Are Blockchain and Procurement a Good Match?

Among the dizzying array of new technologies that are reshaping business today, blockchain is among the most mysterious and intriguing.  The theory behind blockchain is quite compelling. Networks of computers use cryptography to allow each participant on the network (or along the supply chain) to update a central ledger in a highly secure manner, without a central authority.  Such a system, where trust is built in, reduces the time and cost associated with lengthy back and forth business processes and facilitates the tagging of items in the supply chain without revealing sensitive data.  The ability to track movements across the various stages of a product lifecycle become much more acute, thereby improving the efficiency of the entire supply chain (i.e., defective products can be quickly identified so that damage/loss of revenues and/or reputation is limited).  

The Hackett Group, a strategic consulting and research firm familiar with procurement environments, in their research report “Blockchain: The Emerging Application Platform for Digital Business Ecosystems”, defines blockchain as “an application platform to design, build, run and manage decentralized applications that are based on a distributed ledger data architecture and distributed business logic.” Blockchain applications run on a peer-to-peer network and support execution and registration of transactions between participants over a secure ecosystem.

Despite the promise, blockchain is still clearly in the experimental and pilot stages although some applications, such as Bitcoin and other cryptocurrencies, have already been around (although not universally embraced) for a few years.

Blockchain and smart contracting

When analyzing the issue of supply chain integration, much can be accomplished through adjustments to workflow so that integration between multiple players across a supply chain is improved. Not all improvements necessarily have to fit into a blockchain scenario because a secure ledger approach may not be needed for that particular part of the supply chain coordination. Therefore, quite a bit of the data being integrated across a supply chain may not be held within blockchain. It could be processed in a cloud system that allows for the driving of analytics, awareness, intelligence, and wisdom across the supply chain.

Blockchain becomes attractive when stakeholders want to make sure that their data is secure or when they want the ability to manage “smart” contracts (a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract). If a manufacturer hands off a finished product to a logistics company, for example, who then gives it to a third-party company who’s going to store it at a cold storage facility, the manufacturer wants to make sure that the logistics company doesn’t damage your product and that they deliver the product on time.  When that product is shipped to a cold storage warehouse, the stakeholder wants to make sure that handling stipulations within the contract are not violated. If temperature sensitive, the stakeholder wants to make sure that the facility can properly store the product without damage or spoilage. All of this can be dealt with within blockchain through smart contracts.

As pallets of goods are tracked and monitored through Internet of Things (IoT) level sensors, stakeholders can start to monitor their product’s temperature, its health, its vibration levels by monitoring all of that and storing it in the blockchain. The stakeholder has real-time visibility into the standards of that contract and to whether or not the contract has been breached.  Thus, the blockchain becomes a very powerful tool for providing secure, transparent real-time access to contracts within the supply chain whether upstream or downstream.

Today, these scenarios are partly theory, partly reality. Blockchain is in its infancy and only partially understood by most people, because of its technology and business process complexity. To develop suitable use cases, business leaders must first better understand the technology, its unique characteristics and its limitations. 

To understand more regarding the fundamentals of blockchain, download the recent Hackett Group research report.

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