Blockchain – a game changer for the supply chain

PHOTO: Blockchain technology promises an incorruptible record of transactions for the supply chain/Pixabay

Blockchain technology is new, and here to stay. It offers unique and valuable characteristics for data storage that are of great value for their security, cost savings and disruptive potential.

A blockchain is an incorruptible record of transactions distributed across many peer-to-peer computers in a network. A valid record is one that a majority of the computers in the network agrees upon as being identical across the majority of those networked computers. That is, a distributed ledger. Its records are encrypted and given the need for agreement across a majority of the network computers (nodes), making it is virtually impossible to alter or fake a record.

The blockchain has a number of characteristics that provide significant opportunities in supply chain activities:

Immutability – Once stored on a blockchain, a transaction record cannot be altered, therefore it cannot be faked or falsified in any way – it becomes immutable.

Security – Cybercrime is on the rise and information technology everywhere is vulnerable. The blockchain provides an unhackable distributed database of highly encrypted transaction records.

Smart contracts – Transactions are done in accordance with legally binding contracts, each with a number of conditions that must be met. All of those can be programmed into a “smart contract” that ensures all conditions are met before any related transaction can take place. For instance, payment cannot be released unless all defined conditions – delivery, quality, timeliness, etc. are met. The record of each condition being met is part of the transaction record stored on the blockchain and therefore secure and immutable.

Overhead / cost reduction – The use of smart contracts removes the need for middle persons in any transactions. For instance, if material is received, the receiver’s record is part of the transaction record and cannot be changed. Then the inspection record is added to the transaction – also immutable and triggering yet another condition in the smart contract. When each part is added, it triggers recognition of yet another condition in the smart contract. When all conditions are met, the smart contract then automatically executes the next step in the process. In our example of receipt of materials, it may trigger payment to the supplier. That automation of work flow in a secure manner provides opportunity to eliminate various people and steps in supply-chain processes.

Eliminating people from such processes eliminates the most common source of errors – humans! Nothing can fall through the cracks because of transcription errors or lack of signatures because someone is away.

Forbes[1] has estimated that up to 30 per cent of invoices have errors and those errors can cost $20 to $200 to correct. IBM[2] estimates that data breaches and stolen records can cost $141 per stolen record and cost an average of $3.6 million per company.

The smart contract can issue a notice to your bank to pay the supplier without the need for anyone in accounts payable or even accounting to process the payment instruction. On the supplier side, there is no more need for accounts receivable and chasing of payments. The smart contract can be programmed to take advantage of early payment discounts and to avoid late payment penalties.

In a 2016 survey by iPayables[3], no AP departments used blockchain. That study involved some 30,000 CFOs, controllers and finance professionals, for companies with over $50 million in revenues, processing an average of more than 22,000 invoices per month. The study reported that 59 per cent  of invoices were processed electronically, but by only 28 per cent of the companies.

Larger companies with large volumes of transactions relied more heavily on electronic processing, but efficiency of handling was largely the same as manual methods given the manual steps in matching and verifying aspects of each transaction. On average, these companies had six people processing transactions in AP departments (range was 1 to 24 people). Electronic invoicing increases the number of invoices per month per person dramatically but there are still manual verification steps. Blockchain enables elimination of most (if not all) of those people.

That study identified opportunities for 62 per cent reduction in AP staffing, $50k per month in discount capture potential, and a 10-day reduction in approval time to pay. And that was for companies using manual systems. With only 28 per cent using automated systems the potential is huge. With no one yet using blockchain, the savings will grow even further.

The entire procure-to-pay cycle is simplified, made more secure and efficient. It becomes less expensive and far less error prone. The execution of supply chain processes will depend on the skilled set-up of contractual conditions in standard “smart contracts,” and far less on clerical staff that may be prone to error, delays and even falsification of information.

Any transactional environment – where there is a need to ensure conditions are met among parties that are essentially strangers to each other – can be made entirely secure and efficient through the use of smart contracts executed on a block chain distributed ledger system with massive savings potential to those who use it.

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[1] “Don’t Tell Your CFO How Much It Costs to Pay Your Bills,” Forbes BrandVoice, 25 Feb 2015.

[2] IBM Security and Ponemon Institute’s 2017 “Cost of Data Breach Study: Global Overview,” Ponemon Institute, LLC, Traverse City, MI, 2017.

[3] “Why Automation Matters: A survey study of the modern accounts payable department,” iPayables, Inc., 2016.

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James Reyes-Picknell is the Principal Consultant in Conscious Asset – an Asset Management specialty consulting and training firm. An experienced engineer and consulting executive, author of books and many articles, and blogger, he is widely regarded as a thought leader and subject matter expert in his field. He can be reached at www.consciousasset.com, james@consciousasset.com or +1 705 727 7436.