Adopting Blockchain to Set Industry Standards and Drive Collaboration

Adopting Blockchain to Set Industry Standards and Drive Collaboration

Written by Rajat Agrawal, (Platinum Consultant, SAP America) and Rahul Ranjan (Senior Consultant, SAP America)

With all the hype and expectations, blockchain technology for multi-enterprise collaboration is still in its innovation stage. Researchers are working quietly and productively on the various aspects of this technology. One such initiative is Hyperledger Fabric, based on Hyperledger platform started by the Linux Foundation in 2015. Hyperledger Fabric provides distributed ledger with essential characteristics which are necessary for enterprise use.

SAP is a key member in this initiative and has launched Hyperledger Fabric on SAP Cloud Platform. The launch brings the possibility for SAP customers to explore ongoing developments and evaluate the potential of Hyperledger Fabric platform for pragmatic use cases. As organizations are looking beyond enterprise boundary to connect entire value chain for competitive advantage, they are realizing limitations of EDI. This will keep bringing technologies like de-centralized distributed ledger, smart contracts (chain code) into focus to drive cross-company automation and collaboration. With some experimentation, application of Hyperledger Fabric can provide a secure and trusted platform for further optimization. It is predicted that success of such unique use cases will expand the scope and bring roll out of additional use cases driving increased adoption.

EDI and limitations – A common scenario

Manufacturing scenarios include procurement of raw and semi-finished materials from different vendors followed by manufacturing operations, third-party storage and associated transportation. Let us review one such process to understand how few underlying transactions multiply and propagate across multiple organizations. The multitude of these transactions result in transactional overhead and delay in individual contract settlement.

Manufacturing logistics scenario
Figure 1: Logistics Scenario

In this scenario a vendor processing plant (company A) moves semi-finished product in bulk to an end-product manufacturing unit (Company B). The final product is moved to a third-party service provider (company C) where inventory is managed and sold to customers of company B. Stock movement involves transportation and the freight contract is with a transportation company (Company D). The transportation company acts as an aggregator and relays the individual shipments to different trucking companies to supply the trucks.

The interaction in this scenario is typically based on several Electronic Data Interchange (EDI) messages, a common framework for electronic communication between businesses. The connection is partner to partner and designed for each paper transaction between different organization pairs. Each EDI message is independent and despite all the popularity, the use of EDI does not provide visibility into the entire supply chain. The architecture is always filled with additional integration opportunities and pain points. Key improvement topics in the highlighted scenario are:

  • Payment terms – For the stock move from processing plant to tolling unit, freight is paid after verification to transportation company first. Subsequently the transportation company makes the payment as per its contract to the trucking company which placed the truck. This cycle takes more than a month for settlement amount to reach the trucking company that incurred the transportation expense. Similarly, payments are made on a monthly cycle after the transactions are reconciled to tolling unit and warehousing service provider. Automation of payment chain with trusted underlying transactions can significantly cut down the lag in payment cycle.
  • Inventory reconciliation – Inventory is reconciled for product between the inventory management system of processing unit, tolling unit and warehousing service provider. A manual exercise at month end which can involve a lot of effort on each side. A connected process chain across organizations can automate this key exercise and provide insights to improve inventory management.
  • Invoice Matching – The chain of transactions lead to a pile of invoices to be reconciled with underlying transactions. A largely manual exercise involving workflows and reviews before an approval is set to make the payment.
  • Process Agility – Lack of synchronization leaves the co-ordination manual filled with administrative overheads and failure points. An end to end connected process chain provides flexibility in dealing with frequent changes and improves response time. It reduces errors and associated delays – a key differentiator in customer service.

Hyperledger Fabric on SAP Cloud Platform

Hyperledger Fabric was conceived to provide the foundation for enterprise to enterprise data processing. The services on this open source platform come with a modular architecture and provide secure and trusted communication which is a key characteristic for enterprise use.  The goal is to provide a single source of truth across enterprises – a key weakness highlighted in the above process.

