Catching the blockchain wave for procurement applications

Enterprises are increasingly realizing the ability of digital technologies to create a competitive advantage in the procurement function. To date, digital technologies like analytics, artificial intelligence, and robotics process automation have been widely deployed in various procurement domains.¹ Now, a much-hyped newcomer, blockchain, is swiftly gathering momentum.

Blockchain has advanced significantly since its early application as the underlying technology of Bitcoin, expanding its field of possible applications. In particular, its ability to enable transparency, traceability, operational efficiency, and trust among users could potentially disrupt procurement operations. Supply chain executives cannot afford to ignore this promising, but yet-to-mature technology. However, blockchain’s novelty and dynamic innovations can make it hard to grasp how this evolving technology could be applied in the real world. 

To help procurement organizations catch the wave of blockchain technology, this article examines blockchain applications in digital procurement. It highlights areas of applicability and discusses how different blockchain utilities can be advantageously harnessed across procurement processes.  

A framework for understanding blockchain applications

To fully comprehend blockchain’s relevance and potential to empower digital procurement, it is important to move beyond the basics (which are presented in the sidebar below) and understand the types of capabilities that it enables. Figure 1 depicts a blockchain utility-based applications framework that distinguishes three utility-based applications categories: the recording and exchange of data through an immutable, shared digital ledger; the recording and exchange of commercial assets through peer-to-peer (P2P) transactions; and process automation through smart contracts. All of these are supported by blockchain’s underlying tokenization utility. Let’s look at each of these utilities in turn. 

Tokenization Utility

For a blockchain network, tokenization is the process of converting anything of “value” into a digital representation or a token. A tokenized asset effectively represents a blockchain-based twin of a digital or real-world physical asset. 

Tokenized assets can be created as either fungible or nonfungible tokens (NFTs). Fungible tokens possess the same characteristics as a real-world fiat (or government-issued) currency with each token being interchangeable, indistinguishable, and replaceable. Nonfungible tokens, on the other hand, are unique, of limited quantity, and not easily replaceable. Through the tokenization of assets, the economic value and ownership of the underlying asset can be easily conferred, tracked, and validated based on transactions that are recorded in an immutable, irreversible blockchain ledger. The asset tokenization properties and process also make it possible to use NFTs to, for example, track and exchange supply chain documentation, conduct trades, and track and manage movements of goods. Additionally, tokenized fungible assets could represent an equity share or ownership in a venture, real estate property, or physical goods. There are a multitude of use cases for utilizing an immutable blockchain ledger and tokenizing assets, particularly within global supply chains. Indeed, tokenization undergirds the three applications categories discussed below.

Immutable, shared digital ledger utility

This application category focuses on blockchain’s ability to create records of digital representations of assets and all historical transactions carried out among a network of peers in order to provide a trusted single version of the truth. These applications capitalize on blockchain’s ability to create immutable data that is easily verified, audited, and accessed by all parties. Use cases in this category do not involve the exchange of digital assets on the blockchain. Rather the primary intent of these applications is to facilitate efficient and frictionless information sharing and to enhance data transparency and traceability. These capabilities pave the foundation for two brackets of use cases, namely static digital registries and dynamic digital ledgers.

Static digital registry/record keeping. Identity and credentials documents—such as patent/intellectual property (IP) rights, sustainability credentials, and product/part serial numbers—can be digitalized, fed, and stored securely on a blockchain. A static registry can be further enhanced by using NFTs, allowing any changes associated with the NFTs to be digitally tracked and recorded. Overall, static registry applications enable identity management and support the verification of related data. 

Dynamic digital ledger. Dynamic digital ledger applications are distinguished from static digital registries by the use of digital identity and data capture technologies (for example, RFID chips, barcodes, and internet-of-things sensors) in conjunction with the blockchain ledger. Such technology combinations create near real-time monitoring of and updates on supply chain “events.” As in the case of the static registry applications, NFTs may be employed, and additional information and context may be added to the metadata in the asset-tokenization process. 

Markedly, it is this application category that is gaining rapid momentum across various industries, notably in use cases pertaining to tracking and tracing. “Traceability” capabilities are harnessed for a wide range of provenance attestation applications, such as proof of authenticity, proof of origin, and proof of integrity. Meanwhile, “trackability” capabilities center on physical logistics tracking and monitoring applications, such as recording chain of custody and the freight in-transit environment (for example, temperature and humidity). In turn, when the track-and-trace capabilities are enhanced by blockchain, it enables more effective and efficient operations for anti-counterfeiting, sustainability, recall and return management, and regulatory compliance and reporting.

