Blockchain is a revolutionary technology that has the potential to transform all kinds of digital B2B transactions, including procurement and supply chains. As a distributed database that supports tamperproof records of each digital transaction, blockchain could be the foundation of a new supply chain and source-to-pay era. From payments to audits for tracking inventories and assets, blockchain technology in the supply chain could deliver a new level of trust and transparency.
What is the Supply Chain
Supply chain is an end-to-end system that creates products and services and delivers them to the customer. Supply chain is bidirectional because it can move forward as well as back. For example, with product returns and refunds.
Supply Chain Management (SCM) is the active management of supply chain activity to maximize customer value and achieve a sustainable competitive advantage in the most cost-effective way possible. Supply chain activities cover everything from product development to sourcing, production and logistics, as well as the information systems needed to coordinate these activities.
Organizations that make up the supply chain are “linked” together through all flows.
Physical Flows: Physical flows involve the transformation, movement and storage of goods and materials. They are the most visible piece of the supply chain.
Information Flows: Information flows allow the various supply chain partners to coordinate their plans, and to control the day-to-day flow of goods and materials.
Financial Capital Flow: Supply chain has both Accounts Payable (A/P) and Accounts Receivable (A/R) activities. This includes payment schedules, credit, additional financial arrangements and funds flowing in opposite directions: Receivables (funds inflow) and payables (funds outflow). The integrated management of the financial flow is a key SCM activity and one which has a direct impact on the cash flow position and profitability of the company.
Value Flow: Value chain is a series of interconnected activities that are required to bring a product or service from conception, through the different phases of production, delivery to final customers, and final disposal after use. At each stage of the chain, there is some addition of value to the products or services.
The Flow of Risks: Supply chain risk is a potential incident or failure to supply the product or service to the customer and in consequence, a financial loss for the whole supply chain. Risks, therefore, can appear as any kind of disruption, as deficiency of physical infrastructure, natural disaster or any event damaging the reputation of the firm.
Main Issues with SCM Today
Tracking the chain: As a consumer, we don’t really know the true value of the products that we are using. Lack of transparency in modern supply makes it impossible to know the components of each supply chain.
Not scalable: The problem with running a complex supply chain is that it’s necessary to trust all the participants. Today there are too many components in each supply chain, and it is impossible to keep track of all of them.
Costs: There are four main factors that increase the cost in traditional supply chains:
- Procurement Costs
- Transportation Costs
- Inventory Costs
- Quality Costs
Globalization: Globalization occurs when a company starts operating on an international scale. With suppliers in different geographic locations, it can be challenging to coordinate and collaborate effectively. It can also be increasingly difficult to maintain trust.
How Blockchain Improves the SCM
Blockchain is a time-stamped series of immutable records of data, that are managed by a cluster of computers, not owned by any single entity. Each of these blocks of data are secured and bound to each other using cryptographic principles. Every time a product changes hands, the transaction could be documented in the blockchain, creating a permanent history of a product, from manufacture to sale.
Blockchain in procurement could enable the creation of tamper-proof smart contracts that automatically implement terms of multi-party agreements. Smart contracts can verify their own conditions and execute by releasing payment to the appropriate party. Contracts could be originated to include multiple parties across an entire supply chain with the value and terms fully integrated from end to end, and with the execution of the conditions at each stage.
Order validation and approval, invoice processing, multi-way matching and entire request-to-receipt process could be radically enhanced through the application of blockchain during the procurement process. Smart blockchain and orders could automatically trigger pre-agreed payments upon completion of the transaction cycle.
Benefits that Blockchain Can Bring into the System
Transparency: The product’s journey is documented from its’ point of origin to all its’ suppliers. This increases the trust among the various parties in the supply chain because all the data is visible for everyone to see.
Global Accessibility: The blockchain network can incorporate any and all participants of the supply chain network. Additionally, regardless of their geographical location, everybody will be able to connect with the blockchain.
Immutability: All records in the chain are free from corruption. Plus, the strong security from its innate cryptography will eliminate audits, saving time and money.
Based on the preceding parameters, it is likely that blockchain technology and supply chain management systems will be compatible. In fact, all the flaws of the current supply chains can be easily mitigated by using blockchain technology.