Procurement is a critical business function. The efficiency and effectiveness of procurement have a direct impact on a supply chain’s performance. Therefore, it is crucial for procurement professionals need to have a reliable and trusted system to support all their procurement decisions. Some of the common challenges faced by procurement are record traceability, data security and privacy, data integrity and fraud prevention. Blockchain technology has great potential to tackle these challenges by enhancing visibility of transactions, data integrity, automating smart contracts and fraud detection. However, blockchain technology is costly to implement and integrate with existing systems. Existing IT infrastructure must be scalable as blockchain consumes significantly more computing resources as the ledger grew with more transactions. New processes must also be able to comply with existing legal and regulatory requirements. Procurement staff must also be trained and upskilled. Management must weigh its costs to benefits carefully to derive optimum value from this revolutionary technology. This article discusses the use of blockchain technology for procurement applications.
Table of Contents
Supply Chain Transparency
Blockchain Technology offers a clear and transparent record of all transactions in one place. Greater transparency and communication help to break down silos and facilitates cross-functional work. Integration with enterprise resource planning (ERP) system and linking third parties through electronic data interchange (EDI) with blockchain technology offers new opportunities and advantages. The benefits include increased customer trust, improved brand loyalty, builds supplier trust which supports stronger industry collaboration and partnerships. Blockchain also enhances supply chain visibility by proper recording of all activities e.g. inspection and audit reports, safety tests and non-compliance. Transparency also builds trust and can reduce inspection and assurance costs by avoiding the need for expensive third-party verification systems. This facilitates seamless workflows in the organisation and improves both efficiency and effectiveness. Blockchain technology provides a transparent record of all transactions in one place. It also safeguards trust and transparency when multiple agents are involved in various stages of the supply chain process. It can also be used to empower the buyer by ensuring the traceability of all goods throughout the purchasing cycle.
Data Sharing and Collaboration
Blockchain technology provides a secure method of tracking transactions from sourcing, acquisition and payment. This technology has innate security and reliability due to its decentralized ledger. Blockchain allows shared and synchronized digital databases maintained by consensus algorithms and stored on multiple ‘nodes’ that these nodes have access to. Whenever there is a change in the ledger, the node makes the change visible to all users. Upon change approval, the transaction data will be time-stamped, cryptographically signed and added as a new block in the existing blockchain ledger. No further change or alteration by any party is allowed, making blockchain a great choice for peer-to-peer sharing and record-keeping. Back in the day, file transfer methods often rely on central servers, which can be susceptible to single points of failure and potential security breaches. Security is ensured since most nodes will not accept a change, should anyone try to edit or delete an entry.
Contract Management
Blockchain-based smart contracts provides businesses with a new level of transparency by creating unique digital records of all the transactions. This greatly enhances contract management by providing an accurate and updated view of contract performance, credits or rebates. A contract management system capable of smart, self-executing contracts with predefined rules and conditions is one of the key benefits blockchain technology. Efficiency is vastly improved by automating various aspects of contract execution and enforcement to reduce manual effort. This minimizes human errors, delays. Blockchain technology in procurement supports transparency at every stage of the supply chain lifecycle. It can keep a tamper-proof record of every single transaction that has occurred. This real-time visibility streamlines communication and decision-making and enables timely updates and notifications to relevant parties. All stakeholders are kept informed about the status of a contract, leading to faster contract cycles and improved collaboration. Blockchain offers a more secure way to monitor a product or transaction from procure to payment.
Dispute Resolution
Smart contract feuds often involve testimonies and expert reports containing information about new technologies that the parties wish to keep confidential. To avoid potential disputes, business process owners and legal teams can intervene early in the technology discussions. They should seek legal counsel to avoid potential legal implications and pitfalls. In the event of contract disputes, relevant parties should seek to resolve them amicably without a trial. The optimal solution for resolving blockchain-related disputes is by Alternative dispute resolution (ADR), which provide mediation, arbitration and neutral evaluation. The benefits of ADR are avoiding the publicity of a court trial, protecting confidential information, less formal and significantly less expensive than traditional court proceedings. The field of decentralized justice seeks to leverage blockchain and mechanism design to build conflict resolution procedures. This can provide options for fair, efficient and less expensive conflict resolution. Disputes and disagreements are expensive, time-consuming and destroy hard-earned trust and goodwill. They could impact individuals, communities, organizations, the government, and the economy.
