IN
DEGREE PROJECT INDUSTRIAL ENGINEERING AND MANAGEMENT,
SECOND CYCLE, 30 CREDITS ,
STOCKHOLM SWEDEN 2018
Potential of Smart Contract
in Business to Business
AVINASH VATTIKUTTI
KTH ROYAL INSTITUTE OF TECHNOLOGY
Potential of Smart Contract in Business to Business
by
Avinash Vattikutti
Master of Science Thesis TRITA-ITM-EX 2018:716 KTH Industrial Engineering and Management
Master of Science Thesis TRITA-ITM-EX 2018:716
Potential of Smart Contract in Business to
Business
AVINASH VATTIKUTTI Approved 2018-10-23 Examiner Jannis Angelis Supervisor Luca Urciuoli Commissioner SCANIA Contact personJoão Dias Ferreira
Abstract
The implementation of smart contract technology with their plausible applications in a business to business are explored. The thesis work shows how Blockchain technology works on the concept of decentralized system which is beneficial to eliminate the need for central authority. The thesis focuses on elimination of challenges pertaining to the selected departments in an organization. The thesis resolves challenges pertaining to lack of transparency, traceability and significant time-delays while in the process of decision making. The influence of blockchain technology and smart contract technology to eliminate these challenges are discussed. Logic of the smart contract and working of the blockchain pertaining to a specific industrial case study are demonstrated. Methodology to set up a smart contract interface in a business to business setting is investigated in this thesis. An observation study has been done in order to show how transparency, traceability and time delay in decision making is achieved by using smart contract interface. This thesis also shows how the blockchain and smart contract technology tries to implement coordination theory.
Acknowledgement
To Luca Urciuoli, my thesis supervisor, for his extreme motivation and guidance in each and every step of the way. Without his support, expertise and extreme patience, this thesis would not have been possible. I could not have imagined having a better supervisor for my thesis study.
To João Dias Ferreira, my company supervisor, for his guidance in each and every stage in the research. Without his support, this thesis would not have been possible.
To Jannis Angelis, my thesis examiner, for his guidance helped me in all the time of research and writing of this thesis.
Table of Contents
1.0 Introduction ...1 1.1 Research Background ...1 1.2 Problematization ...2 1.3 Research Purpose ...3 1.4 Research Questions ...3 1.5 Delimitations ...3 1.6 Contribution ...4 2.0 Literature review ...5 2.1 Information Sharing ...52.2 Distributed Ledger technology ...6
2.2.1 Blockchain Platform ...7
2.2.2 Smart Contract ... 12
2.3 Supply Chain Management ... 17
2.4 Supply Chain Coordination ... 17
2.4.1 Transparency ... 18 2.4.2 Traceability... 19 2.4.3 Time delay ... 20 2.5 Literature Framework ... 20 3.0 Method ... 22 3.1 Research Approach ... 22 3.2 Research Method ... 22 3.3 Data Gathering... 23 3.3.1 Literature Review ... 23 3.3.2 Interviews ... 23
3.4 Steps to create smart contract Interface ... 24
3.5 Research Ethics ... 25
4.0 Problem Description ... 26
4.1 Implementation ... 27
4.2 Result from the smart contract interface ... 29
4.2.1 Observation on transparency ... 29
4.2.2 Observation on traceability ... 30
4.2.3 Observation on time delay ... 31
5.0 Discussion ... 33
6.0 Conclusion ... 36
7.0 References ... 38
Appendix 1: ... 43
List of Figures
Figure 1: Framework for Blockchain analysis (Brenig, 2016) ...7
Figure 2: Centralized, de-Centralized and distributed network comparison (Morabito, 2017 ...8
Figure 3: Blockchain visualization (Zheng et al., 2016) ...9
Figure 4: Matrix to plot data access and writing/validation restriction (own representation) .. 11
Figure 5: Elements of smart-contract technology (own representation) ... 15
Figure 6: Simplified block structure in Ethereum blockchain (own representation) ... 16
Figure 7: Framework for literature review (Own representation) ... 20
Figure 8: Research approach (own representation) ... 22
Figure 9: Steps for developing smart contract interface (own representation) ... 24
Figure 10: Asset flow and Information flow between departments ... 26
Figure 11: Data for creating smart contract interface(own representation) ... 27
Figure 12: Generation of new blocks and connection of blocks in represented in Sequence Diagram(Own representation) ... 28
Figure 13: Input conditions for generating Block (Own representation) ... 28
Figure 15: Input conditions for generating Block (Own representation) ... 29
Figure 16: Input conditions for generating Block (Own representation) ... 30
Figure 17: Input conditions for generating Block (Own representation) ... 30
Figure 18: Traceability of asset before implementation of smart contract (Own representation) ... 30
Figure 19: Traceability of asset after implementation of smart contract (Own representation) ... 31
Figure 20: Notification in the smart contract interface ... 32
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1.0 Introduction
Every business in the modern era is highly dynamic and competitive. To stay ahead of other competitors, companies demand continuous innovation in their strategies on various aspects. This continuous process of improvement is driven by the introduction of new technologies to solve perennial management problems. Problems are broadly classified purely as managerial and strategic issues which hamper the available productivity and reduce the efficiency of the overall system.
At present organizations around the world widely use ERP (Enterprise Resource Planning) to store data in a centralized system. Data can be fetched from the centralized system such that every stakeholder in the organization can access it. But often in big companies due to reasons pertaining to lack of communication, transparency, traceability and time delay in planning and scheduling, the ERP platform poses threat to proper functioning of routine tasks.
In order to counter these demerits of ERP new technologies have to be tried out. One meaningful way to mitigate such problems is to use smart contract. As described by Nick Szabo in 1996, “a smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises” (Nick, 1996). The relevance of Blockchain technology is probed by improvement in areas such as tracking of asset, traceability of asset and making the manufacturing business processes more secure and transparent. As per one of the definitions, “In essence, Blockchain is a technology for decentralized storage of transactional data. The storage of a transaction is organized in so-called blocks, while following transactions are stored in new blocks. The sum of several blocks makes up a chain; a logical sequence of transactions” (Nick, 1996). As far as supply chain management is concerned, Blockchain technology is potentially poised to play a crucial role in three aspects: first is traceability, second is smart contracts and third is safe transactions. Creating a consistent network for traceability of assets will remain a major objective. Moreover, to achieve transparent and reliable documentation of all movements and transactions, communication in operations management must be matured as lack of cross functional coordination is one of the biggest issues faced in currently implemented ERP systems. (Gopaul et al., 2016).
