Blockchain in Procurement — Explained + Examples

What is Blockchain?

Before explaining how blockchain is applied in procurement, we will provide a brief overview of blockchain technology for those who are not yet familiar with it.

Blockchain is widely recognized for its connection to cryptocurrency and NFTs, but its scope is much broader. Defined as an encrypted network by CIPS and IBM, blockchain creates a shared, unchangeable ledger of transactions accessible to all nodes within the network. Initially developed in 2008 to support Bitcoin, the technology has since expanded to include applications like decentralized finance (DeFi), smart contracts, and various digital tokens.

Each transaction on the blockchain is independently verified by multiple nodes, ensuring transparency, security, and consistency. The decentralized design makes it nearly impossible for any single entity to tamper with the ledger, as altering records would require simultaneous changes across all nodes. This robust system of checks and balances not only prevents fraud but also builds trust among users by maintaining a permanent, tamper-proof record of digital transactions.

Blockchain in Procurement – Explained

Blockchain is transforming procurement and various industries by providing secure, transparent, and tamper-proof tracking of transactions. Each step in a procurement process is recorded as a block, creating an unalterable digital ledger that eliminates the need for intermediaries.

This enhances transparency across the source-to-pay process and streamlines supply chain management, significantly reducing procurement fraud.

How to Get Started Blockchain in Procurement

Implementing blockchain technology in procurement may seem complicated, but it can be initiated by following a few key steps. These steps will help you assess your existing processes, define your requirements, and test a solution before fully implementing the blockchain system. Below are the basic steps that will guide you through the start of this process.

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

1. 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.

2. Pick a blockchain

There are different systems like Ethereum, Hyperledger, and EOS. You should pick one that fits what you need.

3. 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.

4. 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.

5. Monitor it

After you start, watch how it’s working. Keep making it better by finding problems and fixing them.

Blockchain in Procurement – Examples

1. Walmart

Walmart collaborated with IBM to launch a blockchain-based solution for tracking produce and other perishable goods in their supply chain. Through IBM’s Food Trust platform, Walmart can quickly identify the origin of products (for example, leafy greens), reducing the time to trace a potential contamination source from days to mere seconds. This enhanced visibility and speed not only help ensure food safety but also minimize waste and streamline procurement by integrating better inventory management.

2. De Beers

De Beers, a global leader in the diamond industry, developed the Tracr blockchain platform to trace diamonds from the mine to the retail market. Every step of the journey is recorded on the blockchain, ensuring an immutable record of the diamond’s provenance and authenticity. This level of traceability helps confirm ethical sourcing practices—essential in preventing conflict diamonds—and provides customers with transparency regarding the product’s history. For procurement, this system reinforces trust and helps eliminate fraud by verifying each link in the supply chain.

3. Maersk & IBM’s TradeLens

Maersk and IBM teamed up to create TradeLens, a blockchain-based platform focused on global shipping and logistics. While not exclusively about procurement, TradeLens significantly benefits procurement operations by digitizing and securely sharing shipping documents, bills of lading, and related data. This reduces paperwork, shortens customs clearance times, and provides real-time visibility into the movement of goods. By enhancing transparency and coordination among all participants—from suppliers and buyers to customs authorities—TradeLens streamlines the overall procurement and shipping process.

4. Volvo

Volvo uses blockchain technology to monitor the procurement of cobalt, a critical component of electric vehicle batteries. Cobalt sourcing has raised concerns about ethical and sustainable mining, particularly in regions with questionable labor practices. By employing blockchain, Volvo can track cobalt from certified mines, ensuring that the raw material meets ethical standards. This transparent, tamper-proof record of provenance not only safeguards Volvo’s brand reputation but also aligns with growing consumer and regulatory demands for responsible supply chain management.

Benefits of Blockchain in Procurement

Blockchain is unknown to many, and it years away from widespread adoption. However, it has its fair share of benefits it can provide in procurement. Here are the benefits of Blockchain in 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 Blockchain in Procurement

It had its benefits, it also have its drawbacks. Since Blockchain is relatively new, there are still risks when it is used. The following are Blockchain’s drawbacks when it is implemented in 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.

Are People Really Using Blockchain in Procurement?

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.

Blockchain in Procurement – Tools

Blockchain is not widely adopted. But for those who want to utilize it, here are the tools that makes implementing Blockchain in Procurement a seamless experience:

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.

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.