Peer-to-peer transaction utility

This application category revolves around the exchange of value or ownership among peers on the blockchain without the use of trusted intermediaries. Cryptographic tokens, time-stamped transactions, and automatic updates of ledgers are integral parts of the process. Here, the blockchain provides the technology that facilitates the exchange of ownership and creates the trust in the network, and tokenization creates a digital representation of the value. P2P transactions can be made for financial assets and for commercial goods and services, with fungible native tokens being used for financial assets and NFTs for digital or physical assets. A token-based blockchain not only enables direct, simultaneous execution of transactions without trusted third-party intermediaries but also allows the transfer of both ownership and value to be carried out in the same transaction. Thus, both time and related costs are reduced.

Smart contract utility

In this application category, companies leverage “smart” contracts that use data recorded on the blockchain to auto-execute business processes. A smart contract is a term used to describe pieces of code that are stored in certain types of blockchains that enable the execution of transactions when specific conditions are met. A blockchain with a smart-contract capability functions as a new type of virtual machine that is uniquely able to commit transactions, which are fully accountable on a blockchain ledger. When the smart contract, which is coded with an immutable set of conditions and corresponding actions, is triggered (such as when a party initiates a transaction by indicating that predetermined conditions are fully met), it will self-execute a set of corresponding actions. Smart contract applications have evolved significantly with “off-chain” connected capabilities that make it possible for smart contracts to interact with data outside of the blockchain environment. 

Blockchain applications in digital procurement

Blockchain has the potential to transform procurement operations. Figure 2 shows where each of the blockchain utilities described above can be incorporated into the various stages of both the source-to-contract process and the requisition-to-pay process as well as supplier master data and lifecycle management. For all of these applications, blockchain can either be architected as an intra-organization platform (private blockchain) or inter-organizational platform (public or consortium blockchain).

Supplier master data and lifecycle management

The goal of supplier master data and lifecycle management (MDLM) is to ensure data quality and enable the use of a consistent version of the truth about suppliers across different parts of the firm.² However, MDLM is challenging because supplier data often exist independently in various systems (for example, enterprise resource planning (ERP), business intelligence (BI), and other systems) across different business units, departments, and processes.³ Companies can build a blockchain network to support supplier MDLM by leveraging the blockchain’s shared digital ledger as a centralized repository of the data. An example of a blockchain application in supplier MDLM is the Trust Your Supplier (TYS) solution built on the IBM Blockchain Platform.

Blockchain can help from the first step of supplier MDLM: supplier onboarding. At most companies, supplier onboarding is a manual, repetitive, and lengthy process that involves multiple interactions with suppliers. These cumbersome manual processes make it difficult to verify identities and track supplier-related documents throughout the lifecycle of the supplier.⁴Smart contracts can be leveraged to automate supplier onboarding. With the automatic self-verification features, smart contracts can make it easier to register a new supplier by allowing trading partners to confirm their identities and the terms of contracts through secure and immutable digital records that are stored on the blockchain. Once registered, the smart contract can perform essential supplier assessments and accordingly, update the assessment ratings on the master data ledger. By automating the process, smart contracts help to reduce the time and cost associated with qualifying new suppliers and remove unnecessary intermediaries.

Once supplier master data are created, a blockchain shared ledger provides a single source of the truth, with the added advantages of providing data governance and ensuring the immutability of transactions. The shared ledger’s predefined rules act as gatekeepers of data quality and govern the way in which data is used. At the same time, by creating indelible records of all transactions, the shared ledger provides an audit trail for every movement and change of data from creation to use and including all updates. Overall, this application makes it easier for procurement teams to maintain an up-to-date registry of suppliers along with a tamper-proof trail of verified information throughout the MDLM processes.⁵

Source-to-contract procurement processes

A number of source-to-contract processes are promising candidates for blockchain applications, notably e-sourcing, contract management, and supplier management. 

E-sourcing. E-tenders and e-auctions involve various formal “requests for x” (RFx) processes, such as request for quote, request for proposal, or request for information. The complex process of compiling and reviewing responses to these RFx generally takes place via specifically dedicated electronic portals or e-sourcing platforms that connect various entities in a centralized closed system. These systems typically are available only to registered users and rely on third parties to issue timestamps for documents and bid submissions to provide legal proof that they have not been modified.⁶

An alternative to these third-party systems is a blockchain-based e-tendering and e-auction platform that uses smart contracts. Smart contracts can streamline and automate the RFx and bidding processes by automatically administering document publications and supplier submissions and validating any documents transmitted by suppliers. When the RFx deadline or the end of the bidding period is reached, the smart contract can automatically stop accepting new submissions/bids. Afterward, the RFx/bid assessment can be done either through the smart contract or by sourcing teams, depending on the complexity and subjectivity involved in the evaluation. Throughout the process, the blockchain can provide timestamps at the exact time of submission of any document/bids with tamper-proof records, eliminating the need for a third-party to issue timestamps. Furthermore, because blockchain data are immutable, the entire RFx/bid submission can be audited, making it a promising tool to fight against fraud and corruption. 

