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Why Supply Chain Finance Could Be the Key to Widespread Blockchain Adoption

05/07/2018 By

Not to throw a wet blanket on the procurement technology fire, but when it comes to discussions of blockchain, a healthy dose of skepticism is in order.

Just last week, for example, a Gartner study found that only 1% of CIOs indicated any kind of blockchain adoption within their organizations, and only 8% of CIOs were in the short-term planning phase or looking at active experimentation with blockchain, according to the blog Artificial Lawyer. What’s more, the same study found that 77% of CIOs currently have no interest in the technology or any action planned to investigate or develop it.

But these results aren’t necessarily a death knell for blockchain. In fact, they may indicate a positive step forward. Organizations are emerging from the hype phase for the technology and instead starting to take stock of whether they have the technical expertise and talent to actually use blockchain.

To do that, they’ll need to know not only where blockchain could be applied in the supply chain but how exactly it works. Only then can procurement organizations begin to assess whether they’ll be ready to take the next adoption step with the technology.

This is the objective of a new study by CAPS Research of Arizona State University. During a presentation Monday at ISM2018, Dale Rogers and Thomas Choi took attendees through a detailed tour of blockchain, from its origins as a descendant of ERP systems to potential ways procurement can spur adoption of the technology using supply chain finance.

Understanding the Blockchain Hype

Perhaps the best way to understand blockchain, as well as the hype surrounding it, is to compare it with another hot technology: artificial intelligence.

As procurement organizations are keenly aware, AI is at the forefront of many current technology conversations, with software providers now offering real-world use of such features in applications for spend analysis, sourcing and supply chain risk monitoring, to name a few. Yet that was hardly the case 30 years ago. Back then, most companies barely understood what AI was, let alone how they could use it to improve their business processes — even if plenty were aware that AI-based systems did exist, in theory.

That level of awareness is where blockchain is today, Rogers said.

“AI has evolved dramatically from where it was 30 years ago. In 1985, AI seemed like it was limited and only did certain things,” he said. “But today, AI is really multidimensional. The same thing is probably true about blockchain.”

Beyond the business world’s general understanding, AI and blockchain also have a shared history in the way enterprise software has developed. Both relate to long-term ambitions by technologists to overcome fundamental challenges faced by businesses.

For AI, the goal is to create learning machines, software that can take in data about the world around it and produce useful knowledge about that data, such as the likelihood of a supplier going bankrupt or the spending habits of a particular requisitioner. Those systems are now more accessible than ever, but at the same time they are only as useful as the data that goes into the AI system. This is where blockchain fits in.

If AI is the technology for the automation of insights, blockchain is the technology for the automation of record keeping. Blockchain’s history is intertwined with the original ERP systems, which sought to create a unified database that could get everyone — from inside businesses and out to their suppliers — to work off of the same data. Just as SAP set out in the 20th century to realize the dream of a common database for businesses and their partners to work off of, blockchain attempts to realize that dream while fixing some of the problems that have crept up on procurement organizations as ERP matured.

Where Blockchain Fits In

That’s not to say blockchain will replace ERP. Far from it. The more likely scenario is that the technology becomes part of specialty applications that exist outside of procurement’s core management systems, Rogers said.

This is because blockchain is anything but a silver bullet for common procurement challenges. Rather, there are some use cases where it’ll be a great fit but others where current systems, whether ERP or P2P or something else, will still be the most appropriate solution.

As Rogers put it, as of 2018, “blockchain is not an efficient technology.” There’s an enormous amount of complexity built into distributed ledger systems. Thus, implementing them at scale is quite difficult.

Blockchain’s “sweet spots,” according to CAPS research, will be with high value and high visibility items that have complex requirements — areas with lots of tracking involved. This also applies to situations where there are high probabilities of supply disruptions, where improved tracking capability could help better assure supply.

Blockchain could also be a fit for areas where current technologies have performed below expectations. One notoriously complex use case where blockchain could offer a better solution is in supply network mapping. Rogers said that rather than using current offerings, procurement organizations may be interested in “leapfrogging” to blockchain-based intermediaries that offer better traceability and visibility than current methods.

That all sounds great in theory, of course. Yet the biggest problem may not be figuring out where blockchain will work within procurement. Instead, the challenge will be getting everyone on board to actually use it.

Encouraging Blockchain Adoption

As Choi explained — and as many in the audience nodded in agreement — mapping a full supply network is a Herculean feat. For example, one semiconductor manufacturer Choi spoke with decided to map its entire supply chain following a major disruption. The project took a total of 100 people to accomplish, over the span of an entire year.

The biggest obstacle that organization faced was getting its suppliers to share information about their own suppliers. Even though the semiconductor manufacturer represented a considerable amount of business, the tier 2 and 3 suppliers simply didn’t want to disclose any more information than was necessary for both parties to complete transactions. To create the full map, the organization needed to provide considerable concessions to get the information it needed.

If getting suppliers to enter into a private exercise was a struggle, procurement can expect that getting suppliers to adopt a fully traceable, permanent record of all entities it transacts with will be no easy feat. Because of this, businesses will need to figure out the right carrots that will entice their partners into new blockchain networks.

The first step, Choi said, is “to get companies to give away their supply base information, which is very difficult.” But a few businesses have figured out a way to get suppliers to play.

One such instance is the iPhone manufacturer Foxconn. In 2017, the company partnered with Chinese online lender Dianrong to launch Chained Finance, a blockchain-based supply chain finance platform.

Essentially, the system offers access to faster payments for suppliers several tiers down the supply chain. But to gain access to the platform, a core supplier must provide access to its data, allowing its suppliers to be onboarded by Chained Finance. This way, Foxconn gains access to a more complete picture of its supply network, offering better payment terms in exchange.

The future of blockchain may be tightly linked with that of supply chain finance. As Choi put it, the two “are getting married,” and procurement groups can expect some “kids” in the form of new vendor offerings around the corner. But whether the children of SCF and blockchain become mainstays of enterprise software in the manner of ERP, of course, remains to be seen.