1.1 Research Background
Given the advantages of Smart contract, its implementation in operations management is poised to be disruptive (Erik, 2018) since it is relatively new. It is important to take a step-wise approach towards the validation of such technology before its implementation on a day-to-day basis in a business context. Therefore before implementing it on a big network, it is essential to develop a concept and validate it on a small scale.
At Scania, Södertälje three different departments namely, machining, assembly and logistics function in the production of an automotive engine component are considered to implement Smart Contract to their day to day business affairs. Throughout the asset flow, there are several stakeholders who are involved right from the supplier where the raw material is produced until the logistics which delivers the product to the end user. In the current study, when it comes to addressing issues related to traceability, time delay in decision making and planning; and transparency among the three departments the smart contract is implemented.
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identify the problems that do not allow streamlining of the information and asset flow. The identified issue in an ERP system are transparency, traceability and time delay in planning and scheduling. Moreover, once the issues have been identified the use of Smart contract to resolve the gaps are to be explored. Pertaining to this thesis, a Smart contract can be used to establish a set of rules and protocols that nullifies the operational limitations of the involved units (departments) by real time validation and verification of data. Thus, implementation of a smart contract interface that quickens the communication and has the potential to boost productivity is an interesting area to probe in. Instead of analyzing business to customer relationship, here the Smart contract are to be implemented in a business to business setting. The departments of interest can be considered as a partial link of a big supply chain network.
The most important area of focus here is real time access to data as well as control of the shared data and immutability of data. Moreover, this enables transparency and traceability of information among the involved departments. This is because, a transparent association offers information in a way that the responsible stakeholders can obtain a profound insight into the problems that are substantial for them (Maitri, 2010). When it comes to importance of transparency in operations management, some critical business issues like production performance can be evaluated without any hassle (Meuwissen et al., 2003). If the system is transparent then it is easier to narrow down to the problems that affect the business performance and profitability. The performance and profitability are directly attached to the KPI (Key Performance Indicators). An increase in the KPI highlights better profitability and performance (Maitri, 2010).
1.2 Problematization
The organization of interest have problems with tracking of asset flow and sharing of information related to the asset which need to be investigated. Upon collection of information about the issue, the problems that the three departments, logistics, machining and assembly, were facing could be classified in three different categories:
Transparency – despite collecting data and tagging the assets with identification like barcode, it is difficult to get the details of the stakeholders involved in handling the asset, because the barcode is only there to connect the component to information on a system and in this system the information might not be complete. Moreover, it is easy to know where and how a problem has occurred. This is possible only when all the involved stake holders have access to information for monitoring, while only the authoritative personnel have the designation to modify or approve it. To create such an open platform for information sharing, the information is to be decentralized so that everyone who is authorized to get the information can access it.
Traceability – due to various reason like quality rejections and producing different variants of products, etc. manufacturing businesses are often unable to trace where exactly the problem arose. By the time the problem is traced back to its origin a lot of time and effort is already lost. Moreover, in complex manufacturing setting as the one that has been analysed in this study, tracing an anomaly is quite challenging. To improve traceability and avoid production or delivery of unwanted asset a platform that connects all the important nodes of the material flow for a given asset is needed.
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operations management authority in running the business more efficiently. It is not only about making quicker decisions but making decisions based on actual information. This will improve the decision making since better decisions can be made when we know better the state of things.
A suitable technology which could mitigate these problems need to be implemented therefore enabling streamlined flow of information across all departments.
1.3 Research Purpose
The purpose of this thesis is to see the potential of Smart contract technology in addressing the problems stated in the problematization. The potential of Smart contract is to be assessed, considering the domain as three departments (Assembly, Machining and logistic) at Scania, Södertälje.
Since the departments like logistic, machining and assembly have different technical roles and different information requirements, it is important to provide a solution that resolves the issues separately and bring the departments on the same platform as far as the information sharing is concerned. Therefore, the objective is to device a software solution that allows access to important information (attached to the asset like product identification number) that tracks information from the order to delivery and contains the important parameters of time delay. Access to these information in and across the logistic, machining and assembly departments in an organized way is to be presented by the Smart contract interface.
1.4 Research Questions
The research purpose will be accomplished by answering the following research question: The first question is related to creating smart contract interface
What type of contractual agreements (conditions) between the departments are considered for creating smart contract interface?
The next two questions is related to how smart contract interface will achieve the problems
How are smart contract used to bring transparency and asset traceability across departments in a business to business setting?
How are smart contract used to share asset information that improves the decision making and planning procedure across departments in a business to business setting?
1.5 Delimitations
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thesis but allows the possibility to explore the intricacies of Blockchain and smart contracts in depth. The interface has not been implemented and tested on actual asset flow in the department rather, the interface was tested virtually with manual input of data from different nodes (different computers). This was done to avoid the purchase of new sensors and systems which would have incurred costs. In order to avoid breach of privacy and legal scenarios, information which was identified as personal or sensitive for the company has been excluded from the trials of the interface. The author made the decision to focus only on the technical solution which is based on Blockchain technology, this is because scholars believe it to be of great potential in the future.
1.6 Contribution
The main contributions of this thesis can be characterised as empirical and analytical. Empirical in a way that the thesis work has concluded to a profound technological and business recommendation. Analytical in a way that the results this thesis has produced are analytical and are based on empirical findings.
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2.0 Literature review
The focus of the literature review is justified by the purpose and research objectives. The main focus of this chapter is to provide insightful details and analyses that have been done by previously conducted researches in the subject.
2.1 Information Sharing
For a proper function of supply chain operations and planning, a comprehensive information system is required which initiates, monitors, assists in decision making and reports. For forming an integrated information system many components are to be combined. The major components include:
Enterprise Resource Planning (ERP)
Material Requirements Planning (MRP)
Enterprise resource planning (ERP)
The ERP systems are also known as legacy systems and comprise the backbone of supply chain information systems for most of the organizations. These systems hold the current and past data as well as the transactions pertaining to the processes which enable initiating and tracking of performance. Legacy systems are the main frame applications which were developed before 1990 for automation of transactions like order entry, order processing, warehouse operations, inventory management, transportation and the financial transaction that are related to the department. For example, the systems labelled as Order Management Systems (OMS) were the ones that were related to customer orders, this is because these systems managed the process of order fulfilment. In Addition to the order information, legacy systems also manage information about customers, products, status of inventory and facility operations. In majority of the cases, these legacy systems represented software modules which were developed independently, hence they lacked consistency and integration. Thus, leading to problem of integrity and data reliability.