Hyperledger Fabric platform provides the ability to define and build networks catering to the needs of a specific process. The architecture allows for scalability in the same manner it was built originally, via peer nodes. Peer nodes can be provisioned on SAP Cloud Platform or any other cloud platform of choice to drive collaboration and build further on top of it. The benefit with SAP Cloud Platform is that it provides services to replicate blockchain data from and to SAP HANA database. This provides seamless information for analytics with data inclusive of internal and blockchain transactions.

Scenario with Hyperledger Fabric

Let us review the logistics scenario described earlier. There are seven organizations involved and below picture depicts a network view of the consortium and the transaction flow among all these parties.

A network view of the consortium and the transaction flow.

Every transaction that is crossing an organization is making an entry into the distributed ledger, which becomes a permanent ledger record. The distributed ledger in such scenarios is de-centralized and each member on the network is pre-authorized and validates the applicable transactions on the network via consensus protocol.

The architecture model to map this scenario and interactions in the process lifecycle between the consortia of companies based on Hyperledger Fabric is represented below:

Architecture model based on Hyperledger Fabric

A logistics channel largely representing the product flow across the consortia is the main channel in this scenario. Accounting interactions based on pre-defined rules and agreements, also known as smart contracts or chain code are represented on a private channel. This channel holds sensitive and private information for a subset of organizations, e.g. pricing information for the transaction, tariff rates and product details. Another network is the tendering channel which is used by the transportation company to bid on the routes for product movement. It engages the various freight providers and is used to privately share bidding, tendering and settlement information.   

The process begins with a manufacturing company placing an order with the vendor company. The order details are transmitted via logistics channel. The detailed information is encrypted and is shared using a secured digital certificate signed with a private key. This information is available only to vendor company which decrypts the received information using a public key. The vendor company in turn provides the acknowledgement and confirms the availability and estimated delivery date via the same logistics channel using its own digital certificate. This information will be available only to the manufacturing company and transportation company. The transportation company processes the details and transmits it to a tendering channel which is a different network. In this network, the various truck providers submit their bids and vehicle availability for each published route. Once the truck provider is confirmed on this channel, the transportation company submits this information back onto the logistics channel to inform the vendor company and the manufacturing company about the transportation detail.

In this scenario, the vendor company is responsible for the transportation to the manufacturing plant. As soon as the shipment is delivered and shipment confirmation is provided on the logistics channel by the manufacturing plant, it is verified by the vendor and trucking company. The trucking company may do so by first confirming it in the tendering channel so that it can be validated by all the concerned parties to become a part of immutable ledger. This is a key verification step which provides the potential for automated settlement on different channels. The logistics channel will execute the settlement for the product received via chain code. Similarly, the transportation and the vendor company will also execute their chain code to settle the freight charges. The process also extends to the tendering channel where a different chain code is processed to settle the truck charges between the tendering company and truck provider.

Integration capability with S/4HANA

Integration of each of these transactions with the blockchain network can be developed by SAP Cloud Platform Blockchain service. The service directly replicates the individual transaction information from SAP S/4HANA (Cloud or on-premise) to the blockchain network. This accelerates the development and minimizes the effort involved.

In case, a different cloud platform is utilized, and replication capability is not available, existing EDI based communications can be leveraged to connect with the blockchain network. However, such point to point communication brings in a non-standard approach thereby an additional development overhead. Reporting requirements are not addressed with this approach and additional services need to be built to extract data from the blockchain network.

Blockchain use case identification

Organizations evaluate their processes periodically, particularly as it relates to maintaining competitive advantage in the marketplace. Process improvements that involve interaction between multiple organizations become early candidates for building a blockchain platform. Volume of transactions, complexity of process and automation benefits are some of the key criteria to further shortlist the ideas and identify a viable candidate.

SAP Cloud Platform Blockchain service allows development of blockchain scenarios. The development leverages Hyperledger Fabric capability to map with the process requirement and build a blockchain which is integrated with SAP S4 HANA (Cloud or on-premise) landscape. Some amount of experimentation will be required as new business models and standards are built with this service. The capability in this space is really catching up for organizations to build prototypes, develop further and take it to realization phase.

Leave a Reply