A Quick Guide to Smart Contracts, Blockchain and the Supply Chain

The Blume Global Team | April 29, 2019

Most people think of blockchain as the technology behind cryptocurrencies like Bitcoin, but the blockchain has many other applications. One of the most interesting is in creating and managing smart contracts—unique assets on the blockchain that can be used to establish, manage and deliver on agreements between different parties.

Smart contracts can be a complex area, so we’ve answered the questions you might have so you can decide if they’re right for your supply chain organization.

What Is a Supply Chain Smart Contract?

At its simplest, a smart contract is a piece of code that exists on the blockchain. This smart contract can be used to define almost anything about the relationship that exists between supply chain parties. For example, for supply chain purposes, an operational smart contract between a retailer and a manufacturer could state:

  • The cost of manufacturing items as part of a specific order
  • Timescales for manufacturing items between receiving that order and shipping
  • Penalty and bonus clauses
  • Payment terms for settling invoices

Most details that can be written into a standard operational contract can also be recorded into a smart contract, making smart contracts ideal virtual documents to operationally manage dynamic supply chain relationships.

Is a Supply Chain Smart Contract the Same as a Legal Contract?

No. A legal contract sets up the high-level agreements and contractual relationships between two supply chain organizations. The smart contract is an operational tool that ensures lower-level, specific agreements and arrangements are being met.

Why Use a Smart Contract for the Supply Chain Instead of a Regular Contract?

You wouldn’t. A regular legal contract is still needed to create high-level relationships and agreements between parties.

Regular contracts are useful and the established way of doing things, but they do have limitations. For example, it’s very difficult to track ongoing performance against a regular contract, as there’s often a lot of filler language and legalese to get through.

With a smart contract, it’s easier to define and agree the exact, day-to-day requirements and targets to see if they’re being met in the supply chain. They’re most effective as operational agreements for supply, manufacture, logistics and related areas.

Smart contracts have several other benefits for supply chain managers including:

  • Not needing to send around large amounts of paper documents as everything is virtual.
  • Not being delayed by long transfer, review and sign off processes associated with traditional contracts.
  • Not worrying about fraud as smart contracts have a complete audit trail of all changes.
  • Not being concerned about accessibility as smart contracts are available to all parties via a blockchain ledger system.

Can Smart Contracts Automatically Update Themselves?

Yes. Smart contracts can react to inputs from elsewhere, and are automatically triggered when specific factors come into play. For example, a supply chain manager could set up a contract for a particular order and put a payment into escrow. When the goods are received by the retailer’s warehouse, the smart contract is updated and the funds are automatically released to the manufacturer.

How Accessible Are Supply Chain Smart Contracts?

Anyone with the necessary permissions can view a smart contract, as they are held on a central, distributed ledger. This means all relevant supply chain stakeholders can view all smart contracts at all times. They can also see the criteria for the contract, how close it is to being fulfilled and the history of the contract.

Can Supply Chain Smart Contracts Be Tampered With?

Generally, smart contracts are extremely secure from tampering, for several reasons:

  • Any changes to the smart contract are captured in a historic audit record, so people can see how the contract has changed over time.
  • Smart contracts are part of a distributed ledger, meaning that all the technology involved with processing that ledger need to agree on the changes, meaning one party cannot typically change a contract by themselves.
  • Updated versions of the ledger are supplied to all parties any time a change is made, making it easy to track and agree alterations.

Can Supply Chain Smart Contracts Be Negotiated Directly?

Yes. One of the greatest benefits of these types of operational contracts is that they don’t need a middleman like a lawyer. Instead, two organizations in the supply chain can directly create an operational agreement between them and enshrine that in a smart contract. The contract will handle the sign off, and after authorization it becomes effective. Once the terms of the contract are met, the contract is considered fulfilled.

What Other Benefits Do Smart Contracts Provide to Supply Chain Stakeholders?

We’ve already discussed some of the benefits previously, but smart contracts are useful in several other ways:

  • Significantly reduces processing times for agreeing orders, making payments and ensuring everyone is working to agreed standards
  • Provides traceability of raw materials, parts and finished products to all the supply chain organizations that handled them
  • Allows for consensus that all the activities recorded and reported on in a smart contract have been carried out
  • Integrates with other technology and organizations, for example, goods received notifications for payments release or integrating with IoT tracking devices and updating contracts when locations are reached
  • Increases efficiency due to less rework and duplication of effort
  • Enhances trust that goods will be delivered and payment will be made once criteria are met

What About Blockchain Mining, Public Ledgers and Similar Areas?

Although cryptocurrencies and traditional blockchain technology has relied on mining tokens and publicly-distributed ledgers, that’s not the case for other blockchain technology implementations.

Smart contracts do not need to be mined, and the ledger can be as public or private as you need it to be. Business blockchain platforms can be customized to meet supply chain needs and provide the necessary accessibility to supply chain organizations.

How Can Smart Contracts Be Used in the Supply Chain Outside Operational Agreements?

Smart contracts aren’t just for recording and transaction agreements. They can also be used as:

  • Immutable stores of information and previous agreements.
  • Useful audit records on how things have changed in the supply chain over time.
  • Sources for reliable data that can be captured, reported on, optimized and acted on.

Supply chain smart contracts are still in their infancy, but the technology is developing quickly. And many large organizations are already using smart contracts in their supply chains.

Blume Finance enables transparency and granular visibility for freight audit and pay with a smart contract repository, rating management and validation, machine learning-driven invoicing, cost accrual auditing and blockchain-enabled payment and settlement.

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