Contract in a cloud
From the October 2018 print edition
Blockchain has been one of the hottest topics in procurement recently and is likely to remain so throughout 2019. The blockchain is and will continue to be a key tool in shaping the transparency of the supply chain. Through blockchain technology, information is shared and transmitted safely, enforcing contract compliance and improving controls. It allows business processes and data to be viewed across multiple organizations, which eliminates back-and-forth discussions, reduces the risk of fraud and creates new revenue and business opportunities.
Traditional methods of contract management require manual inspections, after-the-fact audits and record reconciliation, which are expensive, time-consuming and error-prone. Modern supply chains demand better solutions and visibility. How can organizations increase operational efficiency while balancing that with the need for better risk management?
The world is set to face major changes in the year ahead. These include the likes of further geopolitical turmoil, global trade wars and increased tariffs—all of which have the potential to disrupt supply chains. During this time, procurement will wield greater responsibility and power within their corporations. Organizational and decision-making processes will play a big role in the strategic actions that companies might take. In line with blockchain’s digital influence, there is also a predictable rise in digital adoption and use of cloud services. In fact, the research and advisory company Gartner estimates that by 2020, the “cloud shift” will affect more than $1 trillion in IT spend as organizations try to make their services agile.
One of the areas that might receive a lot of traction in the year ahead in respect to combating or mitigating supply chain risks are smart contracts. But what are smart contracts and how can they benefit an organization?
Without diving too deeply into the technical details, smart contracts are translations of an agreement—including its terms and conditions—into a computational code, or script. Blockchain developers write the script in such a way that it is void of ambiguity and excludes the possibility of different interpretations. The rules are automatically executed and validated when those criteria are met with no manual inputs required to enforce a contract term.
For example, let’s look at companies that transport food or pharmaceuticals. If certain goods are not kept at the right temperature or humidity, there are risks to consumer health and safety, as well as damage to the manufacturer’s reputation and brand. Just to give a picture of how important this is, every year, about 200 million tons of food spoils before reaching the market, due in large part to insufficient cold transport technology. In 2017, one of the UK’s top chicken suppliers had safety records that led consumers to buy expired chicken.
The manufacturer’s contract with the transport carrier could thus include blockchain technology with IoT sensors, RFID tags and remote temperature monitoring to ensure that products are kept in agreed-upon conditions. That contract could also encourage immediate action to fix any inconsistency outside stated parameters.
All these readings and variables are recorded on the blockchain, with information visible to regulatory bodies on a shared ledger to promote transparency. The smart contract detects any failure to comply with the agreed terms and automatically triggers compensation or fines, revokes payments or pauses production before the affected products get to customers. The parties can also use the shared data transparency to resolve disputes, but with all the transport readings promptly available, discussions (if necessary) are based on hard data.
Tracking the food chain
One company that is about to start enforcing smart contracts is Walmart, after two successful pilots suggested high scalability and flexibility of the technology. The company tracked the transportation of mangoes from a Mexican farm through US stores. In that experiment, the time required to determine the origin of any given product was shortened from almost a week to a mere two seconds. As of last spring, the company wants their suppliers to deliver products on time at least 85 per cent of the time. Enforcing on-time delivery through blockchain technology will help Walmart quickly and easily monitor suppliers that are committed to the contractual terms.
Another group of nine food giants are also teaming up with IBM to explore the technology and data management process to their food supply chains and will certainly push the implementation of the technology. A Chinese e-commerce giant, JD.com, is also implementing a monitoring system in conjunction with a beef producer in Australia by this spring where customers will be able to check how the meat was raised, butchered, and transported. It not only will improve their customer confidence but will use the system to track the origin of foodborne illnesses like salmonella. This tracking method improves food safety, as it will allow suppliers to quickly locate the source of contaminated products.
The blockchain is undoubtedly a powerful technology in its infancy. One impediment to succeeding is that it requires full participation from everyone in the supply chain system. However, it is evolving to become a more viable application, with fewer limitations as a technology that serves as an incorruptible ledger, and one that can trace every interaction. It is extremely valuable in areas where accountability is key.
Nonetheless, it is still far from being widely adopted by the supply chains of big companies. Innovators include Maersk and IBM who are using smart contracts at more than 20 ports (including Halifax); Fleet Complete is using smart contracts to develop standard frameworks for the trucking industry. Another technology venue explored by a company named Kwikxchange, focuses on supply chain financing and invoice financing for SMEs applying for a loan.
An important addition to the current process is the proper creation of the contract itself. Flaws in the creation of some contracts have allowed hackers to drain money from some companies, Decentralized Autonomous Organization (The DAO) being the worst case so far. Auditing and verification of smart contracts from experienced companies represents a new solution. Just as the legal department currently verifies a written agreement, some “bug finders” will also scrutinize the code of the contract and ensure that there is no compromise on funds, sensitive data or breaches. The most curious part of this is that some companies in this arena rely on an overly labour-intensive source code revision and testing performed manually by humans. A team blending academic and corporate verification experience—led by Yale and Columbia University professors and backed by software engineers from Facebook and Google—has created a system that uses automatic modular verification to break tasks down into smaller ones, allowing them to be solved in a decentralized fashion. It will mathematically prove that any contract is free of bugs and hacker-resistant.
Blockchain technology improves the quality of business and cuts out the middleman, providing compliance while increasing transparency. Aside from developing a plan to identify, assess, and monitor the various risks impacting your organisation’s supply chain, putting a blockchain plan in place to proactively and address them in anticipation can ensure the health of your bottom-line and provide competitive advantage. It is comparable to the Internet, which changed everything about business during the decades that followed its invention. Companies that position themselves at the beginning stages of this technological revolution will need to adapt fast but will be poised to experience great success.