Transforming Procurement Function with Blockchain

The year 2019 has seen significant headwinds in the form of a slowdown in global growth, volatility in emerging markets, trade wars and Brexit. Faced with these threats, the role of the CPO has only strengthened beyond cost reductions to ensuring a stronger supply chain via stronger collaboration with suppliers.

According to recent research by the Hackett Group, some of the biggest priorities for procurement leaders are:

Enhancing Supplier Collaboration: Supplier relationship management continues to be one of the top priorities for procurement organizations and companies are heavily dependent on reliable suppliers who deliver quality goods on time. In the absence of dependable suppliers’, projects get stalled, product rollouts are delayed, and customers are unhappy. Effective supplier collaboration and management has emerged as an essential organizational competence.

Improving Cost Reductions: One of the most critical functions of procurement is to deliver commercial benefits to the business, which has been and will continue to be important. Procurement executives, therefore, are looking to achieve this objective through innovative ways. Cost reduction remains the top priority for Chief Procurement Officers across the globe as they look to support growth in dynamic markets.

Increasing Visibility: Procurement as a function encompasses a lot of transactional processes such as purchase requisition, purchase orders, invoice approvals, etc. These processes are manual in nature and lock up key business data. Data which can be analysed and used in optimising operations. End to end visibility remains one of the most important goals for procurement leaders across the globe.

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency” say Bill Gates.

Enterprises are increasingly shifting their focus from manual, labour intensive procurement operations to a more digital procurement approach. As per a recent Gartner report, the future state of procurement will focus on execution speed and business insight as key value drivers and the procurement delivery model will shift to a Hybrid Centre of Excellence (COE) from a standalone corporate function.

Automation in procurement provides clear visibility to business, facilitates better supplier relationship and delivers continuous cost savings. Technologies such as artificial intelligence, chatbots and blockchain are on the verge of bringing about a fundamental change in the procurement function. As per a recent Gartner report, 75% of procurement executives consider displacing low-value added activities to spending more time working with business partners on urgent issues.

Here are some ways how Blockchain can support the procurement function to deliver value. Essentially, blockchain facilitates aggregation of records as a ledger for processes involving multiple parties. It is internet and user-driven database that automatically adds a new record as a digital fingerprint for every new transaction and updates occurring in the supply chain. It is a reliable system of record which every participant can update and inspect, thereby eliminating the need of any centralized authorizing agency. The efficiency and security of transactional and logistical data that is usually exchanged between stakeholders in a B2B or B2C environment can be significantly improved using blockchain.

Smart Contracts: These are contracts that are embedded in a program code on the blockchain and handle a variety of process applications. Smart contracts can automatically find, negotiate, and close deals without the need of a trusted third party.

The smart contract will operate based on the predetermined set of conditions specified by both buyer and supplier sides and will automatically trigger an event when these conditions are met. For example, when a payment is received, the delivery can be automatically started. On the other hand, when a condition has not been met – such as timely delivery – a penalty can be triggered automatically.

Order & Logistics Management: Blockchain can facilitate enhanced services such as invoicing process, order validation and documentation from request to receipt, shipment details, returns and more. In case of any exception the system will automatically integrate the changes and reduce the completion time. Also, with blockchain, organizations can manage inventory better, get insights on product shelf life, delivery routes, consignment tracking, etc.

E-Invoicing using Blockchain: Blockchain has the potential to revolutionize the invoicing creation to pay process. The document on the blockchain network can be visible to all parties in the network. The entire process from receipt until payment to the history of exchanges can be accessed via the network. Though this is still very early stages, it is expected that this technology will eventually be adopted not only for invoice processing but also for other services such as factoring and extending this information to third party financiers to discount bills.

Dealing with Security & Trust: Procurement deals with a lot of sensitive data and while cloud storage provides a safe solution, it’s not as secure as digital ledgers provided by blockchain. Blockchain avoids duplication and any sort of compromise of critical information, certificates, and other documents. Blockchain can facilitate access to the transaction logs for all parties present on the network. Buyers can rate the quality of the goods and services provided and the vendor’s performance as well.

Global Conglomerate’s Payment Processing Transformation with Blockchain

One of Thailand’s largest and oldest cement and building materials company, adopted blockchain as a platform to keep track of payments from suppliers. They were processing around two million invoices per year and the staff members were manually verifying related documents.

The process of course was very time consuming – approximately 70 minutes from invoicing to payment. Also, the costs involved per transaction were high for suppliers, for banks and for the company. The implementation of Blockchain technology in the form of distributed ledger helped cross check documents and conduct a three-way matching process to verify invoice data from suppliers and lessened the overall time spent in the process. As a result, they were able to decrease the amount of time per transaction by over 50%. By storing and managing purchase orders on the system, they also ensured data security and availability for easy auditing and analysis.

Blockchain has a lot to offer for the procurement function in terms of transparency, end-to-end visibility, efficiency, improved trust and security. Blockchain as a technology can embed trust between parties as transactions and agreements become verifiable. The technology enables supply chain to be tracked at every stage and should any mistake happen.

A well-known proverb goes: “If you want to fast, go alone, if you want to go far, go together.” Enterprises are waking up to the immense opportunities with collaboration – collaboration not only to share learnings and experiences but also share information and conduct collaborative transactions. For instance, for the first time in October 2019, seven leading metals and mining companies joined forces with the World Economic Forum to accelerate responsible sourcing via blockchain solutions. They intend to significantly accelerate speed to market and improve “industry-wide trust” via this initiative. One of the largest American retailer company is reportedly using food traceability system using blockchain to ensure authenticity and provenance for their products.

Leading procurement organizations are taking additional responsibilities beyond just cost drivers to value added activities that drives agile sourcing, product innovations supported by suppliers and faster turnaround for customers. Given that this technology is fast and has very strong audit trails, it is likely to have a huge influence on the way procurement organizations of the future will look like.