Contract management. Generally, contract management involves collecting and inputting contracts from across the organization into an ERP system. This may require gathering contracts from employee emails, scanned paper documents, and document management systems such as SharePoint. The digital ledger and smart contract utilities could help improve various critical activities involved in contract management, notably contract creation and repository, contract execution and renewal, and compliance management.⁷

Contract-creation processes are generally governed by business and compliance rules so that the appropriate template is selected to generate a contract. Smart contracts can be designed based on these rules to enable the communication and exchange of information needed for contract creation and approval. Once approved, the contracts are automatically recorded into the blockchain ledger repository, thus providing one authentic, centralized data repository of terms and conditions that is accessible to all users and eliminating the need for multiple data-maintenance efforts across different parts of the organization. 

The national government of Colombia is using blockchain in such a way to manage its mining contracts. Colombia’s National Mining Agency (NMA) has adopted blockchain technology provider Chainparency’s GoTrace system to mint mining contracts in the form of NFTs on a blockchain registry. By doing so, the NMA preserves the contract terms and ensures the authenticity of rights and contracts on an immutable ledger, while enabling the easy transfer and validation of mining title ownership rights. 

Additionally, smart contracts can be used to automatically enforce contract terms and monitor contract expirations. The smart contract can be designed so that it sends a proactive alert to procurement teams about an upcoming expiration date. Or it can be designed to automatically cancel nonperforming contracts as predefined in the smart contract codes. Concurrently, smart contracts also ensure contract compliance because they only permit a transaction to occur after all predetermined conditions are fulfilled.⁸

Supplier management. Supplier management primarily requires access to highly fluid and dynamic transactional data that describe business events and process states at certain moments in time. In many cases, however, there is no master ledger of all supplier management activities. Instead, such transactional data is often privately stored within siloed networks.⁹

A blockchain-enabled dynamic digital ledger, however, can be leveraged to provide both the trackability and traceability capabilities needed to fuel a supplier management system. By placing all the information and data regarding suppliers’ performance and compliance in a single location, procurement organizations can streamline supplier management. For example, the dynamic digital ledger can generate a unique code for individual suppliers and make it possible to access every transaction linked to that account instantaneously. These capabilities make it easier to track a supplier’s performance versus key performance indicators (KPIs) and monitor noncompliance risk.¹⁰

Also, because a blockchain ledger provides an indelible record of actions and asset movements, companies can create verifiable traceability logs to help them with compliance and regulatory audits, as well as reducing the risk of inadvertently supporting illegal and unethical practices.¹¹ For example, the renewable energy company Enviva uses Chainparency’s GoTrace to track and trace fiber loads destined to be included in its industrial wood pellets, a coal alternative. These records provide provenance for its sustainable sourcing claims. Other examples of blockchain-enabled traceability solutions include Honeywell’s Trust Trace for aerospace parts, VinAssure for wines, Everledger for diamonds, the IBM Food Trust Consortium for food retail, Provenance Blockchain for financial services, and VeChain for the fashion industry.

Requisition-to-pay processes

Requisition-to-pay processes entail many vital, but repetitive, tasks that require data transfer and interaction across many internal departments and suppliers. These tasks typically occur in ERP systems that often differ across departments and companies.¹² Blockchain can function as a bridge between different ERP systems, allowing users of different systems to channel data to the blockchain-enabled shared digital ledger.¹³ Furthermore, with smart contracts established between trading partners, blockchain can provide a digital and automated record that is constantly updated with the status of purchased and delivered goods. 

The requisition-to-pay processes that can benefit from blockchain applications include purchase order management; goods logistics, receipt, and inspection; and invoice and payment processing. 

