How Blockchain can transform your procurement organisation
Thursday March 15, 2018,
5 min Read
With secure collaboration for contracts, distributed, synchronised information management, digitisation and standardisation of the multi-party supply chain, the Blockchain sets companies up for success.
The ever-increasing need of consumers forces the supply chain to become lean and agile at the same time. Unlike traditional supply chains, they are vast ecosystems of networks with multiple SKUs through multiple suppliers, all trying to work together. Organisations are always exploring next-generation technologies to improve the levels of performance of their supply chain.
Despite advancements in digital technologies, procurement processes are plagued with a plethora of challenges such as transparency, data inconsistency, trust, and time sensitivity. Paper-based processes are still common, resulting in reduced transparency across networks. Companies facing these challenges are using analytics, IT, and big data to improve supply chain visibility. Newer technologies are replacing older EDI technologies used in the supply chain.
One of the best possible solutions for the transformation of procurement organisation has been Blockchain, which has catapulted into popularity due to Bitcoin and other cryptocurrencies.
Companies have been keen to use this due to the various features it offers such as secure collaboration for contracts, distributed and synchronised information management, and digitisation and standardisation of the multi-party supply chain.
Operational efficiency through smart contracts
Smart contracts are computer code pieces that are programmed to handle logical operations on Blockchain. They are little programs that automate the clause and ramifications part of the traditional contracts. In smart contracts the nitty gritties aren’t ambiguous; hence, smart contracts run by computers allow for a greater level of trustworthiness compared to humans or the intermediaries involved in the supply chain process. Similarly, if the Blockchain networks provide the distributed trustworthy storage, then smart contracts provide distributed trustworthy calculations. Cutting out such intermediaries means savings for businesses and since smart contracts are visible to everyone in the Blockchain they also promote greater transparency.
For example, if a proof of delivery is submitted by the logistics carrier, then, smart contracts will automatically trigger digital invoicing and payments through the banking system. As a result, it will reduce working capital requirements drastically and significantly simplify procurement operations, directly, achieving cost savings.
According to a McKinsey report, it is estimated that Blockchain could save businesses at least $50 billion in B2B transactions by 2021. nd, Gartner has estimated that by 2022, smart contracts will be in use by more than 25 percent of global organisations.
One of the biggest pain points of procurement professionals is the lack of trust with multiple parties involved. For this reason, various intermediaries have been put in place to establish trust between parties.
Blockchain enables businesses to store information in a secure database that is traceable and can’t be modified. It stores and records all transactions and changes the ownership at every step of supply chain. The applications are layered onto a cloud-based, tamper-proof network, ensuring digital trust.
This transparency and immutability feature of Blockchain ensures that transactions and agreements are verifiable, thereby, encouraging accountability among involved partners. For instance, during bidding, Blockchain’s timestamped transparency prevents new quotes from being submitted after the deadline, or any changes from being made including proposal parameters or bids.
Blockchain also relies on well-established cryptographic principles to authenticate unknown suppliers, thereby establishing digital trust.
Digitisation and standardisation
The multi-party supply chain is a sequence of mainly distinct methods undertaken for manufacturing, product development, distribution and marketing, and lastly reaching the end consumer. Digitisation and standardisation is a break from those conventions wherein the chain becomes a more organised ecosystem that offers more clarity and transparency to all stakeholders involved, ranging from suppliers of raw material to components to finished goods and end consumers as well.
The digitisation and standardisation of supply chains using Blockchain set the way for an integrated execution, which enables companies to experience the untapped possibilities of existing capabilities and achieve higher growth targets.
For example, currently, in an automotive supply chain, the flow of work happens linearly from the supplier to the OEM to the dealer. This feed-forward supply chain method doesn’t allow for efficient checks and balances for quality control on the supply chain. In the Blockchain supply chain method, due to distributed real-time update of information, the supply transforms from a linear process to a 360-degree process where every part of the chain has visibility into each other’s functions.
The goal of the digital supply chain is to fully integrate and make visible every aspect of the movement of goods.
Mitigating the risk of money laundering
Given that the Blockchain records every transaction on its ledger and the payment transactions are in public domain, any suspicious or malicious transaction can be easily identified, tracked, and acted upon before it damages the business.
While Blockchain has massive potential, there are challenges that needs to be overcome before Blockchain can proliferate. Firstly, business leaders and organisations are resistant to share information with unseen and unknown network partners. Apart from that, laws and regulations aren’t standard across countries. Therefore, industries must agree on best practices and standards of technology and contract structure across international borders and jurisdictions.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)