Point of View

How Blockchain will disrupt procurement

April 24, 2018

Blockchain has the potential to disrupt procurement as we know it, by unsettling its commerce and transaction foundations. This has become a hot topic, but: what is real; what is hype? And what real-world initiatives are enterprises and service providers undertaking right now?

 

HfS took inventory of the take-up of blockchain technology in the supply chain and procurement services space, as part of our Procurement As-a-Service 2017 Blueprint. We asked both enterprises and service providers about their vision for blockchain in sourcing and procurement processes and services, as well as about their current blockchain investments and implementations.

 

The benefits of blockchain—the 3Ts: trust, transparency, and transaction cost

In a nutshell: because blockchain eliminates intermediaries, speeds up transactions, and makes transactions traceable, it increases trust between all parties involved. This provides for many advantages in the sourcing and procurement value chain, including:

  • The rapid transaction time and low processing costs (transaction fees) of blockchain can add incremental productivity to downstream procure-to-pay activities.
  • With disintermediation in the downstream procurement value chain, blockchain can cut out the middle-man in transactions (especially avoiding those middle-men who function to provide trust or perform administrative tasks). Suppliers and buyers can create their connections directly, instead of going through intermediaries, thus streamlining the procurement process.
  • Smart contract functionality can bundle contractual elements directly into payments (such as volume discounts, payment terms discounts, and service level agreements).
  • The nature of the requests for information or requests for proposals (RFx[1]) can change, allowing suppliers to upload private information and answers onto a blockchain and reveal those by sharing a public key with the buyer, thereby streamlining, standardizing, and automating the inefficient RFx process.
  • Blockchain accelerates purchase order management by eliminating two-way and three-way checks on invoice payments and audits.
  • Supply chain provenance benefits from greater trust and visibility, by creating a single source of truth for POs, goods receipts, and invoices.

 

Reality check: Several blockchain technologies have serious issues with latency and network throughput.

 

Bitcoin, for example, suffers from delays in the confirmation of transactions, as well as rising transaction fees. The amount of energy used by the computing power that is required in the confirmation process of Bitcoin transactions is becoming a serious problem. Enterprises must be conscious of the transaction times and fees of different blockchain technologies and protocols. Blockchains that are not dependent on proof-of-work consensus (and therefore mining) could be faster and more efficient and a better fit for use cases centred around speed of transactions and low fees.

 

Smart contracts drive use cases in procurement and the supply chain

 

Further exploration of the use cases on which service providers and enterprises are currently working reveals a picture of blockchain having a wide array of applications for procurement and the supply chain. These include:

  • Supply chain transparency and accountability
  • Accelerated purchase order management.

 

What is a blockchain-based smart contract?

 

Smart contracts allow the performance of credible transactions without third parties. Therefore, parties can agree to terms and conditions and trust that they will be executed automatically, without human error. With a shared database operating a blockchain technology, the smart contracts are self-executed and self-verified, eliminating the need for a third-party intermediary. A smart contract is, essentially, a computer protocol intended to digitally facilitate, verify, and/or enforce the negotiation or performance of a contract. For example, after a payment has been made and registered via a smart contract, an enterprise can register new clients automatically.

 

55% of service providers[2] (n=9) have smart contract-focused projects underway with clients, making it the hottest area for sourcing and procurement blockchain projects.

 

Exhibit 1: Distributed ledgers, the blockchain, and smart contracts

Source: HfS Research, 2018

 

However, smart contracts face numerous challenges. These must be addressed, appropriately and satisfactorily, before large-scale adoption can be expected. For example, the legal status of a smart contract can be challenged. A smart contract isn’t necessarily ‘smart’ nor a ‘contract’ in the legal sense. It is essentially an “if-then” statement running on a blockchain. Legal contracts are much more complex. Several attempts are underway to solve the challenges, a recent development in Arizona, the state government passed a law clarifying some of the enforceability issues associated with the use of blockchain and smart contracts.  