ERP systems allowed integration of operations and initiation of reporting, monitoring and tracking of critical activities like replenishment and fulfilment of processing. Moreover, the ERP systems also incorporated an integrated corporate-wide database which was also referred as a data warehouse, which along with the appropriate transactions facilitated logistics and supply chain operations. Typical transactions comprised of order entry and fulfilment, procurement or purchasing and transactions pertaining to production.
Communication system, execution system and planning systems are working close with the ERP.
Communication Systems
The flow of information between functional groups within a firm and amongst the supply chain partners was facilitated by the communication module. The logistic information consists of real time data about operations of the company, inbound material flow, and status of production, inventory, customer shipments and a record of the incoming orders.
Execution Systems
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storage, shipping and the warehouse automation, Warehouse Management Systems (WMS) also included reporting for management, value added services support and decision capability.
Planning Systems
Supply chain planning systems are now called as Advanced Planning and Scheduling (APS) systems, these are developed to support in evaluation of supply chain alternatives and advice the supply chain in decision making. The use of sophisticated supply chain planning systems is increasing rapidly to allow for considering complex alternatives especially under tight decision time constraints. General supply chain planning applications comprise of activities like production scheduling, inventory resource planning and transportation planning. The APS software systematically identifies and evaluates alternative courses of actions and proposes an optimal solution that follows the imposed constrains. The decision making and proposing by the APS is done based on the previously maintained and acquired data. The constraints that generally are involved in the system are related to production, facility, transportation, inventory, or raw material limitations.
Material Requirements Planning (MRP)
Material requirements planning (MRP) originates at the sales department with the planning of sales. This plan allows the management to estimate the volume that they think is to be sold in the following months or years to come. Then the comparison is made between the sales plan and the available finished product stock which yields the volume to be produced. The information from this calculation acts as an input for the manufacturing planning and control systems. This input information can be distinguished in the following elements:
Master planning
Manufacturing resources planning
Master production scheduling
General capacity testing
Material requirement planning
Capacity requirements planning
Order release
Priority management
Capacity Management
2.2 Distributed Ledger technology
According to Goel (2016), the main four fundamental features are required to create the distributed ledger technologies. Firstly, the distributed nature of technology is completely independent and of third party intermediaries. Secondly, the cryptographic hashing creates consensus mechanism in which transactions are verified. Thirdly, “the irreversibility” of the transaction history, enabled by a proofing process. Lastly, the selection between permissioned and permission less ledger, which defines much of the privacy.
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components and functions. In this chapter the vision that is pursued with this technology is described along with the prerequisites that must be fulfilled. There are many ways in which the blockchain technology can be implemented and hence a fully-explanatory explanation cannot be made.
The technology described in this chapter is based on the blockchain technology behind Bitcoin blockchain, which in other words is the basis for the explanation of a Smart-contract in the blockchain applications. A technological framework that will work as a base to understand following chapters of this research project is shown in Figure 1. The description of technology is shaped as per the framework provided by Brenig et al. (2016).
Figure 1: Framework for Blockchain analysis (Brenig, 2016)
Blockchain Platform: According to Brenig et al. (2016) A Blockchain platform is identified as a Decentralized consensus system. In market, there are different standards for Blockchain technology. For example, the technologies working as the backbone of Bitcoin introduces some standards, Ethereum introduces standards but it is different from Bitcoin standards and they both represent different platforms, even if they are decentralized consensus system.
2.2.1 Blockchain Platform
This section is aimed at providing a comprehensive definition for Blockchain platform. This is done by analysing the critical building blocks that composes the Blockchain. According to Mougayar (2016), the Blockchain platform can be recognized as the protocol of the Blockchain technology, which is the fundamental basis for the other two layers, which are called as applications and services. Blockchain primarily consists of a skeleton that works as the technical backbone of applications like Bitcoin and Ethereum.
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in a peer-to-peer (P2P) communication network. The access to the network is based on a permission mechanism, which enables the nodes to perform transactions that hold validity based on a consensus mechanism.” (Glaser, 2017)
The following paragraphs provide a complete description of the technical building blocks behind the interface of the Blockchain platform. The main aim of the subsequent sections is to provide an overview of the technical characteristics behind the present and the future potential market applications.
The top - down approach is followed for the description of structure of Blockchain platform. Which starts by describing the network structure. Secondly, after the analysis of the ledger architecture it will be disintegrated into blocks and transactions. Thirdly, a general understanding on the Blockchain working procedure will be presented by the transaction mechanism. Fourthly, the definition of permission mechanism will be established. Finally, the description of various consensus mechanisms will be done.
2.2.1.1 The Network Architecture
According to Swan (2015), the distributed nature of the Blockchain technology is its key feature. A distributed computing network system is a system where data and resources are spread out on various hardware nodes, which is different from the centralized and decentralized networks. As shown in Figure 2, every node in the decentralized network will maintain historical those who hold signed ledger can access the information. Database of transactions which is shared among the nodes. In spite of having copy of the ledger on every node, only According to Morabito (2017), the blocks can be considered as containers that are composed of the shared ledger which hold the data. These containers can only be accessed by those who have the permission, otherwise these containers are sealed and their content cannot be accessed.
Figure 2: Centralized, de-Centralized and distributed network comparison (Morabito, 2017)
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The system is more secure due to the absence of a central server, this is because it is more difficult for a network to experience attacks like service denial attacks or client related attacks. Additionally, huge hash recalculations are required for every block for changing a transaction in the chain, which is to be registered after the modified block. This will improve the security protection. Therefore, a trustworthy invisible authority which is represented by a consensus mechanism is the basis on which the Blockchain is built (Xu, 2016).
As noticed by Meijer (2017), every node in Blockchain doesn’t have same power. Thus, a clear distinction of powers is made. Making a clear distinction is also important since terms like “miners”, “validators” and “full-node” are not used correctly and their meaning tends to vary from application to application:
Users who only read the data: Those who have access to the data and store the Blockchain.