Fraud Prevention
The cardinal feature of blockchain technology is known as the immutability of transaction records. This enables end-to-end traceability, thus reducing counterfeit products and unauthorized modifications. Similarly, blockchain-based identity verification systems heightened security by securely storing and verifying identity information, significantly reducing identity theft risks. With these transactions added to this blockchain, no alteration or deletion of data is permitted. This immutability makes certain that all transactions are traceable and transparent, providing a solid audit trail for fraud detection and investigation. By manoeuvring blockchain, organizations can effectively detect and forbid fraudulent activities by analysing the transaction history and identifying any doubtful or unauthorized transactions. The decentralized and distributed type of blockchain ensures no single point of failure exists. By capitalizing on smart contracts, organizations can automate fraud detection processes, sanction real-time monitoring and immediate action in response to apprehensive activities. Machine learning has the feature to analyse intricate patterns and enhance fraud detection accuracy, reducing false positives, and adapting to new threats over time. Machine learning models can be considered “black boxes”. It is challenging to interpret their decision-making processes, which can be a concern for transparency and trust.
Audit and Compliance
Blockchain-based compliance and record management with authenticity proof to maintain in a verifiable, safe and secure manner. Data integrity is vital in blockchain procurement. Blockchain-based compliance and record management provides authenticity proof to maintain records in a verifiable, safe and secure manner. Robust data verification mechanisms should be established to provide a form of assurance through independent distribution and segregated validation using complex encryption and validation protocols. This guarantees the reliability of procurement data created with blockchain. Records can be created as immutable and independent verifiable digital objects such as data, documents, emails, audio and video. The underlying foundation of auditing and internal controls can be embedded into each transaction. The internal audit design itself can be repositioned from a retroactive, point-in-time examination to an ongoing, real-time monitoring process. Blockchain audit is a comprehensive examination system. Its security, integrity, and compliance comprise verifying transaction records, smart contracts, and system configurations to ensure accuracy and compliance with regulations.
Traceability of Ethical Practices
Technology can aid in speeding up the procurement process and improve internal communication between different departments within a company. Reduce the time it takes to find and approve vendor proposals. Help streamline the process by creating access to a variety of resources and tracking information associated with bids and contracts. This blockchain technology allows stakeholders to verify the ethical sourcing practices of raw materials and components because the transactions are always time-stamped and up-to-date. The organization can query a product’s status and location at any point because blockchain empowers the secure recording and storage of transactions and data. This helps to withstand issues like counterfeit goods, compliance violations, delays, and waste. The COVID-19 pandemic has made a headway toward consumer demands and has amplified the need for step-up visibility and traceability within supply chains. By facilitating the traceability of materials such as cobalt and diamonds, blockchain supports fair trade practices and helps reduce utilization. Work towards sustainable development goals aimed at individual, responsible production and ethical business practices.
Conclusion
The most complete technologies now are blockchain technology. Consequently, banks, suppliers, and buyers may face more risks, inefficiencies, and problems if blockchain technology is not used in procurement. Traditional systems can lack visibility into the movement of goods, leading to inefficiencies and increased risks. Conventional non-digital methods are prone to human errors and often require third-party intervention. Current approaches to recording supply chain transactions leave blind spots that can cause problems for the parties involved. The consequences on transaction processing and scalability, as well as the existing difficulties in supply chain management, further complicate the integration of this technology. Blockchain relies on real-time, large data transfers. Hackers can intercept data as it is transferring to internet service providers. Blockchain users are typically unable to detect a routing attack, so everything appears normal. Data security risks and scalability concerns are among the key challenges faced when not implementing blockchain in procurement. The transaction processing underscores the need for blockchain to be used with extreme caution when it comes to procurement practices.
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