Blockchain’s Potential to Transform Procurement and SCM

Blockchain technology looks poised to revolutionise supply chain management, offering unprecedented levels of transparency, traceability and efficiency. 

At its core, blockchain involves distributed databases that hold tamper-proof records of digital transactions, making it particularly well-suited for application in the procurement and supply chain space. 

"Because they are essentially a transaction-based technology, blockchain technologies are ideally placed to be leveraged in procurement,” explains Simon Thompson, VP Sales Northern Europe at JAGGAER, the enterprise procurement and supplier collaboration specialist. 

“Specifically, blockchain could completely reshape supply chain and source-to-pay (S2P) process efficiency, supporting automation and traceability.”

One application of blockchain already gaining traction is smart contracts – strings of code that sit within an individual block on a blockchain and automate actions where predetermined conditions are met.

CPOs can thus define rules around a transaction so that certain conditions and obligations are enforced.

“Each step of the supply chain that produces a new line of data can be automated to ensure full traceability throughout the supply chain,” Simon adds. 

Paul Brody, Global Blockchain Leader at EY, highlights another concept he believes is crucial to understanding blockchain's potential in supply chain management: tokenisation – in other words, turning a product or piece of inventory into a digital token. 

"Tokens are really useful because blockchains manage them very carefully,” says Paul. “You cannot, for example, give a product token to your customer without removing it from your own inventory.

“Because blockchains enforce reconciliation between all token transfers, supply chains that make sure of blockchain technology are likely to have much better and more accurate inventory data and share visibility across the network.”

Paul further elaborates on the role of smart contracts and their ability to define tokens themselves, facilitating the creation of all different kinds of assets – from simple fungible assets (such as money, piles of screws) to high value non-fungible assets (such as serialised products).

This flexibility allows for the modelling of virtually any supply chain by adapting token designs to specific needs. 

Smart contracts also govern how tokens move between parties and automate various business operations, including replenishment orders and inventory management.

Improving transparency and traceability

Blockchain has huge potential to enhance transparency and traceability. 

This is particularly important when it comes to sourcing materials in categories where there is a high incidence of corruption, such as the extraction and mining industry, or to identify the source of contamination in food supply chains. 

The technology's potential is further amplified when used to complement other emerging technologies, as Simon outlines: “In combination with IoT, blockchain technology can increase the traceability of products and materials across the entire supply chain, helping identify the location of materials at any stage of the supply process.

“Sensors in delivery trucks will, for example, be able to provide real-time information about the movement of goods, but also provide information on conditions such as levels of refrigeration.”

Access to such information gives procurement teams the ability to predict breakdowns and intervene before they actually happen – particularly relevant to the pharmaceuticals and food processing industries, where the ability to track the materials and ingredients that make up a finished product is likely to become embedded in regulatory requirements. 

Paul, meanwhile, emphasises the impact of blockchain on data accuracy and reliability.

He continues: "The enforced traceability of all transactions on chain – and the enforced reconciliation – means that, instead of copying data between silos, you're actually moving ownership of digital assets in your blockchain model. The result is much more accurate, reconciled and reliable data.”

This level of data integrity is unprecedented in traditional supply chain systems and offers significant advantages for businesses seeking to optimise their operations.

Streamlining cross-border transactions

International trade and cross-border transactions have long been plagued by inefficiencies, delays and high costs.

Fortunately, blockchain technology offers promising solutions to these persistent challenges.

Simon says: “Because of its immutability and embedded automation capacity, blockchain can reduce the need for third-party services such as banks, transfer services, card processors to process transactions.

“This provides quicker settlement, saving both parties time and promoting liquidity for suppliers.”

This impact stretches beyond financial transactions, with businesses able to register new clients automatically once a payment is sent, streamlining processes while maintaining transparency and accountability.

Moreover, blockchain's applicability in identity management, contract management and document verification can significantly reduce the potential for fraud and money laundering in international transactions.

Paul highlights potential for process improvements based on EY's client work, which has demonstrated a staggering 99% cut in processing cycle time and 40% cut in administrative costs using smart contracts.

“The ability to integrate payments and business rules also promises to simplify international trade and the process of moving credit throughout the business network,” he adds. 

These efficiency gains could transform the landscape of international trade, making it faster, cheaper and more accessible to businesses of all sizes.

Enhancing sustainability and ethical sourcing

As consumers and regulators increasingly demand transparency in supply chains, particularly regarding sustainability and ethical sourcing, blockchain offers powerful tools to meet these challenges.

Simon outlines the complexity of the issue: "Ethical and sustainable procurement faces a number of complex issues, such as the regular verification that certifications are up to date, as well as the need to integrate new reliable sources of sustainability, diversity and inclusion data into their processes.”

Blockchain's immutable record-keeping and traceability features make it an ideal technology for addressing these concerns, especially when one of the major challenges in longer supply chains is losing sight of the point of origin of materials. 

This makes it harder for companies to verify that sustainable materials really were created in a sustainable manner.

"Blockchain-based traceability makes it much simpler to keep track of raw materials, assuming all the supply chain partners participate,” Paul goes on. “Since everyone uses the same network and the network itself is designed to be tamper-proof, it gets much harder to insert fakes or obfuscate the origin of products.

“Not only can we track the origin of components, but we can keep adding information about those items as they move through the network, such as total carbon content and offsets. We’re talking with a number of clients about the kinds of detailed emissions and offset tracking that will be increasingly required to move goods globally.”

This level of detailed tracking and reporting could revolutionise how businesses approach sustainability and ethical sourcing, providing unprecedented visibility into supply chains. 

Barriers to adoption

Despite these clear sustainability benefits, Simon emphasises the need for firms to take stock of their existing processes and systems and evaluate blockchain’s integration in their ecosystem – as they should for any new tech investment. 

There remains a general lack of understanding across industries, including procurement, as to how it actually works and what is required to adopt it. 

He advises: “Businesses must assess short-term, tangible benefits or procurement management, interoperability with existing technology and applications and their ability to  change transactional processing to accommodate a ledger-based methodology such as blockchain.”

What’s more, companies should take into account that the number of transactions and users in their network will grow rapidly, meaning the system needs to be scalable to accommodate growth. 

It will also need to be flexible to ensure constantly-developing legal and regulatory requirements are easily met.

“These issues may make it daunting for a small to medium-sized business to embark on blockchain technology adoption,” continues Simon. “But, as the arc of adoption consistently reveals, early adopters can benefit from great potential – even when applied across just a handful of processes – to make it worth the initial investment.”

Elsewhere, Paul points to privacy concerns as another significant obstacle, calling it the “biggest barrier to adoption by far”. 

He adds: “It’s great for transparency and traceability, but most firms don't want to share that much detail with the public.”

Paul notes that even private blockchains don't fully address this issue and says the use of a complex type of maths called a zero-knowledge proof is necessary to make privacy work.

EY has been investing heavily in this advanced cryptography, recognising its importance amid widespread blockchain adoption in business contexts.

As blockchain technology continues to evolve and mature, its impact on supply chain management is only set to grow. 

Paul Brody concludes with a glimpse into the future: “We recently completed our first proof of concept that uses tokenisation to track supply chain components from 'dirt' to the data centre.

“I'm hopeful we'll move to a pilot and then production with this client. It's very exciting to see the concepts of sustainability, traceability and inventory management all come together in a single infrastructure.”

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