Purchase order management. Purchase order (PO) management is an intricate process with many transaction-specific details that require validation by several authorized approvers before a PO can be issued. These task characteristics make it an ideal candidate for blockchain smart contract applications as an alternative to procurement systems that use email or electronic data interchange.¹⁴

Buyers can create a PO as a blockchain-based transaction with embedded business rules, including agreement terms like price, quantities, and ship dates, to name just a few.¹⁵ The PO transaction is then distributed and validated via cryptographic hashing. Once a supplier approves the PO on a blockchain, the invoicing process is triggered and automatically executed with assured conformance to the amount recorded on the PO. Overall, not only are PO records digitized and document flows improved, but the lead time and workload associated with the PO processing are also reduced.¹⁶

Logistics management. Blockchain’s dynamic digital ledger allows procurement teams to create an indelible record of the individual steps (blocks) involved in order shipping. In addition to the transaction entries, each block in the chain is also embedded with an encrypted identification of the parties involved, timestamps, and authentication of the transaction. This application enables seamless information sharing among partners in the network and is already gaining momentum to facilitate both domestic and cross-border transactions. Selected examples of blockchain applications in freight logistics areas are: CargoX, dexFreight, Shipchain, Slync, TradeLens, and WaltonChain.¹⁷

Moreover, a dynamic digital ledger can be leveraged in conjunction with smart contracts as a new automated tracking tool. In addition to tracking handoff status, the smart contract can specify predefined terms concerning shipping conditions (such as required temperature and humidity levels). Furthermore, because the smart contract’s event mechanism pushes notifications on event-related information automatically, it makes traditional status inquiries unnecessary. The use of blockchain would also help expedite inspections since all events are automatically recorded and event-related notifications would keep inspectors informed of what requires their attention.¹⁸

Invoice and payment processing. Manual, email-based account payable processes are plagued with common issues like data-entry errors, slow processing speeds, poor visibility, and vulnerability to fraud and noncompliance. With a shared digital ledger, the vendor can submit e-invoices via the blockchain and authorized parties can access and monitor them, as well as check credit limits and payments in a trusted and transparent manner.¹⁹

Additionally, companies can utilize a smart contract to automate invoice validation and reconciliation. When a product arrives and is scanned at the buyer’s warehouse, the smart contract could immediately trigger requests for the required payment approvals. It can also verify that the order complies with specified rule and budget specifications. If those specifications are met, then the smart contract would automatically initiate payments through the banking systems. Hence, the smart contract not only provides real-time status on invoice reviews and approvals but also allows for the real-time dispatch of payment upon approvals. In the event of disputes on supplier invoices for delivered goods, the immutable records on the blockchain ledger provide strong evidence to help settle the differences.²⁰

Finally, instead of making fund settlements through a traditional banking system, blockchains allow P2P financial transactions to be executed in cryptocurrencies without the need for trusted third parties such as banks and clearing houses. This application can offer users instantaneous payments for business transactions that are encrypted with the identification of the parties. Such P2P transactions facilitate faster settlement clearing that could reduce costs as well as risk and fraud related to counterparty settlements.²¹

Game-changing potential

Blockchain technology presents an immense potential to enable the path forward to the next stage of digital procurement. Blockchain applications can address challenges in various procurement processes, such as fraud and noncompliance, process inefficiencies, lack of supply chain transparency, and discrete databases. Given the imperative of digital transformation and the rise of blockchain among technological game-changers, there is no time to wait to begin exploring where it can be introduced to procurement and catch the wave of enterprise blockchain. 

Notes:

1. Capgemini, “Strengthen Your Supply Chain with a Digital Thread,” white paper, (April 2019); Ali Kamali, “Blockchain’s Potential to Combat Procurement Frauds,” CiiT International Journal of Biometrics and Bioinformatics (2019) 11 (6): 101–107.

2. Akhilesh Agarwal, “Mastering the ROI of Vendor Master Data Management,” Forbes, (September 28, 2020); Martin Ofner, Kevin Straub, Boris Otto, and Hubert Oesterle, “Management of the Master Data Lifecycle: A Framework for Analysis,” Journal of Enterprise Information Management (2013) 26 (4): 472–491.

3. Agarwal (2020); Ofner, et al. (2013); Dietmar Rietsch, “Put an End to Data-Management Woes in Your Supply Chain with MDM,” TheSCXchange, (April 26, 2019).

4. Accenture, “How Blockchain Can Bring Greater Value to Procure-to-Pay Processes” (2016); Arnab Banerjee, “Chapter Three–Blockchain Technology: Supply Chain Insights from ERP,” Advances in Computers, (2018) 111:69–98.

5. Accenture (2016); Banerjee (2018); Jan Philipp Bender, Kaj Burchardi, and Neil Shepherd, “Capturing the Value of Blockchain,” Boston Consulting Group, (April 9, 2019); William McKnight, “When Worlds Collide: Blockchain and Master Data Management,” GigaOm, (May 16, 2018); Amit Vats and Bandeep Kaur, “Overcoming Procure-to-Pay Pitfalls with Blockchain,” Infosys, (2021).

