’ etc.) Not only does blockchain offer advanced security, but it time-stamps each transaction and its smart contract feature can be configured to optimize both security aspects and manufacturing flow.
Finally, farsighted EMS companies may find that they can offer “blockchain applications as a service” to multiple customers, if they build applications designed to solve common problems among companies that utilize external manufacturing. Some ideas here include:
- Providing “Transparency” – extensive and up-to-the minute visibility of exactly what quantities of finished products are available, and where, from the EMS facility through the transportation and logistics process, all the way to the OEM’s distribution network or even to the OEM’s own customers. This can provide real value to OEMs. An OEM can’t “sell what they have” if they don’t know what they have.
- Providing detailed provenance of the components that go into an OEM’s product, so that the OEM can (a) ensure compliance with laws and regulations (ROHS, for example); and (b) minimize the cost of any recalls, if it turns out that a particular lot code of a component, from a specific supplier, had a problem of some kind.
- Providing greatly improved coordination on such aspects as engineering change notices (ECNs) and Demand Forecasts. Using blockchain processes (possibly in combination with existing EDI or RosettaNet processes), including the smart contract feature, can ensure that the OEM and the EMS stay ‘in sync’ with each other, while still permitting the EMS facility to operate as efficiently as possible.
- Going beyond coordination on ECNs, blockchain can also provide a mechanism to coordinate design-to-order and configure-to-order processes between OEM and EMS. Increasingly, EMS providers are supporting their OEM customers with processes to build custom products, down to single-unit lot sizes. This requires a much higher level of coordination (and a sort of ongoing synchronization), which blockchain excels at.
Not only does Blockchain technology offer a good conceptual fit to the EMS industry, but it also is a good match to this industry’s frequently risk-averse approach to investment. A new blockchain project doesn’t require a big up-front commitment. A proof of concept or even a small pilot project can be executed quickly (a matter of a few months) and at minimal cost, providing the sponsoring company with the opportunity to get hands-on experience with the application before every step of the process has been finalized, and before the User Interface has been fully designed. This agile methodology lets companies quickly take a good idea to execution, then refine and iterate it until it is finally ready for full production.
 High-friction is used as a way to summarize all the ways that business processes may be unsatisfactory – too time-consuming, resource-intense, expensive, slow, frustrating, etc. – often because they rely too much on manual process steps, require numerous inspections, have to be redone because of varying information standards, or due to other issues.
 There’s generally no need to use Blockchain to replace a well-functioning, existing EDI or RosettaNet-based process; but if none exists, Blockchain can provide a cost-effective way to automate the entire PO to Invoice process with suppliers.