Smart Contracts & Their Application To Procurement

Our vocabulary is littered with buzzwords like, Blockchain, Initial Coin Offerings, Bitcoin & Smart Contracts. As procurement professionals, we are flooded with information regarding these trendy technologies. Not only is the amount of information overwhelming, but the concepts themselves are complex.

Let’s take a step back and narrow our focus to a more applicable aspect of the Blockchain: Smart Contracts.

Smart Contracts Defined:

Visualize a Smart Contract as code on a Blockchain. The code leverages conditional (if x, then y) statements to automate transactions based on specific actions taking place by either party (see example later in the piece). Due to the nature of the Blockchain and its peer-to-peer trust protocol, transactions can take place strictly between two enterprises at minimal cost.

This is widely preferred when compared to the alternative, relying on a middle-man or third-party organization to ensure trust is built into a transaction; for a high percentage fee, too. In addition to streamlining the process, a Smart Contract improves accuracy of transactions, increases payment speed, and breeds transparent supply chains.

Example:

A Buyer and Seller of widgets have regular transactions exchanging goods for money. Buyer is seeking to purchase 100 widgets from Seller for $5 per widget, which results in a purchase order. Seller accepts the purchase order, and ships 100 widgets to Buyer – meanwhile, Buyer’s funds are placed in escrow. Upon delivery, if the purchase order, invoice, and receipt match 100 widgets at $5 per widget, then Buyer’s funds will automatically transfer from escrow to Seller’s account.

  • Delivery confirmation and goods receipts into inventory are automated
  • Manual invoicing delays are eliminated
  • Three-way manual matching by someone in accounts payable is eliminated
  • Manual key stroke errors, overpayments and duplicate payments are eliminated
  • Trust and security are inherent and baked into blockchains protocols enabled via the use of smart contracts

While this example may seem elementary it, does clearly outline the process of using Smart Contracts and their benefits.

With colossal investments being pumped into Blockchain technologies, we foresee procurement-based applications coming to greater relevance in the near future. It can help improve trust between a buyer and a seller, decrease transactional costs due to elimination of the middle-man and increase payment speed between parties. What could Smart Contracts do for you?

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