In part 1 of this blog we were looking at how blockchain and Distributed Ledger Technology (DLT) can tame inventories and put buyers and suppliers on a firmer footing – with significant savings available to both.
Equally enticing is the possibility of lassoing working capital by getting to grips with the payment cycle.
Despite most supply contracts stipulating 30 days payment terms, the average U.S. Fortune 100 company has more than 60 days of sales outstanding. Multiplied over the global economy that is a massive inefficiency.
To take even a small fragment of this bigger picture, according to a 2018 BACS survey in the UK, late payment is costing smaller businesses there more than £2 billion a year. And that’s only the costs you can measure in monetary terms, without calculating intangible costs.
Blockchains end the charade of payment-chasing by integrating delivery and payment in ‘smart’ digital contracts that seamlessly connect buyers and suppliers with logistics partners and banks.
Using smart contracts, where the terms are payable upon receipt, a proof of delivery from a logistics carrier will immediately trigger automatic digital invoicing and payments through the banking system, with no analog gap between customer and supplier.
The result has the potential to radically reduce working capital requirements and dramatically simplify finance operations, with a direct impact on the bottom line. It is important to note that there are still barriers from a legal and regulatory perspective to tackle, and that is something we all need to tackle together: some more examples below.
Certainty over inventory has other implications too. It is common to negotiate volume discounts for a single organization, but much harder to implement this over a total ecosystem, where you are rewarded for all the purchases made by your value chain partners.
The volume will be larger, the potential discount juicier, but the difficulty of proof – to the satisfaction of a skeptical supplier – much more challenging.
Right now, companies are hiring in teams of expensive auditors to validate their discount claims, with a team of 60 in place at one consumer goods company, according to management consultants EY.
With DLT you can mathematically prove the volume and discount you have claimed, while preserving the privacy of each partner’s volumes, without the staff and without any added time.
Cutting out the middleman
There are also radical cost and efficiency advantages when it comes to replacing and enhancing supply chain processes where redundancy (in the form of middlemen) has been built-in to create trust.
Usually people ‘get’ how DLT cuts out intermediaries such as banks and agents in financial transactions. They also see how each of these intermediaries adds cost and delay to any process in which they intervene.
The same principle also holds good for inventory in a supply chain where automation with smart contracts overcomes the fact that individual transactions may have a much lower value than, say, a house purchase, or may even be for just a few cents.
Unlimited use cases
These examples of how DLT in the supply chain raises efficiency and reduces costs are just scratching the surface.
Consumers now demand transparency on where and how products are made. They want to see reuse, return, and recycling of materials.
Regulators around the world demand information about supply chains — with penalties for noncompliance. Trusted digital ledger solutions can fulfill these needs, especially when combined with other technology stacks, such as AI and Analytics.
Then there is the fraud angle. Organizations want reassurance that invoices and paperwork are real and not part of a scam or a redirection. In recent years, banks have lost hundreds of millions of dollars through metals trading scams that rely on fake paper warehouse receipts – all of which would have been reduced significantly or eliminated by DLT.
DLT can also locate and prove the source of flawed parts or component failures and automate the complex, fraught process of dispute resolution.
In any supply chain, delays involving weather, labor disputes or just error are inevitable but DLT-optimized processes can instantly trigger remediation actions like supplier substitutions or price adjustments — before a crisis emerges.
The array of possible use cases is, literally, unlimited, which also implies the potential to select the wrong use case. It is therefore vital to find a reasonable way to qualify and assess potential use cases before going too far and launching a PoC that will never reach production scale.
Proof of Business and Rapid Prototyping are approaches that can really help in this context.
Not as hard as it sounds
Somewhere along the line, alongside the reputation damage caused by cryptocurrency-related abuses and manipulations, blockchain has become known for being complex and hard to deploy.
In my view, there is no valid reason why that needs to be true if you approach it in a reasonable way. That means by thinking disruptively but implementing and integrating in a sensible way.
Integrating blockchain and DLT into your supply chain does not need to be complex, you can start today with simple steps and scale out. DLT essentially functions as a layer supplementing your existing enterprise resource planning (ERP) software or any other related software you may have in use.
Your underlying process and the interface to your software remain as they were, with the difference that you now can trust that your inventory numbers (and those of all the other participants) are more accurate, as are the prices based on the consumption of your ecosystem, and you know what has happened to the underlying data along the way.
Done properly, a DLT implementation based on a standards approach and a permissioned blockchain , should fit invisibly within what you have now.
If there is one obvious place to confirm the value of DLTs for your organization, it is in the supply chain. To discuss how to get to a Proof of Business within five working days, you can contact me.