Users who can read and write the data: These are the users that can send and receive transactions through the Blockchain. Moreover, these users have access to the data and store the Blockchain.
Users who validate data: These are the users that validate the transaction that are sent to the Blockchain.
2.2.1.2 The Ledger Architecture
According to Chuen (2015), a Blockchain ledger can be described as a string of blocks, which can include a detailed list of transaction record, which is also similar to the conventional public ledger. In Figure 3 describes a schematic visualisation of Blockchain. Every block in the chain comprises of block-header and block-body. Block-header contains the data of previous and following block-header hashes and time-stamp. Block-body is having inputs and outputs, which comprises number of transaction and collection of transaction.
Figure 3: Blockchain visualization (Zheng et al., 2016)
Each node in the network hold a set of private and public keys. The private key is used to encrypt the transaction before sending them. In order to send transaction, a sender needs his private key and receiver’s public key. Before being stored or recorded in the Blockchain, the transaction should undergo verification phase and signing phase. The signing phase is defined as encryption of the sender’s data with the private key. The verification phase includes computational problem’s solution that prevents same transaction from happening twice (Morabito, 2017).
2.2.1.3 Blockchain Transaction Mechanism
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Definition of Transaction: A sender creates transaction in the Blockchain, by mentioning the value of transaction and the details of receiver’s public key (It also includes receiver’s address). Lastly, the sender transaction approves with the sender’s cryptographic digital signature. According to Morabito (2017), this proves the digital authenticity.
Authentication of Transaction: As soon as transaction is sent to the network, nodes in the network receives transaction, then it confirms the message validity by decrypting the digital signature. As per (Froystad P. and Holm J., 2016), transaction will be waiting in the pool of pending transaction until block is created.
Creation of the Block: In order to create block, a node in the network takes responsibility of the transaction by combining with all other pending transaction. Moreover, this is an updated version of the ledger. As soon as block is created, a block is spread all over the network for validation.
Validation of the Block: The nodes in the network will be responsible for validating the block received by the proposed block. Then nodes in the network will start an interactive process to validate the block. In this process of validation, there might be deviation in the Blockchain branches, since different nodes do not share same perspective of the entire network state. Hence, it is essential to reach a consensus on the block validity among the different nodes based on a validation technique. According to Zheng (2016), this phase will verifies the validity of every transaction by avoiding the fraudulent attempts of transaction.
Chaining Block: As soon as each every transaction is included in the block, a block has been accepted. If the new block is recorded, this will be linked to the last Blockchained in time. The chain is updated and spread to the network, which will be accepted as verified version of the Blockchain (Froystad P. and Holm J., 2016).
2.2.1.4 The 4 Ps of the Blockchain
The original decentralized Blockchain structure is not applicable to all time stamped ledger application. Each and every type of applications requires different level of security. Hence, Blockchain architecture is based on two dimensional classification system:
Public Blockchain/Private Blockchain
There is a huge difference between public Blockchain and private Blockchain, especially when it comes to level of platform accessibility. In public Blockchain, any user can join the network, without requiring third party permission. A platform allows to each and everyone in the network can do transaction. In private Blockchain, only authorize user can have an access and read the data. In this every user in the network are known and trusted.
Permissioned Blockchain/permissionless Blockchain
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Figure 4: Matrix to plot data access and writing/validation restriction (own representation)
2.2.1.5 Consensus Mechanism
Blockchain platform is a cryptography-based system that is used to secure transactions in a verifiable ledger of records. This basis leads to a redefinition of the mediator’s role as a guarantee of validation in the system. This trust doesn’t rely more on any third-party but rather on consensus mechanism. According to Swanson’s definition (2015), “consensus mechanism is the process in which a majority (or in many cases all) of network validators come to agreement on the state of a ledger”. Therefore, it comprises in the set of procedures and rules that allow multiple nodes that are participating in the system to trust the information. From a technical point of view, the use of pre-defined state transition rules is enabled by the consensus algorithm, these rules act as a method to securely update the states, where the transition of state is modified and decentralized in every node (Buterin, 2014). According to Morabito (2017), an operative consensus mechanism should be based on three key concepts:
The laws, rules, transitions and states in the Blockchain are mutually accepted;
The nodes infrastructure, methods and stakeholders to which the laws apply are also mutually accepted;
The perception of identity that is accepted by all nodes should be common and should comply with the same set of rules.
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consensus mechanisms. There is an attempt to make new Blockchain platforms which have better scalability and are more energy efficient in ways of achieving the consensus amongst the nodes for a given network. According to Mattila (2016), there are examples of alternative consensus mechanisms like Proof-of-stake (this has more than one definitions), proof-of-activity, proof-of-burn and proof-of-validation. The major the proof-of-work (PoW) mechanism. They were the first to introduce the network security protocol, and then, later the Hash cash proof-of-work scheme was theorized by Back (1997consensus types are briefly described in the following part of this section.
The study done by Dwork and Noar (1993) provided). The concept consists of solving mathematical computation that matches the hash relative to the transactions with one of the last block recorded on the Blockchain. However, the computational process here needs to be supported by a hardware, which demands a lot of energy. When the energy required for a single transaction is multiplied with the total transactions required per second, the total energy required is evaluated and it is found that the entire process is highly energy demanding. The proof-of-stake (PoS) represents a treasured substitute to the PoW scheme, this is because it is based on a more efficient computation procedure. Despite the blocks being generated similarly to the PoW mechanism, the entire hashing procedure gets processed in a substantially less search space, whereas unlimited search space is needed for of PoW (King and Nadal, 2012). With the PoS scheme, since the transactions can be managed and registered quicker, the system becomes faster and more energy-efficient. However, this system has its own challenges. For example, there is risk of centralization, this is because the nodes with a high number of stake holders exerts a dominant role on the remaining network.
According to the theory proposed by King and Nadal (2012), the version that is amalgamation of Pow and PoS is a hybrid that represents the combination of the mining process of PoW while having the energy effectiveness of PoS. In this Hybrid mechanism, the mining of the block is done by miner with highest coinage, which is characterised by the cumulative amount of coins that are owned by a miner throughout the span of ownership of the coin. In simple words, it consists of a scheme with has low latency which is typically a PoW characteristic and low energy-cost which is typically a PoS characteristic on the long run.
