How blockchain technology could revolutionize procurement

April 16, 2019

Here at Fairmarkit, we always have an eye on how new technologies might improve the lives of procurement professionals. Among the most hyped advances of the last few years has been blockchain, a new means of logging, securing and storing information. Defined by Fortune as “concatenated blocks of transactions [that] allow competitors to share a digital ledger across a network of computers without need for a central authority,” this technology has the potential to impact almost everything. To believe its most ardent proponents, blockchain is nothing short of revolutionary.

The revolution is a long way away. Still, many companies are already experimenting with blockchain in order to increase visibility, flexibility, and cost savings in procurement. Keep reading to learn more about what blockchain is, how major-players are deploying it and understand why procurement should carefully watch this technology moving forward.

What Is blockchain?

MIT describes blockchain as a “public, permanent, append-only distributed ledger.” This seemingly simple definition has a lot to unpack.

Blockchains are public in that the information they encode can be accessed by anyone. They are permanent in that no party may change or destroy the information contained in any constituent block, making them tamper-proof. They are append-only, meaning that old entries cannot be altered, though new ones may be added. They are distributed in that they are not controlled by a central authority. And ledger, here, means much the same thing as a sales or purchase ledger. Blockchain is, at its core, a record of transactions.

Digital procurement specialist Bertrand Maltaverde helps put things in perspective when he writes that, “Many present blockchain technology as a ledger or some database. Describing blockchain as a form of digital trust is more meaningful, and gives a better idea of its true potential.” The trust blockchain engenders is key.

Blockchain, because it is secure, transparent, and decentralized, allows different parties to approach transactions with confidence. And because of its distributed digital infrastructure, it allows businesses to streamline processes, create transparency and improve cooperation at every stage of supplying and sourcing.

For these reasons, some of the world’s largest companies are beginning to explore the potential of blockchain in supply chain and logistics contexts.

How are companies using it

Early innovation is coming from companies with stake in efficient supply chain management.

Since 2016, Walmart has partnered with IBM to study how food makes it from farm to table. The two corporations used blockchain to map the stages produce passes through before reaching a consumer’s home. While Walmart was primarily interested in bolstering supply chain transparency and enabling its stores to pin-point the source of contaminated food in real time, they discovered that the technology had broader implications.

Blockchain helped Walmart save time, remove costs in the forms of overhead and intermediaries and reduce the risk of tampering, fraud and cybercrime. After the study, employees could trace the source of food in 2.2 seconds, a process that previously took seven days. Walmart’s currently has test programs set to expand on this work in ambitious ways, and their expectations for it are high. According to a recent white paper, Walmart anticipates blockchain will deliver value by increasing consumer trust, minimizing waste and fraud, improving sustainability, easing compliance, producing charts of unwieldy global supply chains and focusing product monetization efforts.

Similarly, in 2017 global shipping giant Maersk implemented blockchain to optimize transit routes and automate a shipping process that required many intermediaries and more paperwork. Not only does blockchain allow each party to a shipment access to information on its location, scheduled arrival, and contents in real time, but it removes the need for many middlemen. Its digital infrastructure all but eliminates paperwork from the process. Because blockchain places customs documents, proof-of-payment, and other critical shipping information at the ready, companies need enlist fewer lawyers, border agents, and onshore representatives.

Though adoption of the technology remains low in procurement—as of 2018, only 6% of companies had blockchain programs in the pilot phase, and a further 17% said they were considering adding blockchain to their repertoire—it is growing quickly. Maersk has already enrolled 92 participants in a blockchain collaboration, and is in the process of rolling-out a proprietary supply chain platform based on its blockchain infrastructure. Walmart, for its part, has already patented many of the blockchain-adjacent technologies developed in the course of its studies. As scalability improves, and if early adopters continue to see cost and time savings, expect to see blockchain implemented elsewhere.

What does it mean for procurement?

At Fairmarkit, we speak with procurement professionals every day about their challenges, and there are some common complaints. Procurement professionals in every sector and industry struggle with transparency, poor data, procedural inefficiencies and unclear digital strategy.

Perhaps the reason why blockchain is generating so much buzz in procurement is because it promises to kill all of these birds with a single stone.

In its current implementations, blockchain is already:

  • Unmasking supply chains and creating unprecedented visibility throughout the procurement cycle.
  • Generating and storing huge quantities of data, allowing organizations to produce analyses and insights that can drive strategic sourcing initiatives.
  • Automating traditionally paper heavy processes by digitalizing payments, contracts, invoices, shipping manifests and more.
  • Increasing efficiency through AI and machine-learning enabled automatization and IoT integration. For example, smart contracts, programs that run as soon as certain conditions are met (e.g. automatically processing a transaction with the winning bidder at an auction without human intervention).

In short, blockchain has the potential to move all aspects of “old school” procure to pay into the future.

Aligning value and values

Some commentators are drawn to blockchain for more than potential improvements in cost savings and efficiency. They are drawn to the technology because it promises to bring cost value in alignment with human values. It will make help make it cost effective for companies to invest in ethical labor and sustainable shipping and products, and ensure better outcomes for consumers and businesses alike.

If this sounds utopian, it is. For now. By pursuing this utopian vision, however, procurement has an opportunity to be a leader in world innovation in the coming decades.

We’re still a long way away from full (or even majority) adoption. Blockchain still faces serious barriers to scalability, high on-boarding curves, security vulnerabilities, and unknowns businesses will encounter in the coming years.

The evidence is there, however, that procurement should carefully watch this technology as it develops.

Expert procurement and supply-chain tips sent straight to your inbox.