Digital Supply Chain Transformation toward Block chain Integration

Digital supply chain integration is becoming increasingly dynamic. Access to customer demand needs to be shared
effectively, and product and service deliveries must be tracked to provide visibility in the supply chain. Business
process integration is based on standards and reference architectures, which should offer end-to-end integration of
product data. Companies operating in supply chains establish process and data integration through the specialized
intermediate companies, whose role is to establish interoperability by mapping and integrating company- specific
data for various organizations and systems. This has typically caused high integration costs, and diffusion is slow.

DSC should offer companies competitive advantage: intermediates should offer fast integration; logistics partners
should offer visibility of deliveries, using tracking and tracing features; information and communication technology
(ICT) companies should develop cost-effective cloud solutions; and finance providers should offer working capital
through the transaction banking services.

In DSC transactions, organizations currently execute process and data integration through the trusted third parties,
most often through the trade finance services of banks. However, several advocates of block chain technology (BC)
have promised to change this [1] by minimizing unnecessary use of third party intermediaries. Advantageous
features of BC include a public ledger of transactions without transaction party identities, the use of public key
infrastructure (PKI) to notify counterparties about executable transactions and the concept of the smart contract. The
present article investigates how block chain technology might support digital supply chain integration. The main
research questions are i) how can we accelerate DSC integration and ii) how will block chain technology support
that integration?

Blockchain technology is regarded as a potential means of enhancing the security and cost effectiveness of DSC
transactions. In general, blockchain technology is used to establish integration over the internet and can be
understood as a many-to-many integration model, deployed in the public cloud to conduct secured transactions
rapidly and at low cost.

supply chain can be defined as a set of three or more entities (i.e., organizations or individuals) directly involved in
the upstream and downstream flows of products, services, finance, and/or information from a source to a customer.
This definition highlights the role of information flows between firms, especially at activity and business process
levels. It follows that effective integration between actors requires the integration of processes [4] and information
[5] in the supply chain.
Digital supply chains

The benefits of Digital supply chain (DSC) include cost-effectiveness of services and value-creating activities that
are advantageous to many actors in the ecosystem, including firms and their suppliers, employees and customers [2].
According to Mentzer et al. (p.4.) [3], a supply chain can be defined as a set of three or more entities (i.e.,
organizations or individuals) directly involved in the upstream and downstream flows of products, services, finance,
and/or information from a source to a customer. This definition highlights the role of information flows between
firms, especially at activity and business process levels. It follows that effective integration between actors requires
the integration of processes [4] and information [5] in the supply chain.

Other identified benefits of DSC include reduced product or service costs, creating competitive advantage and
barriers to competition, reduced supply chain lead times and increased flexibility in supply chain design [21].
Effectiveness of information sharing refers to how information brings new value to customers and supply chain
actors in terms of services, decision making, visibility and prediction. Here, the key capability is to deliver the right
information to the right people at the right time for decision-making purposes [22]. Previous research has
highlighted how information integration and service automation serve as important drivers of business value in
supply chains [23, 24, 21]) Additional value drivers include the systemic integration and bundling of information
about products and services to create additional value for customers [24].

There are four transformation requirements for digital business ecosystems, which constitute a foundation for
business and innovation development, and for the present research.

1) Business model development: Companies must develop strategies and business models that maximize
innovation and effectiveness in leveraging digitalization and supply chain integration services in their business
offerings.

2) Information model platforms: Appropriate information models are needed to collect, store and deliver
information in supply

3) Business process standards for supply chain connectivity: New competencies and solutions are needed for
the development of business process connectivity and standards. This relates to how trading partners in the supply
chain can be digitally connected to business process transactions.

4) Operator services for data transfer between actors: Integration channel intermediaries (e.g., operators) are
needed to transfer and integrate information across actors and systems.
The level of B2B integration and investment can be estimated by means of different models. The concept of
investment cost is based on three variables: a) integration volume, b) total amount of process integration and c)
volume of transactions. In terms of technology, standardization and service development,

B2B integration models are categorized as Manual operations, EDI, HUB and Cloud models. These integration
models are briefly described with the formula:

Manual transaction integration:

EDI B2B integration model (Point-to-point)

Hub B2B integration model (one-to-many);

Cloud B2B integration model (Many-to-Many):

The promoters of blockchain technology suggest that the underlying reason for security breaches is that the
identities of parties to the transactions (and especially of trusted third parties or banks) are known. It is argued that
because these data (including the bank account and security data of seller and buyer) form part of electronic
transactions, it makes sense to cyber criminals to break in and steal such data, no matter how secure information
systems are or how securely transactions are transmitted.

