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Blockchain in ProcurementThe Ultimate Guide of 2023

Many professionals, especially rookies in procurement, are not familiar with blockchain. So what really is blockchain in procurement?

For this article, we will discuss what blockchain is. We will explore how it can be applied in procurement and the supply chain. 

After reading this article, you will have a deep knowledge of the role of blockchain in procurement. You will also know its benefits and importance as digital transactions grow rapidly. 

Whatis Blockchain?

We know that you have heard this word due to the popularity of cryptocurrency nowadays. Blockchain is greatly associated with cryptocurrency and non-fungible tokens (NFT). However, there is more to it.

Blockchain is defined by CIPS as an encrypted network that stores records of transactions and communicates or disseminates this to other node points within the network.
According to IBM, blockchain is a shared and unchangeable record that helps keep track of transactions and things owned in a business network. Things owned can be tangible or intangible.

The first blockchain technology was created in 2008 to support Bitcoin. It is a technology that makes a decentralized record of transactions in a network that can be managed by its participants.

Since Bitcoin was introduced in 2009, the ways we use blockchain have grown a lot. We now have different cryptocurrencies, apps for decentralized finance (DeFi), special tokens called non-fungible tokens (NFTs), and smart contracts.

Blockchain technology works by confirming transactions in the network independently by a third party. All nodes that are connected in the blockchain network receive an updated version of the ledger as new transactions begin. However, the users cannot change it. This leaves a public trail of information and makes all tampering impossible.

Hackers who intend to falsify the ledger would need to do the same to multiple computers at the same moment. This makes blockchain technology secure and transparent. Furthermore, The setup has built-in methods that stop unauthorized transactions and make sure everyone sees the transactions the same way.

    Blockchainin Procurement

    Blockchain is a revolutionary shift not just in procurement but in all industries. It has the potential to become the main figure in business-to-business (B2B) transactions.

    It has the capability to change the ways of digital and the supply chain. In procurement, blockchain provides a secure method to track a product or deal from where it starts to when it’s bought and paid for.

    Every step in the process creates a new set of blocks. The process is safe from tampering because the information is coded. And since there’s no middleman, blockchain helps with business-to-business transactions, making the supply chain smoother.

    Blockchain technology allows the integration of innovations in the procurement process and supply chain management.

    Utilizing blockchain technology will provide transparency across the entire source-to-pay process and the supply chain.

    We all know that one of the problems that many companies face is tracking products before, during, and after shipment. Blockchain allows the visibility and control of shipments that reduces procurement fraud.

    Getting blockchain into procurement might seem complicated, but you can start with a few steps:

    • Evaluate your procurement process: Before going digital, check how things work and find any problems. Blockchain can help with clear information, tracking, and doing tasks automatically.
    • Figure out what you need: Based on your current buying process, decide exactly what you want from the blockchain. This means knowing what information to save, how secure it should be, and what special tasks it should do.
    • Pick a blockchain: There are different systems like Ethereum, Hyperledger, and EOS. You should pick one that fits what you need.
    • Try to make a prototype: Use your chosen blockchain to make a small version of your new buying system. Test it to find any issues before using it fully.
    • Start using it: Once the test is complete, put your new blockchain buying system into action. Teach your team how to use it and connect it to your old way of purchasing.
    • Monitor it: After you start, watch how it’s working. Keep making it better by finding problems and fixing them.


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    Benefits of Blockchainin Procurement

    1. Utilization of smart contracts

    Using smart contracts will definitely benefit blockchain in procurement. Smart contracts are tamper-proof documents where your agreements are stipulated. It can be concluded by two or more parties and it can execute itself if it meets all the pre-set terms and conditions. 

    Smart contracts are capable of verifying themselves, checking their own performance of their own condition, and ensuring that the terms in the contracts are fulfilled. 

    Additionally, it can automatically release payment to your supplier if the contract is completed. Smart contracts are able to cover end-to-end transactions between multiple parties in the whole supply chain. Also, the terms of the transaction are visible and integrated with all parties.

    2. Transparency and tracking

    Blockchain in procurement can ensure the authenticity of the goods at the source. Additionally, it can track its movement throughout the supply chain process. 

