Whether you are familiar with Blockchain or not, you might have already heard about cryptocurrencies. Rooted in finance, blockchain can be applied to many things including procurement. The technology can record and track essentially any data you want. If there’s an element of a good or service that can be tracked, blockchain can help you do it. The goal of this article is to help procurement decision-makers better understand the benefits of this technology.
What is Blockchain?
What is Blockchain?
To put it simply, the technology can record and track essentially any data you want. Indeed, if there’s an element of a good or service that can be tracked, blockchain can help you do it. Blockchain isn’t really something new. The concept has been around for about a decade.
The technology is essentially a digital ledger. The benefits of this technology are that it is both decentralized and distributed. In other words, blockchain transactions do not require agency, and multiple copies of each transaction may exist in more than one location. These two elements lead to great security — falsifying the record in one location is impossible because of the true, untampered version that resides everywhere else. This makes blockchain a permanent, tamper-proof record keeping device.
Blockchain for Procurement
Beyond the hype and other markting buzz words, procurement can tremendously benefit from Blockchain. Indeed, the security-focused and peer-to-peer nature of blockchain technology offers some unique benefits which can be applied to great effect in supply chains.
One of the biggest issues in procurement are trust and transparency when multiple organizations or even buyers are involved in the various stages of the buying process. As you may know, trust can lead to not collaborate with unknown suppliers or justify the existence of complex financial terms until the supplier proves to be a worthy partner. Most organizatins rely on financial institutions and insurance agents to mitigate these risks.
In procurement, establishing due diligence can get quite costly and time-consuming as well.
By leveraging a blockchain-based infrastructure, information at each step of the shipping process is logged in a secure and accessible database, which cannot be modified by any of the parties involved without it becoming immediately apparent to others. In other words, if something unplanned would happen during the shipping process, the supply chain can be precisely traced back to the point at which the mistake occurred. So, both the company and suppliers can see every step of the product and hence anyone who caused a problem can be held accountable. The data sources can simply can be taken from manual scanning at factories centers, or from automatic processes such as temperature sensors within freight containers.
Another worth mentioning example of blockchain applied to procurement would be related to malicious transactions. Indeed, as blockchain technology records every single transaction in its ledger, all payments and financial information are accessible in the public domain.
Consequently, any suspicious or malicious transactions are incredibly difficult to hide, and can be flagged and dealt with before they can damage the business — both in terms of revenue and brand image.
The other key application is related to contract management. Placing orders and processing payments is still a manual job for many procurement and finance departments. Through blockchain, things cound change. Indeed, a smart contract is a set of executable code that runs on top of a blockchain application to carry out the contract. Smart contracts are able to automatically identify, negotiate, and close deals right across a supply chain, and without the need of a trusted third party. This workflow allows the given company to significantly recude transaction costs and facilitate more advantageous trades.
The smart contract will work exactly as it has been customized, with terms and conditions able to be specified by both sides. When pre-determined conditions are met, the smart contract will automatically deliver a result. For example, if a payment has been received, a delivery can be automatically triggered. This application can also be very handy when it comes to supplier onboarding since all of them have access to the hiring contract.
Blockchain establishes digital trust between suppliers.
From a purely payment perspective, smart contracts can be also be very helpful to procurement organizations. B2B payments are usually very complex and slow as many details have to be put down on paper. Procurement teams are therefore often dealing with repetitive tasks such as drafting contracts, talking to insurance and finance before finalising payment, etc. These lengthy processes not only delay the vendor but might mean another purchase cannot be initiated until the first one is processed.
According to industry reports, over 50% of organizations still write checks for their B2B transactions.
Procurement Data security
Just like most company departments, procurement teams have started to care about data. As such, the issue of data safety has also become a relevant topic for procurement decision-makers. Indeed, procurement teams are surronded by a lot of sensitive data that could cost a company millions if it falls into the wrong hands.
Some of you might be familiar with Cloud storage solutions but it’s not as secure as digital ledgers — and cloud services are getting expensive as your data pool continues to grow.
Through advanced cryptography techniques or private blockchain, critical information, certificates, and other documents can remain obscure to avoid duplication or any sort of compromise.
The end of intermediaries
Procurement organizations are particularly interested in cutting costs. This goal can become easier through the use of blockchain-based applications. Indeed, if most of the procurement repetitive tasks are managed automatically through smart contracts, and data is secure, and we have no use for intermediaries, then there is a lot to save. Moreover, automating processes increases accuracy.
The two most important features of blockchain — trust and transparency — have tremendous implications for procurement, especially as it relates to the supply chain and source-to-pay processes.
Because there is a network of computers storing the data, verification of information is more robust. In blockchain, every transaction is linked together, creating a more trustworthy string of information. Because there is no authority that ‘owns’ the data, there is zero chance of that data being manipulated in one way or another to benefit one particular party.
As we said before, blockchain could represent a major shift for intermediaries and procurement organizations. Indeed, companies and intermediaries (such as bankers, brokers, lawyers, etc.) who make their living on validating, identifying, and verifying information will become less relevant.