 

Smart contracts enable supply chain transparency and accountability

The level of engagement by consumers in the supply chain is growing, because of the increasing transparency and accountability along the chain. The capacity to view the purchasing cycle on a
micro-level and share the details with multiple stakeholders is key to building credibility and trust
with customers. Blockchain is an immutable chain of transactions accessible either to the public or only to the involved parties, which increases transparency and accountability via audit trails of supplier goods, authorization, and supplier credentials.

 

Examples of blockchain technology projects:

 

Use case #1: Pharmaceutical procurement

IBM and Chinese firm Sichuan Hejia Co., Ltd. have created a blockchain-based, supply chain financial services platform for pharmaceutical procurement to help improve the efficiency, transparency, and operations of supply chain finance. The Yijian Blockchain Technology Application System uses Hyperledger Fabric to eliminate financial challenges in the pharmaceutical industry.

 

Due to nascent and slow credit valuation and risk evaluation systems, small and medium pharmaceutical retailers in China face difficulty obtaining loans from traditional financial institutions. Moreover, it takes more than three months to recover payments after delivering drugs to hospitals.

 

Partnering with IBM, Hejia has initiated a blockchain-based platform involving multiple stakeholders in the supply chain. The encryption of pharmaceutical trading and tracking transactions helps to establish transaction authenticity. Such encryption also helps to lower the credit risk with traditional financial institutions, allowing the process to be optimized and run more efficiently and effectively.

 

Use case #2: Agriculture supply chain

Infosys has been successful in improving transparency for agricultural supply chains using EdgeVerve’s Blockchain framework. It builds a network that includes multiple stakeholders in the supply chain; within the network each member has access to transaction information through a shared distributed ledger.

 

Contracts between multiple stakeholders are stored in the blockchain networks as smart contracts. Each contract is verified by a minimum of two other stakeholders on the same network. The relevant stakeholders certify a product with standard certificates. Once produce is harvested, logistics companies pick it up from the producers and deliver it to the factory. The delivery receipt is updated and made available to all stakeholders in the network. Once the factory accepts the consignment, the contract is fulfilled, and the bank is notified to initiate the payment. Meanwhile, the product is prepared for export to the packaging company. As a shipping request is raised, the owner of the packaging company can track the details of the imported product.

 

Use case #3: Digitization of shipping supply chain

IBM and Maersk, a global leader in container logistics, collaborated to create a blockchain platform to digitize the global shipping industry. The platform also includes artificial intelligence (AI), IoT, and analytics to reduce barriers and track goods digitally across international borders. The aim of the platform is to create a network of interconnected shipping corridors linking manufacturers, shipping lines, freight forwarders, port and terminal operators, customs authorities, and, ultimately, consumers.

 

Use case #4: Tracing and tracking food from farm to fork

Some of the leading retailers and food companies have collaborated with IBM to integrate blockchain into food supply chains. It will help to increase the visibility of the whole ecosystem, so that companies can identify any potential source of contamination and discard affected products, as quickly as possible.

 

All stakeholders in the global food supply chain—producers, suppliers, processors, distributors, retailers, regulators, and consumers—are connected, through the distributed ledger technology, to access to information regarding the origin and state of the food associated with their transaction.

 

The bottom line: Blockchain will become an integral part of the future of the supply chain and you should start testing proofs of concept now

 

As the impact of Blockchain and smart contracts on procurement clarifies, so do its salient points for use cases. Trust and transparency are two of the fundamentals for procurement—blockchain increases both. Furthermore, the introduction of blockchain technology into business networks and transactions lowers transactional costs.

 

Like the internet has been, blockchain is a revolutionary technology that will transform the way business is done. Procurement and supply chain leaders who are quick to adopt this technology are bound to benefit from the greater efficiencies and insights that they provide. They will be in a much better position to ‘seize the field’ and leverage competitive advantage from distributed ledger technologies for their businesses.

 


[1] RFx (request for x) encompasses the entire formal request process. The RFx process is conducted business-to-business (B2B) during the negotiation process and helps to manage expectations prior to purchase or procurement.

[2] Service providers that contributed to this report: Accenture, Aegis, Genpact, GEP, HCL, IBM, Infosys, TCS, WNS

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