2.2.2 Smart Contract
Smart contracts in a Blockchain are nothing but a logic that is applied on the Blockchain, this Blockchain consists of nodes which can receive and perform transactions among the linked nodes. Smart contract is the logic on which these transactions are based and controlled. The entire purpose of smart contracts is like a "computerised transaction protocol that executes terms of a contract" (Szabo, 1996). The term ‘Smart contracts’ term was first coined by cryptographer Nick Szabo. The elementary idea and the origin of the contract-part is that several parts of the contracts can be included in the software in such a way that their breach is either very expensive or entirely impossible. Sometimes, these smart contracts are often confused with Ricardian contracts (Griggs, 2015), which is nothing but the compilation of digital recording and connections of systems on a contract that is to be lawfully abided. But, these are not smart contracts because they are neither supposed to be legal in any way nor connected to any outside systems. It can however be imagined that value in connection of smart contracts is one defined by Ricardian as "outsource" functionality of legal contracts.
According to Szabo, contracts should have a couple of characteristics if they are to be called as smart contracts. These characteristics are as he describes it are, “visibility, online enforceability, verifiability and privity”. These are explained as:
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performance and some certain activities as per the terms of the contract. Moreover, they should be able to prove the implementation of their own terms to other participants. It is like referring to the transparency of the actions taken by the logic algorithm of the contract. Like, a Point-Of-Sale screen that shows the amount that is to be paid to the customer but omits the fact that the data is being retrieved and saved from the credit card is an excellent example of such a hidden action.
Online enforce-ability is referred as making sure of fulfilment of the terms of a contract. The actions which can be taken to achieve this can be characterised as proactive and reactive ones. Proactive measures try to make it technically impossible for the participants to breach the contract terms and prevents either party to drop out of the contract as well. Furthermore, if in case there is a valid breach on another part, then that should be notified for further dealing. However, reactive measures seem to deter malicious behaviour through the reputation or enforcement and by recovery of potential assets after the breach of contract.
Smart contracts should be verifiable and auditable if there is a conflict amongst the participants.
Smart contracts should be as private as possible, which means that the knowledge and control pertaining to the data involved in a smart contract can only be accessed by the participants if necessary.
The above-mentioned objectives of smart contracts can be observed as resulting in two separate directions. Privacy is exercising a controlling force over contracts, ability to minimise openness to outside parties. Whereas, on the other hand, there are three other objectives of: visibility, enforceability and verifiability. These objectives require access to contractual data, which is to be available to participants. Thus, an optimum solution must be found where even the little information’s control is possible if it is given to external parties, however the possibility to verify, observe and enforce should be simultaneously available.
2.2.2.1 Free Programmability in blockchain
The smart contracts are designed to enable the creation of the decentralized programs, it will also monitors and execute the programs. In addition the smart contracts allows the implementation and mapping of agreements and stores the complete corporate structures (Dannen, 2017). In this section, what are all the strength of smart contracts, how the Implemtation is done are explained. In order to implement the programmable blockchain, the following conditions are necessary:
The programming in the Blockchain: All the business agreements includes the terms and conditions. The basic goal of smart contract is to include these conditions as a logical commands through blockchain system.
The Reliable execution of the code: The implemented code must be work reliably on the decentralized system. And also data should not be changed without the authorization by the user.
The Automation of code execution: The fulfillment of all the terms and conditions of a program is resolute in a digitally. It is the fundamental concept of smart contract.
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The Coordination of decentralized: The contracts are digitally signed. They are compatible with the theory of blockchain. The testing of conditions and the execution of their logic must function in the network of decentralized.
Speed: The software script is executed and implemented in the platform of blockchain, a fast response time is required. This would be in conflict with the time consume for processing. Non-manipulability: Once data and programs is entered into the blockchain system, which cannot be able to manipulated or deleted. The unauthorized modification of the blockchain is usually not possible.
Consistency: The programs in the blockchain is reliably stored, nevertheless of the time between execution and implementation. The stored programs are available all time.
The conditions stated above is satisfying, the blockchain system is used to map the business logic and agreements. The smart contract also offers different possibilities for participants in the network:
The reduction in labor: The smart contract helps in real time monitoring, the enforcement of agreements and the conclusion of agreements can be automated, this help in reducing the human labor.
Avoiding third parties: The smart contract is a decentralized blockchain structure which enables automated contract handling and therefore the supervisory from the third parties can be eliminated.
Reduction in cost: By avoiding third parties and automating the process in turn helps in saving the labor and time, this helps in transaction and processing cost can be reduced.
The security of the agreement: if the non-manipulability and reliability of a smart-contract network is ensured, then the foundation to secure the agreements will be created. This includes both their long-term feasibility over several decades and prevention of unexpected beach of agreement by the participants.
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Figure 5: Elements of smart-contract technology (own representation)
According to (Dannen, 2017), the Ethereum can thus be understood as an extension of the Bitcoin concept. Ethereum also has a digital currency like Bitcoin. The further extensions of the blockchain concept by Ethereum, which are essential for the implementation of the approach, are the subject of the further development of this chapter. It also explains in more detail what smart contract are, how the virtual machine of Ethereum works, and how to achieve the benefits of the concept mentioned in this section.
2.2.2.2 Creation of Smart contracts and dApps – platform specific
programming languages
There are four different programming languages like Solidity, LLL, Serpent and Mutan are available to create smart contracts. These languages specially developed for ethereum virtual machine on existing languages. Solidity is a majorly used language since it is existing on JavaScript (Ethdocs, 2017a). The smart contract script will be written from one of these languages. And then compiler is designed to respective language. Compiler is used to compile code in byte code. i.e. the EVM-readable commands.
Both processes described so far can be carried out offline and independently of the blockchain. The created byte code can be communicated to the blockchain during a transaction in order to initiate the mining of the smart-contract. For this, one of eight different ethereal client applications is used (Ethdocs, 2017b). If the transaction is transferred to the network, its contents, including the contained byte code, are checked. If the test is successful and there is sufficient gas, it is linked to the blockchain by mining. From this point onwards, the smart-contract is stored as an account in the blockchain and can be called up by means of transactions. Since smart-contracts can communicate with each other by means of messages, it is possible to form an application from several contracts and thus perform services similar in scope and function to conventional computer programs. The blockchain can serve as a backend, which performs the functions of the application. For this reason, applications implemented on the blockchain are called dApps, i.e. decentralized apps. Both the results of the function execution as well as the user input can be implemented thanks to an in Ethereum interface to external surfaces such as e.g. Websites are offered (Dannen, 2017).
