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Home / News and Insights / Insights / Blockchain for businesses: the future of supply chains?

What is a Blockchain?

A blockchain is a decentralized ledger for recording transactions among multiple parties in a verifiable and tamperproof way. The ledger itself can also be programmed to trigger transactions automatically.

How does this apply to supply chains?

In the context of supply chains, blockchains are useful as they allow parties to protect their business operations against malicious actions while supporting better performance.

When blockchain record keeping is used, assets such as units of inventory, orders, loans, and bills of lading are given unique identifiers, which serve as digital tokens. Participants in the blockchain are also given unique identifiers, or digital signatures, which they use to sign the blocks they add to the blockchain. Every step of the transaction is then recorded on the blockchain as a transfer of the corresponding token from one participant to another.

How does this work in practice?

Conventionally, a retailer generates an order and sends it to the supplier. At this point, since no exchange of goods or services has taken place, there would be no entries in a financial ledger. However, with blockchain, the retailer records the digital token for the order. The supplier then logs the order and confirms to the retailer that the order has been received –  another action that is recorded on the blockchain but would not generate an entry in a financial ledger. Next the supplier requests a working-capital loan from the bank to finance the production of the goods. The bank verifies the order on the shared blockchain, approves the loan, and records the loan’s digital token on the same blockchain, and so on.

What are the advantages of using blockchain in supply chains?

Increased supply chain transparency

Parties in a supply chain network may have limited visibility of what happens at each level. Blockchain solutions give permissioned participants greater visibility across all supply chain activities by providing them with one verified ledger which records every update in the supply chain. This means that less time can be spent validating data and more can be spent on delivering goods and services by improving quality and / or reducing cost.

A more resilient supply chain

One unexpected event can cause a cascading array of supply chain disruptions. Blockchains use smart contracts that automatically trigger when contractual obligations have been met enabling payments to be issued. Smart contracts can also be programmed to assess the status of a transaction and automatically take actions such as releasing a payment, recording ledger entries, and flagging exceptions in need of manual intervention; counterfeits can be traced back to their source using the blockchain trail. Put simply, blockchain gives near real-time visibility into operations and affords the ability to take action earlier should there be an exception.

Streamlined supplier onboarding

New supplier onboarding is a time-consuming, manual experience for both buyers and sellers in a supply chain. Blockchain solutions can speed up this process by creating an immutable record of new vendor details that business network participants can trust. This could be particularly beneficial in cross-border trading, which involves manual processes, physical documents, many intermediaries, and multiple checks and verifications at ports of entry and exit. Transactions are slow, costly, and plagued by low visibility into the status of shipments. By connecting inventory, information, and financial flows and sharing them with all simultaneously with transacting parties, a blockchain enables companies to reconcile purchase orders, invoices, and payments much more easily.

Financing

An open record of a party’s details on the blockchain could also be beneficial when looking to secure financing. Banks that provide working capital and trade credit to businesses involved in supply chains will need to verify the information regarding a borrower firm’s business, the quality of its assets, and its liabilities. This is to prevent companies borrowing money from several banks against the same asset, or requesting a loan for one purpose and then using it for another. Banks design their processes to control such risks, which increases transaction costs, slows down access to capital, and reduces the capital available to small firms. A blockchain could provide a verifiable record of this information – cutting down costs and time spent in verification.

Looking ahead

There is considerable room to improve supply chains in terms of end-to-end traceability, speed of product delivery, coordination, and financing. Blockchain can be a powerful tool for improving supply chains but the extent of its success will depend on the ability of each company to integrate them within their present processes.

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