Integrating Enterprise Resource Planning Systems and Blockchain: Overcoming Challenges

3317 words (13 pages) Essay in Business

08/02/20 Business Reference this

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Abstract

This paper explores the challenges and opportunities that organizations will have when integrating existing Enterprise Resource Planning (ERP) systems with emerging Blockchain technology. Both of these systems have significant value on their own merits and integrating them will provide significant value and security for their respective organizations. This paper is a macro view of the challenges that face organizations in today’s business environment. There will be many changes to business networks and infrastructure that will have an impact on data storage, security and privacy concerns along with regulatory and legal hurdles that may not even exist as of yet. The business goal is to positively influence a firm’s operation, free-up capital, improve transparency, increase security and trust, follow regulatory requirements and increase shareholder value. The analysis will demonstrate solutions for each opportunity that will provide companies a clear path to integrating these systems.

Keywords:  Enterprise Resource Planning, Blockchain

Enterprise Resource Planning (ERP)

With the coming of age of larger, less expensive and more flexible computer systems, it has become possible to implement infrastructure that could manage and plan many mundane or complex tasks for the facility. The system is name Enterprise Resource Planning (ERP). A high-level definition of ERP is “a business software system that that supports business or enterprise throughout the project in organizing, planning or maintaining, tracking and utilization of resources (Man, Machine, Material, Money), effectively.”(What is ERP (Enterprise Resource Planning) Software | ERP, n.d.) An ERP system is a modular software application that eliminates stand-alone programs and aligns all systems under one. This system of modules has been implemented across many different business environments for many years and have become the backbone for how business manage all operations. There are many system providers in the marketplace such as SAP, Microsoft and Oracle, etc.

As Figure 1 illustrates, ERP integrates many functions of a business into one system. Prior to ERP, if the Finance department wanted to know how much and what inventory was on hand, they would need to go to that department and get the data, if it was available. It was also common for bureaucracy to stand in the way of gaining of visibility due to overly managed approval processes to acquire the information. If the data were available, there may be a measure latency as it relates to the timeliness and even the accuracy of the data. With today’s ERP, visibility to activities outside of once department are instantly available and accurate to within a day or less. Having such visibility is crucial when making decisions in an environment that could be changing by the minute.

Not all systems are perfect and may lack functionality that will require an extension of ERP such as Advanced Planning and Scheduling (APS) software. “Some of these capabilities include multi-plant operation integration, superplant, real-time operational visibility, and overall throughput enhancement.” (PlanetTogether, 2018) Figure 1, Example of an ERP System. Adapted from “What is ERP (Enterprise Resource Planning) Software | ERP”(n.d.) Retrieved from https://www.saponlinetutorials.com/what-is-erp-systems-enterprise-resource-planning/

While the system is flexible to upgrades, there are opportunities to improve record integrity and security that are currently being developed and implemented.

Blockchain

As a way to increase data security for transaction, a new system that allows these transactions to occur automatically more securely and without an intermediary has been conceived. “Blockchain or (Distributed Ledger Technology) was developed in the aftermath of the 2008 recession to deliver transparency, security, and efficiency in managing transactions between multiple parties” (Melay, 2018). This concept is now being implemented or considered in many business models worldwide.

What really is Blockchain? In its simplest form, Blockchain can be described as a private, secure network that uses” cryptography to keep exchanges secure, provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.”  (Hutt, 2016)  Figure 2 illustrates the Basic Blockchain Process. Figure 2, Basic Blockchain Process. Adapted from “Blockchain: The Fastest Financial Technology You’ve Never Heard Of”(2017, October 23) Retrieved from https://www.capitalgroup.com/europe/capitalideas/article/blockchain.html

One of the benefits of this system is that once a record is in a Block, it is not possible to alter that record. This provides clear chain of transactional events that cannot be broken which the business world is starting to see as an opportunity to capitalize on as it relates to contracts and other legally binding documents.

Integrating ERP and Blockchain

While the Blockchain technology is relatively new and ERP systems have been established for almost 3 decades, many industries and corporations are looking at how this new technology can be married together. Businesses are vie wing this integration as an opportunity to make their business transactions more robust, transparent and binding. For instance, in Supply Chain many transactions are recorded through the cycle of a product. Conceptually, in a Supply Chain scenario, “these systems build, track, purchase, and ship products, integrating with Blockchain will provide a copy of this information into the network which is immutable and indelible and can be tracked and used for any purpose, at any time.” (Banerjee, 2018) Figure 3 illustrates how this concept integrates with ERP in Supply Chain transactions and how Blockchain records each event.