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The structure of a block header of the Ethereum blockchain is analogous to that of a bitcoin block. It includes features such as time stamp, block number, a reference to a previous block, nonce, and difficulty. The main difference lies in the way data is stored. Bitcoin blocks contain a hash tree, which contains all transactions of the block. By calling up all the transactions, information such as the credit balance of an account can be calculated in the future. According to (Buterin, 2014), Ethereum also includes such a tree, but adds two more to it. The resulting Ethereum blockchain structure is shown in Figure 6.
Figure 6: Simplified block structure in Ethereum blockchain (own representation)
The event tree stores the results of all events triggered by the block's transactions. For example, Changes in variables of a smart contract. The state tree stores the status quo of the blockchain prevailing at the time of the block generation. This includes existing accounts as well as their credit balances, data and, in the case of Smart Contracts, their scripts.
Thus, in the Ethereum blockchain, not only all transactions but also, contrary to the original concept, states are stored. The advantage of this approach is the fast irretrievability of states without the necessity of reconstructing the relevant transactions, which primarily benefits the processing speed of inquiries with strong growth of the blockchain as well as the support of thin clients without complete ledgers (Ethdocs, 2017a).
Solidity contracts are likely to process the ownership of the valuable tokens; execution of contracts occurs on Blockchain, meaning that all the members can view it and access the source code. The security guidelines that Solidity has been used are:
Damage control: To avoid damage, the limited amount of tokens should be stored in Smart contract, because if the source code or compiler contains bug, the tokens will struck in the contract.
Modularity: The Smart contract should be kept as simple as possible. The length of functions and local variables should be limited, in order to keep the contracts as clear as possible. If the contracts are more modular, it is easier to improve system of Smart contract.
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2.3 Supply Chain Management
Supply chain management is one of the most vital aspects of directing business. Many people outside the related community (in research and industry) do not comprehend to this because a normal consumer only experiences its consequences (Martin, 2015). Earlier, there were times when the item that the customer wanted was not available in their nearby store; sometimes the consumers will get a great ’deal’ at the end of the season; sometimes there were sudden surge in prices of commodities like gas due to shortages; also there were cases when the e-commerce site promised availability but were unable to deliver the required product or delivered the incorrect product and there have been incidences when a customised product was delayed to a great extent. All the above-mentioned and a few other experiences which consumers have had on a routine basis were direct consequences of supply chain principles on which the firms relied. The term ‘Supply Chain Management’ was coined by Keith Oliver in 1982, Supply chain management has evolved from formerly being understood as only logistics to an intricate multifunctional business responsibility that ranges from purchasing and demand forecasting to delivery and after-sales service (Martin, 2015). Supply chain management is all about dealing with the supplier base, determining the outsourcing commodities and from which suppliers, and managing relationships with those suppliers.
A supply chain is a set of articles that are involved in designing of products into semi-finished and finished distributing them to end users (Tan, 2001). Supply chain management is the process in an effective management of the process from end-to-end, starting from design of the product or service till the time when it is sold, then consumed, and finally disposed by the end user. This entire process comprises of product design, purchasing, planning and forecasting, production, delivery, realisation, and post-sales support (Tan, 2001).
The issues faced by supply chain management can be classified into two broad categories – configuration and coordination. Configuration-level issues are related to high-level designing and rudimentary infrastructure of the supply chain. Coordination-level issues are related to the tactical decisions and the day-to-day supply chain operations.
The issues like configuration and coordination are co-dependent. The issue configuration can be regarded as a long-term strategic decisions. The issue like coordination can be regarded as medium to short-term decisions. Generally, the organizations will develop strategies for undertaking the configuration-level decisions and then apply constrains to the coordination decisions.
2.4 Supply Chain Coordination
The theory of coordination is applied to this thesis to give a theoretical basis to consider how organisation can together manage the business processes across the supply chain (Malone and Crowston, 1994).The management of dependencies between activities is called coordination ((Malone and Crowston, 1994). The main purpose of coordination is to achieve collectively objectives and goals but individuals will not meet. The main issue like information sharing will affect the coordination capability (Anand and Mendelson, 1997).
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organising the supply chain according to needs of the organisation: customer demand, inventory management, production targets.
The two approaches like centralise decision making and decentralise decision making will achieve the coordination. Firstly, centralise decision making applies to optimise the overall network. Secondly, decentralise decision making applies to coordination mechanism (Sahin and Robinson, 2002). Ideally centralise decision making necessitates the decision maker to have all access of relevant information in the supply chain performance which isn’t the scenario in reality (Li and Wang, 2007).But decentralisation thrives on local and asymmetric information which improves the performance of individuals and its target, therefore having better advantage than centralise decision making.
In order to achieve better performance, it is necessary to share responsibilities. This can be done in two ways. Firstly, complementarity which rely on how supply chain stakeholders jointly increase value. Secondly, coherency which rely supply chain stakeholders on common understanding. The coordination may focus on organizational linkages, this is required to reward or penalize decision maker to reach their common targets. The coordinating collective learning means sharing knowledge and capabilities across the organisation (Simatupang et al., 2002).
The main focus of this thesis is on the coordination of operational linkages in a supply chain which deals with information sharing and synchronising logistics processes. The latter coordination mode, synchronising logistics processes is also called asset flow coordination. Coordinating information sharing among supply chain stakeholders aims to give relevant, timely and accurate information available for decision makers without lack of transparency, reliability and traceability.
The main challenges of coordination in supply chain are:
Transparency
Traceability
Time delay
2.4.1 Transparency
Modern companies, organizations and enterprises tend to be operationally overly complex. The complexity can be eliminated partially but not completely eliminated (Shalloway, Beaver et al. 2009). The cooperative work involves a lot of interactions with the many teams, which has a lot of dependencies, a coordination is required to escalate the problems that arrives. (Loch and Terwiesch 2005). The effective management in the organization having a lot of interdependencies, which is coordination (Malone and Crowston 1993). The transparency in information on asset is very much important, since every stakeholder in the organization uses information to make better decisions (Davenport and Prusak 2000).
