Making Supply Chains Smarter with Blockchain Smart Contracts

Published : Jul 22, 2020

Smart Contracts SupplY Chain

  • Blockchain is a decentralized ledger that 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.

    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.

    Overall, 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 Smart Contracts

    Another useful concept enabled by blockchain is smart contract development.

    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 a customer confirms delivery of a package, a smart contract may be used to release payment to a carrier. 

    A smart contract is a contractual arrangement between parties that keeps each party responsible for their position in a contract.

    Smart contracts specify the rules and terms 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 or not.

    Smart Supply Chain Development with Blockchain Smart Contracts

    A smart contract at its simplest is a piece of code that exists on a blockchain.

    This smart contract can describe the relationship that occurs between supply chain parties.

    For example, an operational smart contract between a retailer and a distributor may state, for supply chain purposes:

    • The cost of 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 for 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, Visit | Smart Contract Solutions for Business Development | Advantages and Use Cases

    Is it Equivalent to a 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

    The formation of high-level relationships and agreements between 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, precise, day-to-day specifications and goals are easier to identify and agree on and see whether they are being met in the supply chain.

    They are most successful as operational agreements of procurement, production, distribution, and related areas.

    Also, Check| 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 with 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 payments into an escrow. When items are purchased by a retailer's warehouse, a 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 decentralized ledger. It means that all relevant stakeholders in a 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 agree on the changes, ensuring that one party can not change a contract by itself.
    • Every time a change is made, revised copies of the ledger are given to all involved 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.

    Must-Read | Blockchain Smart Contract Solutions for Efficient Contract Management

    Additional 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 
    • 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 major companies, through their supply chains, have started implementing smart contracts.

    Connect with our blockchain development experts for more information on how to get started with smart contract implementation across supply chain processes.

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