While integrating these systems provides many benefits, there are still many challenges to overcome, while not insurmountable, they still need to be developed, funded and institutionalized.  Again, the challenges that will be explored are Infrastructure and network, Security and Privacy Concerns, the Cost of Data Storage and Legal and Regulatory issues of integrating these systems.Figure 3, Basic Integrated ERP and Blockchain Process. Adapted from “Blockchain Scheme” (n.d.) Retrieved from https://transmetrics.eu/blog/blockchain-in-logistics-will-it-change-the-industry-part-1/blockchain-scheme/

Challenges and Opportunities

Infrastructure and Network

         To begin with, combining ERP and Blockchain, while there are many hurdles to overcome, all of the challenges are interwoven. One of largest impact to corporations will be that of infrastructure and network capability. These are the backbone of many organizations and without a clear understanding and plan to manage this change could cripple many organizations as well as cause repercussions from environmentalists.

The largest network impact will be that of increased users and power consumption. These networks currently require “the computation of ultra-complex mathematical problems to verify and process transactions and to secure the network. Therefore, combined with ERP, Blockchain systems will consume extra power to run the computers and a considerable amount of infrastructure will be required for cooling and maintaining the systems.” (Shewale, 2019)

At its peak, see Figure 4, the bitcoin Blockchain consumed enough energy that it as a country “would come in 53rd in yearly energy consumption; more than Iraq and less than Singapore.” (Jospe, 2019) With environmental concerns as prevalent as they are for all corporations and many seeking alternative energy sources, there needs to be improvement or significant reduction in energy consumption. The reason for the high-energy consumption and thus taxing networks and infrastructure is how the system, in its current form is with bitcoin.  The bitcoin model “uses the proof-of-work (PoW) algorithm to validate transactions made on the Blockchain and requires the computation of ultra-complex mathematical problems to verify and process transactions and to secure the network.” (Shewale)

As companies migrate to Blockchain they will need to employ, a concept called Proof of Authority (PoA).  A way to describe PoA is that it “allows pre-selected nodes to run a chain, using about the equivalent energy of a light bulb, or 78 watts.”(Jospe) Employing this system will relieve the networks of high-energy demand and ease the burden on the infrastructure. In addition, this will enable a more secure use of the Blockchain between parties.

Figure 4, Bitcoin Energy Consumption Index Chart. Adapted from “When it comes to blockchains and energy usage”(2019, January 8)  Retrieved from  https://medium.com/nori-carbon-removal/when-it-comes-to-blockchains-and-energy-usage-dca8a76b88e

Privacy and Security

As systems change, one of the primary goals is to ensure that data is secure and that all information that is deemed sensitive and private remains that way, especially with our ERP systems. The Blockchain that bitcoin utilizes is an open network that will allows anyone that has made a transaction on the system, access. This open access raises many concerns for data security and privacy. However, industry must take a very different approach than bitcoin when it comes to these standards. Fortunately, “one can customize Blockchain to meet the needs and specifications of the specific ERP system. A Blockchain can be made restricted to others.” (Shewale)  Such that user permissions can be restricted, for those tasks that are required to do their job. As an added measure to the system, “records in the node are cryptographically secured, with no possibility for anyone to change the data, so there is no threat to security.” (Banerjee). The data in a block cannot be changed or misrepresented without raising a security concern or creating a new chain in the block.

Cost of Data Storage

 With Blockchain, once a record is created, it is permanent and needs to be retained, literally forever. This issue is not germane only to ERP systems, bit to all networks that implement Blockchain. As with everything today that increasingly require the storage of data, this system is no different other than the fact that there is more data to be stored. Blockchain data storage systems are inadequate from a standpoint of flexibility. “Because Blockchain has a distributed architecture, it requires multiple processing nodes scattered across multiple participants, both increasing overall costs per transaction while also leading to issues of scalability and performance.” (Bloomberg, 2018) Currently, there are many companies working to understand what it will take to improve the systems scalability and performance issues, but as of this writing no viable solution has been found, but hope is on the way. The issue remains cost. Most companies that handle data storage, charge a monthly fee to store data and as a company’s data need continues to expand, so does the cost.  A company called Airweave is working to solve the problem and has started to change the way data is stored with blockchain. The new approach what “they call ‘blockweave’. It provides permanent and scalable on-chain storage, something that’s never been done before.” (Raviv) The premise is that users pay a one-time fee to store data and not pay a monthly fee and as their needs grow, they pay additional costs to store. The company will take on the cost of managing the data, forever. While this does not solve the problem, entirely, it is an initial start. Another solution that two others, StorJ and IPFS, are working on are “systems that break apart your files and distributes them across specialized nodes that store files economically.” (Kyle, 2018)  Retrieval of your files is not done by using the file itself, but by sending “back unique signatures that identify your files on the network.” (Kyle)

Where companies that want to maintain their own data the need is to have larger, less expensive storage solutions that will allow companies to expand their storage infinitum without causing bankruptcy. In the case of storage, the obvious solution to this challenge is not always the one that is the most obvious or trendy.