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dependent on the designation of the personnel in the official hierarchy. An efficient information disclosure strategy must be a stepwise built up, first, the type of information that needs to be shared must be identified, then depending on how confidential, risky and how valuable the information is, a befitting response must be made (Marshall et al. 2016). The hiding of specific information in the organisation, which information privacy will plays major role in transparency (Marshall et al. 2016)
2.4.2 Traceability
Most of the researchers define traceability is the follow the asset movement through supply chain as (Bosona and Gebresenbet, 2013). A system that has good traceability must allow both tracking and tracing. The other definition of the tracking is the process by which asset is monitored by keeping all documents and records at each and every stage (Kelepouris, Pramatari, and Doukidis, 2007; Bosona and Gebresenbet, 2013; Pizzuti and Mirabelli, 2015). Traceability can also be expressed by three basic characteristics of a system in which it exists:
1. unique identification of units, assets, products and batches,
2. information about the time and place, like when and where the units are transferred, 3. Linking of the units to their movements.
There are internal and external are the two different categories in the traceability (Moe, 1998; Thakur and Donnelly, 2010). The Internal traceability is defined as the capability to visible and track the assets within the organizations (Moe, 1998; Karlsen et al., 2010). The external traceability defined as the capability to visible and track the assets between the organizations (Moe, 1998; Karlsen et al., 2010). To enable quick and accurate tracing, traceability should be able to address to both internal and external aspects with clear links in between them (Bertolini, Bevilacqua, and Massini, 2006; Donnelly, Karlsen, and Dreyer, 2012; Hu, Zhang, Moga, and Neculita, 2013).
As far as the current work is concerned, internal traceability is of importance. It is vital to understand the fact that external traceability is a consequence of having a system which is successful in internal traceability. This is basically due to each and every person is accountable for collection and communication of the information, which is pertaining to their own processes and the assets. This means that, a system with internal traceability acts as a prerequisite that enables the way to external traceability (Senneset, Foras, and Fremme, 2007). Although, an important disadvantage of traceability is that it does not lead to direct economic benefits, it requires funding and initial investments (Donnelly and Olsen, 2012). The visibility of information can also be used for the marketing departments in the organization, to visualize the quality and safety standards of the assets (Liao, Chang, and Chang, 2011; Storoy, Thakur, and Olsen, 2013). The advantages of traceability in the organisation is to improve the supply chain performance and reduces the logistic cost by enable real time information of assets throughout the supply chain (Regattieri, Gamberi, and Manzini, 2007; Hong et al., 2011; Karlsen, Dreyer, Olsen, and Elvevoll, 2013).
The efficient traceability system means there should be clear connection between information flow and asset flow (Bosona and Gebresenbet, 2013). Three main pillars of traceability are identified:
1. Product identification: marking of asset/product/unit with a unique identification number (Regattieri et al., 2007; Karlsen et al., 2010; Aung and Chang, 2014).
2. The data to trace: information required to be traced
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2.4.3 Time delay
According to Manos and Manikas real time decision are the best and also it will not disrupt the quality of the decisions.
The real time of taking operational decisions are fast: most of the operational decisions are repetitive, structural. Having a new software tool which analyses real-time data would make automated decisions faster. Hence, saving time and increasing productivity by reducing the non-value activity time.
The view are personal but the same operating picture: One of the disadvantages of ERP system software is that they mostly have a common user interface and hence does not highlight the information as per the requirements of the user. For a user to make faster decisions it is essential to have quick access and a single window visibility to the critical information pertaining to his work area. If the user must look up and invest time in extracting the required information, then there is loss of productive time.
The decision management is the best: Decision-making systems are generally being implemented using rule engines and analytic software tools. As companies nowadays are aiming to rely more on real-time analytics, they are beginning to exercise Decision Management, together with their Data Management as well as Business Process Management activities.
2.5 Literature Framework
Figure 7: Framework for literature review (Own representation)
In this section a representation of the extensive literature review is presented and shown in figure 7. Firstly literature review on information sharing is presented in order to understand the different types of information sharing in the supply chain. This in turn helps in understanding the importance of information sharing activities in the supply chain. Secondly this thesis mainly focuses on the concept of Distributed ledger technology. In particular, the blockchain technology literature review is presented this is done to understand the concept of blockchain platform and block chain application (smart contract). This is helps to clarify the technology features and the working mechanism and the potential applications.
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3.0 Method
This section presents method that was used to collect, process and utilize information required to answer the research questions of the project. Firstly, research approach is presented followed by how data is gathered and examined. In the last section, explains how the gathered information is used to device a solution to resolve the problems mentioned earlier.
3.1 Research Approach
To answer the research questions, a qualitative method will be used (Arvidsson, 2017) describes how qualitative data is data that cannot be measured and counted, and is generally expressed in words rather than numbers. Therefore a qualitative method is suitable for this study and has therefore been used. The qualitative method is chosen because of the nature of the problem. Figure 8 elaborates on the methodological approach adopted in this research and it identifies the main steps that need to be taken in order to answer the research questions. To answer the research questions, relevant literature was explored and explained in the previous chapter. Now the fore coming chapter explains the approach adopted in this thesis towards answering the research questions.
Figure 8: Research approach (own representation)
3.2 Research Method
A pre-study was conducted to understand the current situation and identify the issues related to information sharing activities between departments at Scania. The data was collected through interviews. A lot of informal communication and meetings with executives at Scania along with database searches to acquire relevant articles was performed.
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Based on the information received, a smart contract interface is developed that allows fast, fair and easy access to information which is relevant to the stakeholders involved in the three departments. This is done by using six vital steps that are used to develop a smart contract interface. These six steps helps in creating a smart contract interface. The information flow and sharing mechanism is explained by the use of sequence diagram. A sequence diagram is later made to give a clear representation of the information flow and how it works. Lastly, observations are made to check the conditions using smart contract interface. The observations pave way for the solutions of the three research questions asked.
3.3 Data Gathering
The data gathered for this study were obtained from interviews within the chosen departments at Scania. The data was also gathered from secondary sources, which are presented in this section.
3.3.1 Literature Review
The literature review was performed to give a profound understanding and knowledge within the area of research. Firstly, literature review was done to get a basic overview on supply chain management, information sharing system. Secondly, based on the information gathered from primary sources, literature review was done on the identified issues like transparency, traceability and time delay. Lastly, since the main objective of this research was to see the potential of Smart contracts, the literature relevant to this technology was also explored. The resources used were: wide-ranging searches in credible data bases like Google scholar and KTHB primo. Additionally, information was also gathered from internal company websites and related articles.
