Blockchain: Disrupting Procurement and the Supply Chain

If you have heard a lot about blockchain but don't really know what it is, you're not alone. The success of Bitcoin and other cryptocurrencies has given blockchain a major leap forward. But cryptocurrencies aren't the only place where blockchain technology makes itself useful. It can completely disrupt procurement and supply chain operations. First, however, it's important to have a bird's eye view of blockchain. 

What is Blockchain?

Blockchain is a distributed ledger system where all transactions are recorded in a decentralized manner. For example, imagine you have a database management system where you maintain one set of records/transactions. Despite security measures, there will always be the possibility of data being overwritten or maliciously updated as it is a single point of failure.

With blockchain, however, there is no single point of failure. Any transaction made over the peer-to-peer network gets encrypted and is padded from others (forming a ”block"), which is in turn linked (or "chained") one after the other (hence the name “blockchain"). These are then recorded in a decentralized manner over a peer network, making the system immutable. In other words, any transaction/activity you conduct is recorded and verified in multiple places over the network.

Now that we have a basic understanding of what blockchain is, here are some common supply chain problems that any organization/industry faces and the ways in which blockchain can solve them:

1. Lack of transparency: Supply chains involve multiple points of contact. From the moment raw materials are procured until the point the final product is delivered to the consumer, a product goes through many stages. In case of product returns due to quality concerns, it becomes a herculean task to identify the stage of the supply chain where the error occurred.

What blockchain does is enable a system to track the purchase of raw materials and navigate through the point of sale, eventually reaching the end user. This also involves leveraging other technologies like IoT (Internet of Things) allowing many organizations to make giant steps towards supply chains transparency.

2. Lack of authenticity: Authenticating data is of utmost importance in many businesses. Let's take the case of the property insurance industry. A key aspect of its supply chain is validating data before deciding on a premium amount or settling a claim. For example, when a property is being insured, how would an insurer validate its history? There might have been a fire incident in the past, or other damages, but there is no foolproof way for the insurer to check this.

Now imagine all the records related to this house (like buyer, seller, property history, monetary transactions) stored on a blockchain network. This establishes authenticity of the data and makes it easier for the insurer to validate premiums/claims. Similarly, with health insurance, a patient's medical history could be stored on the blockchain network, constantly updated by hospitals and insurers over time where they are preserved and centralized free from disputes. In this way, blockchain can help solve problems related to authentication/validation in the supply chain for service-related industries and become a form of digital trust.

3. Seeing supply chain as a cost center: Most organizations view supply chain and procurement as cost functions rather than revenue functions. However, if blockchain is part of company's supply chain, it can actually be leveraged from a marketing angle. A growing set of consumers in any given industry want to know what really goes into their product, like whether it conforms to ecological and health standards. Now, imagine a coffee manufacturer running an advertising campaign on how their entire supply chain aims to eliminate the unethical working conditions that often exist in the coffee supply chain. They can use blockchain as a platform to provide proof and real-time updates to its consumers, showing how the company meets labor standards and other environmental best practices.

4. Hassles in invoicing and payments: Managing invoices and payments, an important part of the Procure-to-Pay (P2P) process, requires a lot of manpower and is time-consuming. Maintaining these records involves significant paperwork if there isn't sufficient digitization in the process. Additionally, the buyer needs to validate delivery of goods or services as per the required quality. For example, the procurement of marketing-related agencies involves performance-driven retainer fees, and correctly analyzing the performance of campaigns affects these fees.

Blockchain can address some of these problems via its "smart contracts" feature. A smart contract is a self-executing contract that enables the stakeholders to encode conditions. Using the above as an example, the buyer wants to work with a digital agency for promotional campaigns to give clicks/redirects to their website and are willing to pay 1% of sales coming from these campaigns. Integrating smart contracts would mean automatic payments to the agency based on the conditions set in the contract, post-validation.

Many startups are working on implementing blockchain across industries from the supply chain side, and it won't be long before we start seeing blockchain disrupt supply chains in ways we never previously thought of!