Making Supply Chains Smarter with Blockchain Smart Contracts

• Mudit Kumar
• July 22, 2020
• Leave a Comment

Blockchain and Bitcoin, while related, are two distinct entities. Blockchain is the underlying infrastructure because Bitcoin is one blockchain program. Bitcoin is a virtual currency built upon a foundation of blockchain.

Blockchain

Blockchain is a decentralized ledger which is distributed yet immutable.  

It’s immutable so nobody can undo or overwrite once a transaction has been added to the blockchain, thus, making it almost tamper-proof.

Distributed blockchain. The ledger is not stored in a single location, it is duplicated in the blockchain by parties. Furthermore, blockchain is decentralized; the database does not have a central authority or administrator. It renders blockchain immune to interruptions, as there is no single point of failure.

In the end, blockchain is a ledger, a transaction record. Those transactions can be almost anything that can be recorded digitally, such as ownership names, attributes, transfers, places, conditions and statements, and more.

Such versatility makes blockchain supply chain management perfect where various parties meet, and paperwork is continuously exchanged.

Blockchain Gets Smart

Another useful concept provided by blockchain is the “smart contract.” A smart contract is a digital contract that executes itself when predetermined conditions are met. Such code-based contracts allow agreed actions (such as payments) to take place automatically, immediately, and without intermediaries upon fulfillment of the contract terms. For instance, when the customer confirms delivery of the package a smart contract may be used to release payment to a carrier. 

The smart contract is a contractual arrangement between parties that keeps each party responsible for its position in the contractual. Smart contracts specify the rules and punishments for a conventional contract-like agreement, but also make sure the contract is implemented. They specify the rules and punishments for a conventional contract-like agreement, but also make sure the contract is implemented.

Smart contracts can be a complicated area, but we answered your questions so you can determine whether they are right for your supply chain organization.

Smart Supply Chain Contract 

A smart contract at its simplest is a piece of code that exists on the blockchain. This smart contract can be used to describe the relationship that occurs between supply chain parties to almost everything. For example, an operational smart contract between a retailer and a distributor may state, for supply chain purposes:

• The cost of the products created as part of a particular order 
• Timescales for the production of goods between receiving an order and shipping 
• Bonus and penalty clauses 
• Payment conditions to clearing invoices

Some of the information that can be written into a traditional operating contract can also be written into a smart contract, making smart contracts suitable for virtual agreements to handle complex supply chain relationships operationally.

Also, read | Smart Contract Solutions for Business | Advantages and Use Cases

Is it Equivalent to Legal Contract?

 A legal arrangement specifies the high-level arrangements and contractual ties between two supply chain organizations. A smart contract is an operational tool that ensures the execution of lower-level, specific trade agreements.

Using a Smart Supply Chain Contract Instead of a Traditional Contract

You might not. The formation of high-level relationships and agreements between the parties also involves a normal legal contract. 

Standard contracts are useful and the way things are done is defined but they have limitations. For example, monitoring ongoing output against a standard contract is very difficult, as there is always a lot of filler language and legal to get through.

In a smart contract, the precise, day-to-day specifications and goals are easier to identify and agree and see whether they are being met in the supply chain. They’re most successful as operational agreements of procurement, production, distribution, and related areas.

Also, read | Ethereum Smart Contracts | An In-depth Review of the Potential

Smart contracts | Benefits for Supply Chain Management 

• You don’t need to pass around vast amounts of paper documents as this is interactive. 
• No delay due to the lengthy transition, review, and sign-off of conventional contract procedures. 
• As smart contracts have a full audit trail of all changes, there is no chance of fraud. 
• No issues about transparency as smart contracts are open to all stakeholders via a blockchain ledger system.

Automated Execution of Smart Contracts 

Smart contracts can respond to inputs from elsewhere and are activated automatically when specific factors come in. A supply chain manager, for example, might set up a contract for a specific order and put the payment into escrow. When the items are purchased by the retailer’s warehouse, the smart contract is updated, and the funds are transferred to the supplier automatically.

Smart Contract Accessibility

Anyone with the requisite permissions can access a smart contract because it is stored on a centralized, central ledger. That means all relevant stakeholders in the supply chain can access all smart contracts at all times. They can also see the contract conditions, how close it is to being met, and the contract history.

Tampering Issues

Generally, smart contracts are secure from tampering:

• Any changes to a smart contract are recorded in a historical audit record, so people can see how the contract has evolved. 
• Smart contracts are part of a distributed ledger, which ensures that all the systems involved in running the ledger need to agree on the changes, ensuring that one party usually can not change a contract by itself.
• Every time a change is made, revised copies of the ledger are given to both parties, making it easy to track and compromise on changes.

Direct Negotiation of Supply Chain Smart Contracts

Yes. One of the greatest benefits of these forms of operational contracts is that they do not require a middleman like a lawyer. Instead, two supply chain entities may establish an operating arrangement directly between them and enshrine it in a smart contract. The contract will manage the sign-off, and it will become successful after authorization. If the contract terms have been met, the contract shall be considered to have been fulfilled.

Also, Read | Blockchain Smart Contract Solutions for Efficient Contract Management

 Other Benefits of Smart Contracts for Supply Chain Stakeholders

We have addressed some of the advantages before but smart contracts are useful in many other ways:

• Significantly reduces order processing times, makes payments and ensures everybody operates to agreed standards 
• Provides traceability of raw materials, components and finished goods for all supply chain organizations that handled these goods 
• Allows agreement that all the activities registered and documented in a smart contract were conducted
• Integrates, for example, products obtained alerts for payment releases or integration with IoT tracking tools, and updates contracts when locations are reached 
• Increases performance with less rework and commitment duplication 
• Enhances trust that goods will be delivered and will be paid after conditions have been met

Using  Smart Contracts Outside Operational Agreements

Smart contracts are not just for tracking and managing transactions. Can also be used as:

• Immutable data repositories and prior agreements. 
• Helpful audit reports on how things in the supply chain have changed over time. 
• Reliable data sources can be collected, recorded, refined, and acted on.

Smart supply chain contracts are still in their infancy but the technology is rapidly evolving. And other major companies, through their supply chains, are now using smart contracts.

Oodles allows for transparency and granular visibility for freight audit and payment, cost accrual auditing, and blockchain-enabled payment and settlement with smart contracts.