    Suppliers need to establish audit trails of goods that can also be tracked from source to delivery. The transparency of the distributed ledger in the blockchain network means that certifications and other requirements cannot be forged. 

    3. Builds trust

    Blockchain technology allows trust and business relationships to develop further. Due diligence is necessary for you to mitigate the risk between unknown companies. 

    Blockchain technology offers open access to the ledger for all the parties that will participate which makes due diligence faster and simple. 

    Through blockchain technology, you can immediately determine the quality of products or services that you can get. Additionally, you can rate their performance based on how the supplier provides for your needs.

    4. Streamlining procurement processes and systems

    You can use blockchain to enhance purchase order management as transactions are visible. Many organizations still use a manual process in terms of invoice and payment processing. The whole process of invoicing could be greatly streamlined if blockchain technology is integrated into your system.

    5. Security

    Blockchain smart contracts are tamper-proof. All confidential information and payments are secured with encryption on the distributed ledger that is cheaper and more secure than cloud storage.

    Drawbacks of Blockchainin Procurement

    1. Too expensive

    Introducing a blockchain solution can be expensive upfront. Hiring blockchain developers, who specialize in this technology, tends to cost more than traditional developers.

    Planning, licensing, and ongoing maintenance also add to the total costs. These factors need careful consideration when deciding to implement blockchain technology.

    2. Scalability

    Scalability is a challenge for blockchain solutions because they process transactions more slowly compared to regular databases. This is because many computers or servers need to confirm each transaction.

    Moreover, in supply chains with a lot of transactions, using a permissionless blockchain could be costly due to transaction fees needed for miners to create blocks. Some supply chains handle millions of transactions daily, so it’s important to carefully consider how to make blockchain scalable.

    3. Data modification

    Blockchain technology poses challenges when it comes to changing recorded data. Modifying information requires rewriting codes across all blocks, a process that’s time-consuming and costly. This drawback makes correcting errors or making necessary changes difficult.

    Is It The Real Thingor Just a Hype?

    According to predictions made by Gartner, blockchain is still 5 to 10 years away from what they call the “plateau of activity”. All we see in procurement are prototypes that are just starting their way into practical applications.

    However, many organizations see the huge impact of blockchain in procurement and the supply chain. They see the potential of blockchain to revolutionize the flow of information, finance, security, and materials through the supply chain. 

    Blockchainfor Procurement

    1. IBM blockchain

    IBM blockchain enables the trusted data exchange and workflow beyond the boundaries with distributed ledger technology. 

    Technical innovators switch to the IBM blockchain platform because of its fast process. Additionally, it leads businesses to a new era of collaboration and innovation. 


    2. Amazon Quantum Ledger Database (QLDB)

    QLDB is a fully managed ledger database that provides businesses with a transparent, immutable, and cryptographically verifiable transaction log.

    Its cryptographic verification allows third-parties validation of data changes. Additionally, it tracks and maintains a sequenced history of every change in the application data.


    3. AkaChain 

    AkaChain is based on the hyperledger fabric with an end-to-end, permissioned, and multi-chain network. 

    It is powered by FPT Software which is the blockchain for business platforms. AkaChain offers a unique approach to security and consensus. This allows transparency, and trust, and preserves the data privacy that businesses demand.

    In Conclusion

    In conclusion, blockchain technology has emerged as a transformative force across various industries, including procurement.

    While closely associated with cryptocurrency and non-fungible tokens (NFTs), its potential extends far beyond these domains.

    Blockchain operates as an encrypted network that stores transaction records and disseminates them across nodes within the network. It creates a shared, unchangeable ledger that enhances transparency and traceability.

    Although blockchain has many challenges, we cannot deny that it has a potential to make the procurement process much better.

    Frequentlyasked questions

    + What is blockchain in procurement?

    Blockchain in procurement is the secure method of acquiring materials or services through blockchain technology.

    + Is blockchain safe?

    Blockchain technology is secure because it is distributed and decentralized.

    + Are we ready for it?

    Blockchain is still in its early phase. However, many organizations can now see its potential in revolutionizing procurement and supply chain processes.

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