Today it seems that the data storage industry is moving increasingly towards Cloud technology. This would not be a good fit for Blockchain data storage, at least in today’s environment. The cloud has “done the job fairly well up to now, but it has some major flaws. It can be unreliable, unsafe, and costly.” (Raviv, 2018) Compared to current data storage, the primary concerns would relate to the cloud being unreliable and unsafe.

Legal and Regulatory Requirements

With the creation of Blockchain, there are many regulatory and legal questions that arise when it comes to protecting individuals and companies, privacy concerns for all, international ramifications, policing of the system and how to investigate and adjudicate possible crimes.

Within the United States, the government has not acted to regulate Blockchain in any way, with the exception of some states regulating Bitcoin technology to protect consumers. Our government “has shown support for the development of Blockchain regulation and governance within the context of the technology’s growth and expansion.” (Kowlessar, 2019). In this case as in the case of other emerging technologies, the government may be taking a wait and see approach to Blockchain. Allowing the market to drive the development without government interference while ensuring secure commerce will be beneficial for consumers and long-term system development.

However, in 2018, the “U.S. Congress has created the Congressional Blockchain Caucus to handle legislation pertaining to Digital Ledger Technology (DLT) and cryptocurrencies.” (Kowlessar) While no approved legislation has come out of this new caucus, there were several bills introduced in 2018 by Minnesota Congressman Tom Emmer to start the regulation of Blockchain technology. The bills were entitled “Resolution Supporting Digital Currencies and Blockchain Technology, Blockchain Regulatory Certainty Act and Safe Harbor for Taxpayers with Forked Assets Act” (Lanz, 2018) The reason that the Congressman put forward these bills was to “seek to touch on a series of sensitive issues in what can be considered a “grey area” within the North American legal system.” (Lanz) The 115th Congress chose not to act upon these proposals during their session. However, in the 116th Congress, the Blockchain Regulatory Certainty Act was again brought forward and is currently under review for pending legislation. The language of the Blockchain Regulatory Certainty Act “states that “[n]o Blockchain developer or provider of a Blockchain service shall be treated as a money transmitter, and aims to protect these entities from the harsh penalties faced by those who operate an unlicensed money transfer platform.” (Prentiss, 2019) As of this writing, the other bills have not been brought forward to this session of congress for action. While these actions do not pertains to ERP and Blockchain Integration, the proposed actions are initial regulation steps meant to protect users and begin the framework around Blockchain implementation and its use.

On the international landscape, many countries are also starting look at regulations for Blockchain, but mostly, “the regulations are mostly limited to cryptocurrencies and ICOs [Initial Coin Offerings].” (Intellectsoft, 2018)  The cryptocurrency market is the prime concern and how it affects international transactions, as there could be significant disruption in global financial markets if this activity is unchecked. 

This is not stopping countries or unions from implementing laws to protect their citizens. As an example, in 2018, the European Union enacted a law titled, General Data Protection Regulation (GDPR). This seeks to protect the data ownership for its citizens with the requirements for compliance placed on “Blockchain companies to ensure that the EU threshold for data ownership is met sufficiently.” (Chen, 2018) There are many more examples of where governments understand that, “while Blockchain is still in its infancy, governments around the world recognize the value of distributed ledger technology.” (Intellectsoft)

Having the United States and other countries recognize the opportunity with Blockchain and taking a proactive approach to ensure that there are regulations in place to

Conclusion

In summary, when it comes the integration of Blockchain with ERP, this combination will provide significant value and security for their respective organizations. This paper has explored a few of the more significant challenges along with emerging solutions on how to overcome them for organizations that choose to pursue this direction. While the paper took, a macro view of the challenges that face organizations in today’s business environment this technology is emerging daily, with more improvements to come. Overcoming these challenges for implementation should have a long-term positive influence on a firm’s operation and profits.

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