6. Jurij Matyskevic and Inna Kremer-Matyskevic, “The Economic Advantages of Blockchain Technology in E-Procurement.” Regional Formation and Development Studies, (2020) 2 (31): 17–27; Tahereh Nodehi, Aneesh Zutshi, and Antonio Grilo, “A Blockchain Based Architecture for Fulfilling the Needs of an E-Procurement Platform,” proceedings of the 5th NA International Conference on Industrial Engineering and Operations Management, Detroit, Michigan, The United States, (August 10–14, 2020).

7. Accenture (2016); Banerjee (2018); Vats and Kaur (2021).

8. Girish Mutagi, “Digital Reinvention in Procurement and Supply Chain with Blockchain, AI, and IoT,” LinkedIn, (March 22–April 22, 2018); Jim Pearce, Ana Conde, and Elouise Epstein “The Future of Procurement: Say No to Mediocre Technology.” Kearney, (2019).

9. Ofner, et al. (2013)

10. Sahil Guleria and Alok Sharma “NextGen Technology: Blockchain for Vendor Management,” Supply Chain Management Review, (May 12, 2020); Günter Hofbauer, “Blockchain Applications in Business Processes Exemplified for Procurement.” Economics and Business, (2019) 134–147; Praveen Rao, “Simplify Your Supply Chain with Blockchain-Enabled Digital Passport,” IBM blog, (November 5, 2019).

11. Atul Mahamuni, “How to Unleash Blockchain into Your Supply Chain,” Material Handling & Logistics (MH&L), (February 3, 2019); PwC “How Can Blockchain Power Industrial Manufacturing?” PwC publications (2019); Vikrant Viniak, “Beyond Cryptocurrency: Blockchain as a Value Creator & Connector,” Supply Chain Management Review, (2019) 23 (1): 26–29.

12. Banerjee (2018); Steve Thompson, “How to Improve Your International Procure-to-Pay Process,” Spend Matters, (September 1, 2020).

13. Pearce, Conde, and Epstein (2019); Vats and Kaur (2021); Matthew York, “What is Blockchain for Procurement?” CPO Rising, (April 24, 2017).

14. Amber Road, “Blockchain for Supply Chain: Smart Contracts & Purchase Order Management,” Blockchain for Supply Chain white paper series, (2018); Ana Farr, “How Blockchain Might Revolutionise the Procurement Process,” Spend Matters, (December 3, 2018).

15. Ibid.

16. Abbas Batwa and Andreas Norrman, “A Framework for Exploring Blockchain Technology in Supply Chain Management.” Operations and Supply Chain Management, (2020) 13 (3): 294–306; Kamali (2019).

17. Bender, Burchardi, and Shepherd (2019); Ken Cottrill, “The Benefits of Blockchain: Fact or Wishful Thinking?” Supply Chain Management Review, (Jan/Feb 2018) 22 (1): 20–25; Damien de Chillaz, Adrien Calvayrac, Jörg Junghanns, and Jean-Baptiste Meriem, “The Value of a Blockchain-Enabled Supply Chain,” Capgemini series, (2021); “Blockchain in Logistics,” DHL Trend Research (2018); Bill McBeath, “Blockchain, Identity, and CSR in 2018,” ChainLink Research (January 5, 2018).

18. Amber Road (2018); Banerjee (2018); Batwa and Norrman (2020); Shuchih Ernest Chang, Yi-Chian Chen, and Ming-Fang Lu, “Supply Chain Re-Engineering Using Blockchain Technology: A Case of Smart Contract Based Tracking Process,” Technological Forecasting and Social Change, (2019) 144:1–11. Iain Steele, “The Practical Application of Blockchain in Procurement,” Information Age, (August 20, 2019); Zycus, “Blockchain Technology: The CPO Guide to Transformative Technology,” white paper, (2018).

19. Accenture (2016); Banerjee (2018); Batwa and Norrman (2020); Vats and Kaur (2021).

20. Banerjee (2018); Farr (2018); Stuart D. Levi and Alex B. Lipton, “An Introduction to Smart Contracts and Their Potential and Inherent Limitations,” Harvard Law School Forum on Corporate Governance, (May 26, 2018); Zycus (2018).

21. Steele (2019); Antonios Litke, Dimosthenis Anagnostopoulos, and Theodora Varvarigou, “Blockchains for Supply Chain Management: Architectural Elements and Challenges Towards a Global Scale Deployment,” Logistics,  (2019) 3(5).