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How Blockchain Cuts Costs in Supply Chain Management

Nearly all of the world’s businesses utilize enterprise resource planning and supply chain management software.

While this expensive investment in digital infrastructure has worked well, blockchain technology ushers in a new paradigm shift for supply chain management. For businesses, this means that blockchain technology can offer cost-savings that earlier supply chain technologies simply could not offer.

  • Removal of intermediaries
  • Improved product tracking
  • Better data and analytics

Blockchain Technology Reduces Costly Supply Chain Intermediaries

Blockchain technology allows supply chain businesses to share and agree upon key pieces of information. In other words, they don’t have to appoint an intermediary to facilitate the complex negotiations that come along with setting the rules before handing over critical business information. Because blockchains synchronize data across the network and in a verifiable way, complex contract negotiations can be executed in a truly peer-to-peer manner, thus removing the requirement for costly central intermediaries to facilitate this function.

Blockchain Technology Reduces the Cost of Procurement Discounts

Many supply chain businesses encounter difficulties when delegating the right for other people to purchase goods on their behalf. Consider, for example, businesses who negotiate procurement discounts based on the aggregate number of purchases they make for a specific item. In this case, it is extremely difficult for businesses to keep track of the sheer volume of purchases made across business partners, subsidiaries, and other entities in their supply chain network. In effect, business seeking procurement discounts lose the opportunity to generate cost-savings because they simply lack the technology to track all of their purchases.

Blockchains, however, make this complex process extremely simple because its digital ledger is constantly updated. In other words, your business can collect all of the relevant data from your partners in real time which allows you to see the total purchase volume regardless of the complexity of the purchasing activity. Currently, businesses hire professionals to audit their orders to capture these volume-purchase benefits, which is extremely expensive and labor intensive. To put this into perspective, one auditor costs a business an average of $75,650 annually. And many of the world’s largest businesses deploy auditors in the hundreds to monitor their purchasing volume. Blockchains eliminate the need for staffing these positions because the business logic can be programmed (via smart contracts) to do the exact same work for a fraction of the cost. For this reason, your business has the potential to generate significant cost-savings in the domains of price-verification processes and procurement discounts by adopting blockchain technology.

Blockchain Technology Provides Better Forecasting Data for Inventory Demand

Lastly, most businesses compensate for the uncertainty of how much material or product is required in a specific location by shipping extra inventory. If one accounts for the cost of capital and the rapid depreciation in the value of technology products, the deployment of this extra inventory is far from cheap. Some estimates even predict that these costs range from 15 to 40 percent of the cost of inventory. That said, blockchains are beneficial in this context because they have an uncanny ability to track and manage resources with great precision. This precision enables blockchains to manage and track resources at the ecosystem level, which enables better accuracy, forecasting, and the need for less inventory to maintain the same service level for customers. Altogether, this unique functionality has the ability to generate your business cost-savings by cutting down on the extra inventory and freeing up capital.

Blockchain technology has the potential to provide many cost-saving benefits for your business. We expect to see blockchains significantly transform supply chain management in the near-term and provide early adopters with a multitude of benefits as these solutions become more widely embraced.