June 22 by Steve Feyer
As we covered in a previous post, blockchain can help execute contracts more smartly. In fact, blockchain-based contracting could yield significant benefits for procurement. As a shared, secure record between parties, blockchains are a way to introduce transparency into supply chains and create entirely new opportunities for participation. In essence, they can break supply chain data out of its silos.
Consider this definition: “Blockchains allow us to have a distributed peer-to-peer network where non-trusting members can interact with each other without a trusted intermediary, in a verifiable manner.” Blockchains and Smart Contracts for the Internet of Things, Institute of Electrical and Electronics Engineers (IEEE)
Through blockchain-based contracts, supply chain managers can see where every product and components are at all times, and even track them all the way to a consumer. These types of contracts also pave the way for more trust with new suppliers and buyers. After all, with a clear, sound view into each parties actions in relation to the contract – e.g., are they delivering on time, are they honoring agreed-to pricing, etc. – procurement can base their trust on solid data.
Note: While blockchain enables a “smart” contract it doesn’t remove the need for a contract in many cases because it doesn’t provide means for recourse. However, a smart contract does help procurement build consensus with multiple parties and guarantees every entity’s interests are preserved.
Six Benefits of Blockchain for Procurement
Let’s explore more of the benefits for procurement.
1. One version of the truth.
Blockchain enables a single, consistent source of information for all participants in the network. In industries struggling with inefficiencies around the storage, reconciliation, transfer, and transparency of data across multiple independent entities, this feature could be highly beneficial.
2. A complete, immutable, and traceable audit trail.
From contract execution to fulfillment across the supply chain, blockchain can create a chronological and immutable audit trail of all transactions. As a result, procurement gains a systemic view of the full supply chain involved in fulfilling the contractual obligations. Any issues are more easily resolved with a clear view into which party is responsible for which aspects of the supply chain activities and movement. Perhaps even more importantly, this insight into all transactions makes it easy for procurement to understand how well a vendor has met contractual obligations. In other words, it provides a mechanism for whether or not procurement should do business with a relatively unknown entity.
3. Better price discovery.
The transparency facilitated by blockchain could reduce the information asymmetry and network disadvantages that some companies, especially smaller ones, currently face in supply chains. In turn, procurement could more astutely and confidently determine market rates and negotiate accordingly.
4. Speed and certainty.
Blockchain disintermediates and simultaneously records information across a supply chain, virtually eliminating time lags in information and payment flows. This increase in speed and certainty could significantly reduce counterparty risk and increase cash flow. Plus, it can empower procurement professionals to quickly make decisions. Consider that smart contracts can register new supply chain participants automatically once payment is submitted. Moreover, because no central authority is needed to clear payments or verify compliance with contract terms, procurement can move more quickly.
Blockchain’s capacity to increase the security of data can alleviate questions about contract validity and terms. Because everyone using the blockchain can easily compare their copy to all other party’s versions, the network is secure and accurate. Plus, with a view into complete, accurate records, procurement can eliminate the need for a central authority to verify contracts.
6. Minimize inventory issues.
In a blockchain, it’s possible for a company and manufacturer to set up their smart contracts to exchange information. Should inventory start running low, the company’s contract would automatically request more inventory from the manufacturing contract based on preset rules. In fact, once the terms were validated, the blockchain could automatically send payment to the manufacturer. Automating both upstream and downstream supply chain activities in this way could save the company tremendous time and money.
So, are blockchain-based smart contracts right for your organization? They are if you handle a significant number of transactions involving many parties and use interrelated, complex contracts. That said, even if you feel they’re not a fit for you now, every procurement group needs to prepare for blockchain-based contracts—because those that don’t use them will be at a disadvantage. Contact Apttus now for mode details on how smart contracts can drive results for your business.