3.3.2 Interviews
The primary source of information relevant to the business setting in this thesis are the formal interviews. Interviews were conducted in the departments of Assembly, Machining and Logistic. This was done to understand and gather the current asset information flow and supply chain operations between departments. A questionnaire was drafted to record responses which are consistent to a given set of questions. Following this approach allowed insights into what is important for one department or a personnel and what is not. The interviews were based on the literature review. Later, interviews were conducted with the employees in selected departments at Scania with matching knowledge and recommended profiles.
Interview A- Assembly department Employee working as a System Analyst
Interview B-Machining department
Employee working as a production planner
Interview C-Logistic Department
Employee working as a Logistic developer
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efficient, interviews were recorded to make sure that gathered information is secured. Answers from each interview can be found in Appendix 1.
3.4 Steps to create smart contract Interface
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3.5 Research Ethics
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4.0 Problem Description
In this chapter, the business setting on which the project work has been done is explained. To highlight the changes that the smart contract interface has brought to the setting have also been elaborated. The business setting before and after the implementation of the smart contract interface have been elaborated and compared. Moreover, special emphasise is given to the shortcomings in the existing system that are tackled by the smart contract interface.
Figure 10: Asset flow and Information flow between departments
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The above-mentioned system has a few shortcomings which were identified during the empirical interviews (Interviews A, B and C) with the officials who are working in the above-mentioned departments. These shortcomings are:
1. Manual updating of material status amongst the departments and sections which causes time delays, miscommunications among departments and sometimes there is loss of important information as well.
2. Poor quality raw material input to the production section due to unclear quality requirement definition.
3. Difficult to track and trace the asset flow for a product since there is no interface that stores the information in an organized way. Therefore, it is almost impossible to track the origin of a failure or discrepancy.
4. Problem with verification of information that is available, like – what is the information source? Who exactly updates the information and how does it reflect the real time status of the product during operations? Moreover, the quality of information that is available plays a main role in driving the decision-making process.
5. The conditions like raw material quality limit and product quality limit should be specified from the customer(Assembly department)
6. There is no provision for real time data validation in the current setting.
7. There is no provision of in-process control – like traceability of in process quality inspection results.
4.1 Implementation
Firstly, essential data on asset that are required by the each sections in the departments are mapped and shown in Figure 11. The set conditions like information of the asset should be entered from the specified owner address of the departments. The information of raw material quality limit and asset quality limit should be entered by the specified limit by the customer (assembly department). Once information of the asset is entered by each section in the departments, every other sections in the departments gets notified. These conditions and data in the each section is written in the smart contract code as shown in Appendix 2.Thirldy, deploy smart contract code in the Ethereum virtual machine (EVM). Lastly, execute the smart contract code by clicking manual option.
Figure 11: Data for creating smart contract interface (own representation)
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Figure 12: Generation of new blocks and connection of blocks in represented in Sequence Diagram (Own representation)
The initial block in the Blockchain is called as the Genesis block which is represented by B0. A new block B1 is created when the order is generated by the assembly department. B1 is generated if and only if the smart contract requirements are fulfilled by the user while generating the order. The required input conditions that the user must input to successfully create a block are shown in Figure 13 for all the blocks (see block 1 for B1).
Figure 13: Input conditions for generating Block (Own representation)
Creation of B1 is notified to all the departments (nodes) of the Blockchain. When B1 is received by the raw material department then the raw materials section supplies material to the production section. This raw material is received by an outside supplier by the raw materials
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section. After the successful delivery of material from raw materials section to production section the raw materials section takes up the responsibility to send a transaction to the next department (node) containing the information pertaining to the delivery of the material. If this transaction contains correct and authenticate information, it will lead to generation of another block B2 which is then added to the existing Blockchain which consists of B0+B1. But, before adding the block B2 to the existing Blockchain a set of queries is generated, these queries check whether the information in the transaction sent by the department is coming from a previously specified authenticate source or not. The queries will also check if the block contains all the required information as per specifications in the Smart contract. Once, these conditions are satisfied then and only then will the new block B2 be added to the existing Blockchain. Once the block gets added, the Blockchain becomes B0+B1+B2 and the successful creation of new block (B2) is notified to all the nodes. This process is repeated by the subsequent nodes to create add B3 and B4 to the Blockchain. The nodes responsible for creation of B3 and B4 are production section and WIP section respectively. Eventually, when the material is delivered to the customer (assembly department, also the last node in the Blockchain network). Then the last transaction is sent, which after satisfying all the queries, results in creation of block B5. Likewise, if every condition is satisfied by all the departments in the process the final Blockchain pertaining to a given order would be like B0 + B1 + B2 + B3 + B4 + B5.
4.2 Result from the smart contract interface
4.2.1 Observation on transparency
This section explains how transparency is achieved for the test case considered in section 4.0. Here in Figure 14, Block 1 has three conditions which need to be satisfied in order for the information to flow for Block 2. Since the three conditions are satisfied, highlighted in green, the information from Block1 is cleared to Block 2. Similarly, in Block 2 there are two conditions that need to be satisfied in order for the information to flow to Block 3. But one of the conditions is not satisfied, hence the information is rejected from Block 2. The Blockchain thereby gives a clear understanding about the conditions necessary to transfer information from one Block to another thereby making the whole process transparent.
Figure 14: Input conditions for generating Block (Own representation)
If both the conditions in Block 2 are satisfied the information flows to Block 3 as shown in Figure 15. In block 3 there are two conditions which need to be satisfied. Upon failure of satisfying either one of the conditions the information is rejected from Block 3.
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Figure 16 shows that in Block 5 the condition is satisfied, hence the information is rejected.
Figure 16: Input conditions for generating Block (Own representation)
Figure 17 shows all mandatory conditions are satisfied thereby accepted the final information flow. This whole process makes the information flow transparent.
Figure 17: Input conditions for generating Block (Own representation)
4.2.2 Observation on traceability
This section explains how traceability is achieved by considering an example which is taken from the test case. There are different suppliers S1, S2, S3, S4, S5, and S6 in the raw material section, machines in the production section are M1, M2 and M3, storage locations in the WIP section are SL1, SL2, SL3 and SL4, logistics in the warehouse and logistic section are L1, L2 and L3. Before implementation of smart contract, if there is a faulty product found in the assembly department, it is difficult trace back where it happened, who did it, which end fault had happened(interview A,B and C). This as shown in Figure 18.
