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Smart Contracts for Innovative Supply chain management

Smart Contracts for Innovative Supply chain management
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by Sanjeev Kapoor 22 Apr 2022

Supply chain is comprised of a series of individual company processes that eventually result in the delivery of a product or service from the supplier to the customer. In the past few decades there has been focus on improving supply chain operations. However, the COVID19 crisis demonstrated that supply chain management can be still greatly improved. Specifically, the COVID19 crisis provided a great lesson in how industrial supply chains are run. As the disaster unfolded, it came to light that companies rely more on their own and less on the operations of their suppliers. This makes sense because each company wants to be sure that its supply chain will meet its needs. However, there is the other side of these companies’ balance sheets called customers, who rely on large corporations to provide them with manufactured goods at affordable prices. Overall, the COVID19 pandemic outbreak has highlighted that there is still room for improving supply chain management based on novel technologies and techniques for managing information flows and business operations across the various supply chain participants.

Blockchain technology and smart contracts can be used to enable smart supply chain management. In principle, smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. They can be used to complement supply chain processes and augment them to include external factors such as marketplace prices and demand or critical shipment timings. To this end, they use AI smart bots. Furthermore, smart contracts can also identify alternative supply chains in case of delays or discretionary orders. Likewise, they can reduce delays by creating decentralized escrow tokens. Smart contracts can be implemented and executed over blockchain infrastructures in order to make supply chain processes more transparent, autonomous and reliable.


Supply Chain Operations

The design and implementation of smart contracts are usually driven by supply chain operations and the lifecycle of supply chain interactions. The different phases of supply chain management include:

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  • Plan activities, including the planning of demand, finances, and production planning.
  • Sourcing activities, which include primarily the management of procurements and other sourcing processes.
  • Making activities, which hinge on the manufacturing strategies and comprise inventory management.
  • Delivery activities, which are based on proper distribution networks and transportation strategies, as well as related inventory management activities.
  • Return activities, which are focused on reverse logistics towards returning products from the customer to the manufacturer.

Moreover, major supply chain management activities can be classified into planning and operational activities. This classification is based on the SCOR (Supply Chain Operations) model, which was developed by the Supply Chain Council (SCC) as a cross-industry standard diagnostic tool to address supply chain management. Planning activities include: strategy development, demand management, sales and operations planning, master production scheduling, material requirements planning, capacity planning, distribution requirements planning, transportation planning and network optimization. The planning activities can be further distinguished into: (i) Strategic Planning activities, which strategizing the long-term goals and objectives of the company or organization with a view to achieve success in its endeavors; and (ii) Tactical Planning activities, which involve day to day planning such as sales forecasting, demand forecasting and inventory planning for running the supply chain more efficiently. Tactical plans are typically implemented on a much shorter time frame than strategic plans.

On the other hand, operational activities include order fulfillment, procurement/purchasing, manufacturing/production execution, product development and commercialization, supplier relationship management and returns management. For instance, order processing is one of the most prominent operational activities, which involves the processing of orders from customers.


Smart Contracts and Blockchains for Supply Chain Management Innovation

The previous list of activities demonstrates that Supply Chain Management (SCM) is a broad area. The needs of this challenging process can vary widely depending upon the industry and type of product, meaning there are many ways to tackle SCM. However, blockchain technology may provide innovative solutions for supply chain management problems. Smart contracts have become a strong tool of trust between buyers and sellers and have also revolutionized the concept of escrow accounts. In fact, smart contracts have been proven as a viable way to encode and enforce non-financial business rules. A smart contract is essentially code that runs on the blockchain network, which enables the execution of certain tasks that were previously performed by intermediaries via off-blockchain systems. Smart contracts depend on pre-determined conditions to be executed. Once these conditions are met, smart contracts perform an action automatically in a transparent and verifiable manner. Blockchain infrastructures guarantee transparency and verification due to their decentralized nature. Smart contracts can be used within supply chains to carry out complex contractual tasks on various stages of the supply chain lifecycle management process, such as logistics coordination, contract terms and compliance aspects of cargo sub-businesses, and more.

Smart contracts provide the means for regulating complex supply chain relationships in effective, automated and trustworthy ways. Hence, they help overcome proclaimed supply chain management challenges such as the lack of transparency, fraud and lack of information security. Using smart contracts and a wide range of sensors it is nowadays possible to provide transparent and accurate data for logistics companies, delivery service providers or even for consumers in an online shop. Specifically, blockchains and IoT devices can be combined to track every step of the supply chain process, while at the same time ensuring tracking and tracing of supply chain data assets across their lifecycle. This helps eliminating fraud and data violations towards automating supply management processes with faster deliveries, tighter delivery control and without data losses.


Although there are many exciting developments surrounding Smart Contracts, the incorporation of the most cutting-edge smart contract applications will not happen overnight. However, in the future, by combining peer to peer transactions with the power of a smart contract and tracking ledger, a deeper level of transparency will be created within the entire supply chain. This is crucial for improving visibility to suppliers, customers and consumers, as part of an effective supply chain strategy. It is also the reason why supply chain participants should consider smart contracts and blockchain technologies for the management of their interactions.

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