The
practical application of blockchain in procurement
20
August 2019,
Iain C. Steel
Any conversation about
blockchain usually starts and ends with someone muttering
vaguely about bitcoin and then moving swiftly away. However,
behind the boom and bust headlines of cryptocurrency, the
underlying blockchain technology is increasingly seen as a
potential market disruptor in the world of procurement and
supply chain.
So, what is a blockchain? Even the most basic description
tends to quickly dissolve into a long list of buzzwords. A
blockchain is essentially a database (or ledger) that is
distributed across a network of computers at the same time.
When a new record (or block) is added, it contains a timestamp
and a unique fingerprint of the previous block in the chain (a
hash), creating a linkage between the new block and the
previous block — thus, a chain of blocks. Old entries are
never deleted so the blockchain continually grows. Each time a
new entry is made, this is authenticated across the
distributed network of computers where a majority need to
agree to its validity before the transaction is recorded as a
new ‘block’. Simple(ish).
The answer to why this technology is so newsworthy is more
complex.
Smart contracts
Throughout this article I have
referred to ‘transactions’ and it would be easy to interpret
this to mean financial transactions. After all, this is where
blockchain was originally implemented. Things have moved on
somewhat and this is where the true power of blockchain comes
to the fore for the procurement professional – smart
contracts.
Smart contracts are essentially pieces of code that sit within
an individual block on a blockchain and automate actions where
predetermined conditions are met. This allows the author to
define rules around a transaction and enforce any obligations
automatically. Examples include:
- Digital keys: Once a pre-determined
date passes the digital key becomes useless, enforcing
payment. These keys could be virtual (for example,
software keys to permit time limited access to a service)
or physical (for example, timed access to a property).
- Chain of custody: Each step of the
supply chain that produces a new line of data can be
automated to ensure full traceability throughout the
supply chain. This has been used to trace and assure
ethical mining of rare earth minerals and even diamonds,
where there is a clear audit trail back to the place of
origin within seconds.
- Food and medicine: Tracing individual
batches following the identification of contamination,
saving not just time and money but also potentially
safeguarding lives.
The application of smart contracts is not a panacea for every
issue facing the modern procurement professional, but the
potential to automate everyday transactions and interfaces
will call on us to innovate in a way that has previously been
impossible. Transparency and traceability are essential
aspects of a well-managed supply chain and transactional
certainty can go a long way to improving trust relationships.
Managing
myths
Any new(ish) technology also tends to attract an element of
mythology, for example:
1. “Blockchain is Bitcoin”
There is a general conflation of cryptocurrency with its
underlying ledger using blockchain. This is perhaps inevitable
given that the technology can trace its origins to the
creation of Bitcoin, however there are now far wider
opportunities than just cryptocurrency.
2. “It’s the Wild West of criminality”
It is true that criminals can use blockchain technology for
illegal activity. However, it is also true that criminals can
use the postal system, transport system and worldwide
financial systems to conduct criminal activity. Blockchains
are used for legitimate tasks, just like anything else.
3. “Blockchain can’t be hacked”
One of the benefits of blockchain technology is its
security from hacking due to the distributed nature and the
need for over 50% of the computers in the network to ‘agree’
the transaction. Existing blockchains are theoretically
vulnerable to “51% attack” where an attacker manages to
control over half of the network and is able to exclude blocks
or modify the order of transactions.
However, they would have to tamper with all of the copies of
the record across the distributed network at the same moment.
For major public blockchains this is currently hypothetical as
it would require a huge amount of processing power and the
cost to undertake such an act would be massive; however, the
impact of future increases in lower cost processing power is,
at best, unclear. Smaller private blockchains remain more
vulnerable to this type of attack.
Limitations
The information is a flat file, so you can’t store information
like an image or a Word file. While this can be perceived as a
limitation, the combination of blockchain with other
technologies (the internet of things, data lakes) can serve to
remove this barrier.
Smart contracts are not contracts as we would currently
consider them. The distributed nature of the blockchain is, by
nature, global. This could lead to issues of jurisdiction,
dispute resolution, conflicting laws and so on, requiring
careful navigation by specialist advisors.
Any blockchain is also only as good as the data it contains.
Errors in coding, bugs and poorly designed smart contracts
could be exploited by criminals, so the benefits cannot be
taken for granted.
Future
I’m quite sure that any futurologist would agree with the old
Danish proverb “prediction is difficult, especially the
future”, however there are signs on the direction of travel in
the use of blockchain technology in procurement.
There is an increasing interest in streamlining payments. If a
smart contract is agreed to self-execute a transaction only at
the point when all pre-set conditions are met, this could
reduce the need for certain financial insurances at a
transactional level and further automate elements of the
accounts payable process. There has been some uptake of this
already, however the potential for further efficiency benefits
could become increasingly compelling.
All businesses are looking to improve productivity and reduce
costs wherever possible. The increasing use of smart contracts
could reduce the need for some intermediaries, remove
interfaces where human error could impact a transaction, and
automate mundane tasks between organisations whilst
maintaining security and traceability. For example, a simple
move to paperless transactions between commercial
organisations could lead to a significant transactional cost
benefit when used at scale, in addition to the benefit of
accuracy where the possibility of human error is removed.
The future of blockchain is likely to become a part of
everyday life over the next few years. The procurement
community might be facing a new world filled with buzzwords
but if we choose to embrace both the concept and the
technology, we could see tangible benefits across our real
world supply chain.
(This
article was first published as 'Editor's Choice' on the web
magazine Information Age, on 20 August 2019).
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