One of the key features of blockchain technology is that it maintains an open distributed ledger of transactions
without identifying parties to the transaction. In addition, the ledger is copied to all nodes of the network [1, 35]. If a
transaction is changed, a new block is created and chained to previous blocks. Ledger data between nodes of the
blockchain network are matched at random intervals (every ten minutes on average).

Although some advocates of blockchain technology strongly commend the ability to avoid trusted third party
intermediaries, this is not entirely necessary. Using a smart contract, the seller and buyer can mandate a trusted
intermediary to “supervise” the execution of a transaction as in trade finance services. As part of a smart contract,
the parties may even agree that the trusted third party receives necessary security key(s) to perform its role. Clearly,
this is unnecessary in the context of direct exchange of documents between two organizations, whether at physical
or IoT document level.

In summary, blockchain technology appears capable of providing security and flexibility at lower cost than
traditional transactions. On the other hand, blockchain technology cannot meet the need for standardization of
electronic supply chain documents; international document standards must be relied on for that purpose, probably
requiring their further development to ensure fully automated transfer of documents between organizations. It should
then be possible to use blockchain to execute transactions and document exchange quickly, reliably and at low cost.

31 business managers created 85 ideas related to digital supply chain integration. Focus group activities are
summarized in Table 1.

Table 1. Data collection during focus groups (2014–2016)

Based on the interviews with blockchain technology experts and on the literature review, functionalities could be
summarized as four vertical activities within the DBE framework:

1) transaction data; 2) processing ledger or smart contract; 3) storing blocks to peer-to-peer networks; and 4)
managing blocks by mining experts. Blockchain design principles and functionalities are illustrated in Figure 1.
Figure 1. Blockchain design principles and functionalities in the DBE framework.

In the first phase, to understand the current stage of supply chain integration, we arranged a focus group meeting
with 18 highly experienced business managers. During the session, we first asked the participants to list their
ideas about the requirements for supply chain integration, which yielded 41 specific

requirements. These requirements were then prioritized by participants on a 7-point Likert scale. In the second
phase, participants generated ideas about how these supply chain requirements should inform the design of
system functionalities. These functionalities were also prioritized by participants as illustrated in Table 2.

Table 2. Examples of metrics of sc-importance, sc- readiness and QFD valuation of blockchain readiness

Analyzing and combining the results of supply chain and blockchain functionalities into the same scale, we were
able to illustrate the current gap between perceived importance of supply chain integration and supply chain and
blockchain readiness, as illustrated in Figure 2 by the 20 most important functionalities.
Figure 2. Perceived importance of DSC integration and current supply chain and blockchain readiness.

Utilizing the QFD method for analysis of the total effect of blockchain functionalities produced
interesting results as shown in Figure 3.
 Figure 3. Blockchain functionality results from QFD analysis.

These were linked to blockchain functionalities, and QFD was then used to identify which BC functionalities
related to each idea. The prioritized illustration is shown in Figure 4.

Figure 4. Blockchain ideas for supply chain integration from QFD analysis.
 In general, blockchain system security and privacy by digital signature was a high priority. Contracting was
also seen as an important new functionality. From a business perspective by the focus group, the blockchain is
seen as a service for delivering both business transactions and IoT transactions. However, the fundamental issue
of a supply chain data model for integration needs to be adjusted in common ground.
The views of DSC stakeholders can be summarized as follows. Big organizations often use ERP systems as a
private cloud. Suppliers are often SMEs, and they are now beginning to use cost-effective cloud services. For
intermediates, blockchain technology offers a public cloud model that can improve current business but also
enables new agile start-ups to enter the market. Combining the long-term results of the study, if a data model
could be agreed and adjusted for both B2B transactions and M2M IoT transactions, the above combination of
cloud integrations can build this disruptive technology into a DSC.

For a number of industry sectors (retail, auto, electronic, aviation, chemical), digitalization of supply networks has
been an important issue for more than two decades, but this concern is not shared across other industries.

By analysing the business requirements and the current readiness of integration there seemed to be a significant gap
in many functionalities. This was an interesting finding, as intermediates (EDI operators) including banks (SWIFT
operators) have been operating and collaborating in this area over two decades, but services still lack some
fundamental functionalities (e.g., standards, timestamping of transactions, monitoring and tracking of information
flows and secure end-to-end delivery of information). An analysis showed many of these missing functionalities to
be embedded in blockchain technology.

intermediate services, seems a very promising blockchain functionality for integrating (B2B) business and (M2M)
IoT transactions. Data-encrypting private and public keys enable secure data transfer and digital signatures for smart
contracting. However, DSC integration requires standards for system interoperability, which blockchain technology
itself does not offer.