Part 2 in the 3-part series “Blockchain and the Supply Chain.”
Through blockchains, companies gain a real-time digital ledger of transactions and movements for all participants in their supply chain network. But don’t let the simplicity of the tool overshadow how transformational it is. The benefits to be gained will save you time, money, and effort on several fronts — and have the potential to redefine how you do business.
Procurement: more visibility and more savings
Companies negotiate procurement discounts based on the total number of purchases they drive. Your business may ask other people to do purchasing on your behalf, but the consequence is that it’s hard to keep track of the volume you drive across subsidiaries, business partners, and everyone else in your supply chain network.
Blockchains make that simple. With a constantly refreshed digital ledger that incorporates data from all your relevant partners, your company can see the total volume regardless of who directed the purchase activity—without each user having to share its operational data with the others.
Without a blockchain, companies hire many people to audit their orders to capture these volume-purchase benefits. Large businesses can have dozens of professionals spending days and nights to audit each one to add up all the gains they’re supposed to receive. (For example, EY assisted a large consumer goods company that had 60 people devoted to this task.) But blockchains do this work without the staff and without any added time, eliminating the extra price-verification process.
Data and analytics: better data, better outcomes
The oldest phrase in computing is “garbage in, garbage out”—and nowhere does that apply more strongly and more expensively than in supply chain management. To compensate for uncertainty in how much product or material is in different locations – how much actual demand there has been in a period of time—companies put in extra inventory.
And while that inventory is often cheaper than a lost sale, it’s far from free. In the technology industry, it is often estimated that keeping $1 of inventory costs 20 cents to 40 cents per year, when you account for both the cost of capital and the rapid depreciation of technology products.
With blockchains, through the ability to track and manage resources at the ecosystem level, the payoff should be much greater accuracy and, from there, better forecasts, and the need for less inventory to maintain the same service level.
Digital contracts and payments
The average U.S. Fortune 100 company has more than 60 days of sales outstanding. That’s how long it takes for companies to get paid after completing a task or delivering a product in the real world. What’s odd about this statistic is that nearly all these companies are interacting with each other in contracts that specify payment upon receipt or, at most, within 30 days.
The gap between contracts and reality comes because payments, though themselves digital, are separated from contact performance by an “analog gap.” That is, work is done and invoices are generated, which are emailed to customers, who, in turn, enter them manually and decide when and how to pay them.
Smart contracts to end costly procure-to-pay gaps
The result is a ridiculous and insanely expensive dance as suppliers politely call and nudge customers to pay, while customers aim to cash in on the float by entering and processing invoices at a snail’s pace and occasionally “losing” them. Blockchains can put an end to that by integrating delivery and payment in digital contracts that flow across enterprises and integrate with logistics partners and banks.
Using smart contracts, where the terms are payable upon receipt, a proof of delivery from a logistics carrier will immediately trigger automatic digital invoicing and payments through the banking system, with no analog gap between customer and supplier. The result has the potential to radically reduce working capital requirements and dramatically simplify finance operations, with a direct impact to the bottom line.
Putting a stop to the rogues
Blockchains give these supply chain networks the chance to create one shared truth without one all-powerful, centralized intermediary. Each participant has a copy of the ledger, and all transactions and movements are part of that ledger. If any participant tries to game the system or perpetrate fraud, that company is manipulating only its ledger and is immediately out of sync with the rest of the ecosystem, a powerful deterrent to bad behavior.
Sounds good, right? So what’s the catch? You may be thinking that the blockchain is yet another “solution” in a long line of others you’ve purchased, and that you’re not ready to rip everything up and start again. The good news: you don’t have to. I’ll discuss how you can seize upon the supply chain of the future in the last article in this series.
Originally published on August 30, 2017 by Paul Brody in The D!gitalist magazine online.