Sourcing and Procurement
The Potential of Smart Contracts in Revolutionizing Supply Chain Management
Self-executing contracts that meet all pre-defined conditions without human intervention - this is not a futuristic fantasy but the promise of smart contracts today! Indeed, smart contracts are heralding a new dawn for the supply chain professionals who grapple with the inefficiencies caused by the lack of visibility across the various touchpoints. Inefficiencies, lack of transparency and high operational costs plague traditional supply chain management, eroding trust and impacting supplier relationships. A 2023 Gartner research report said smart contracts could unlock the value of blockchain-based applications, with the potential to positively impact diverse industries, supply chain being a key one.
In today's dynamic business environment, agility and adaptability are two key factors that aid businesses to stay competitive. Smart contracts help achieve these goals with a few other significant add-on benefits. They leverage the blockchain technology to enhance transparency and efficiency while ensuring security. One of the discussion points of The Gartner Hype Cycle™ for Web3 and Blockchain, 2024 report, is how smart contracts support new business models for digital assets. Gartner believes smart contacts are one of the top technologies that will reach the plateau of productivity in the next two years. They are not a passing trend but a transformational technology aiding better contract lifecycle management solutions.
So, what are smart contracts?
Understanding smart contracts
Smart contracts are digital contracts that execute automatically when meeting pre-set conditions. At their core, smart contracts are blockchain programs that define the conditions and terms to complete a transaction. They are defined as automated protocols that enforce and execute the terms of a defined digital contract. They perform trusted and tamper-proof transactions between anonymous parties without the need for any intermediary involvement.
Interestingly, smart contracts are not inherently smart; neither are they legal contracts in the traditional sense. They only contain codes that execute on verified conditions, triggering the next activity as expected by all stakeholders. They do not think or evaluate to make intelligent decisions, unlike the other smart technologies of today. These codes have simple "if/when…then…" logical statements on a blockchain that dictate actions based on specified conditions.
Once completed, the transaction is irreversible; the blockchain gets updated, and the status is shared with the eligible stakeholders, ensuring trust and transparency. The stakeholders must define the simplest to the most complex terms of engagement for execution into this smart contract. They must anticipate and account for all possible exception handling. For example, it could be a payment release upon verified delivery of goods or triggering a penalty for supply chain delay. Once these engagement terms are clearly defined, a programmer codes these terms into smart contracts.
How do these smart contracts change the supply chain landscape? They eliminate the need for intermediaries, speed up transactions and reduce errors. Further, these contracts seamlessly adhere to all agreed terms and requirements between the parties removing lags. Let us delve a bit deeper to understand this better.
Impact on Supply Chain Management
Listed below are a few significant benefits that showcase the impact of smart contracts on supply chain management.
Enhanced transparency and traceability
Smart contracts executed on the decentralised blockchain networks make all details accessible to all stakeholders in real time. All stakeholders can access and verify the transactions, reducing disputes and building trust. The complete journey of a product can be traced in real time from the source to the destination for every action along the way. This traceability lends visibility and builds accountability, allowing businesses to strengthen compliance, especially concerning ethical sourcing, etc.
Reduction in fraud and errors
Decentralised blockchain technology ensures data integrity, aiding immutable transactions with reduced risk of fraud and errors. Pre-set conditions and automatic execution leave no scope for manipulation or tampering. Encrypted information sharing happens among the stakeholders, ensuring everything is shared accurately without manipulation. The records are part of a distributed ledger connected to previous and next parts, making it difficult for hackers to alter the entire chain.
Streamlined logistics and inventory management
Imagine how streamlined supply chain management would be with seamless order fulfilment and payment processing. Smart contracts deliver these benefits, vastly enhancing logistics efficiency and inventory management while also reducing costs incurred due to the intermediaries. They make supply chains more resilient, helping businesses in their agile journey.
Here’s a summary of benefits from the standpoint of various stakeholders:
- Manufacturers: Streamlined operations, improved efficiency, reduced costs, trusted supplier relationships.
- Suppliers: Assured payments, better visibility and cash flow management.
- Consumers: Authentic, high-quality products with improved delivery times.
- Supply chain professionals: Better visibility, lesser chaos and enhanced contract lifecycle management solutions.
The Outlook
While the future looks promising, the evolving legal and regulatory landscape of smart contracts poses some challenges and concerns. The discourses range from interoperability of blockchains to scalability, high investment and awareness. Emerging trends indicate the integration of AI technologies to build more sophistication into smart contracts, making them a pivotal part of the future digital economy.
How can Infosys BPM help?
Infosys BPM'scontract management services cover all aspects of contracting, including solicitation, creation, negotiation, administration, and maintenance. We offer smart contract management through Infosys BPM NIA for contract analysis using artificial intelligence and Natural Language Processing (NLP), delivering high contract visibility and improved TAT.
