A Brief Guide to Smart Contracts for Supply Chains
- Developing a system of smart contracts requires elaborate planning
- Smart contracts assist a company’s effort towards automation
- The use-case potential of smart contracts increases with the cross-pollination of technology
Supply chain have today become an important use case for smart contracts owing to the high volume of engagement with multiple parties. For example, to move a container at the Port of Antwerp, there are, on average, 200 different interactions amongst 30 parties.
What is a Smart Contract?
A smart contract is a self-executing contract with embedded rules that defines the agreement and conditions between two or more parties.
Currently, there are more than 30 million smart contracts deployed worldwide spread across industries such as BFSI, energy, life sciences, public sector, and real estate.
In a supply chain, smart contracts are most useful in three areas:
- Making payments: A smart contract releases payments when a pre-defined condition is fulfilled.
- Recording ledger entries: It records changes which include data from IoT devices, manual changes and timestamps.
- Alerting for manual intervention: Parties in the smart contract are alerted when manual attention is needed. For example, when an IoT device detects an out-of-range temperature, it alerts all the parties to take necessary action, reducing supply risk.
Creating Smart Contracts
Developing a smart contract requires thorough and systematic analysis to understand the best and most efficient parameters needed for coding an effective contract.
Parameters are important as they shape the codes and rules for auto-execution. A smart contract can be used to define almost anything about the relationship between different supply chain parties.
For example, an operational smart contract between two parties could state:
- The cost of manufacturing products
- Timelines for product delivery (from factory to consumer)
- Penalty and bonus clauses
- Responsibilities of each party
- Payment terms and conditions for settling invoices
Smart contracts are automatically triggered when specific factors come into play. This drives automation and operational efficiencies.
For example, a supply chain manager could set up a contract for a particular order with specific parameters and transfer the payment into a holding account. The funds will release automatically from the holding account, without any human intervention once the specified task is completed.
Benefits of Smart Contracts
Smart contracts have several benefits for supply chain managers. These include:
- Reducing the burden of managing large amounts of paper documents as everything is digital
- Eliminating delays caused by payment approval hierarchy used in traditional contracts. They also reduce processing times for orders and payments
- Comprehensive audit trail and traceability
- Full transparency, as smart contracts are open for inspection to all parties via the blockchain ledger system
The power of smart contracts grows exponentially when coupled with internet of things (IoT) and distributed ledger technology IoT-enabled GPS can enhance the company’s visibility to track and trace goods in the supply chain. RFID sensors can provide data that becomes an automatic trigger for a smart contract once the pre-defined conditions are met.
The rise of tech-collaborative smart contracts
There has a been a lot of innovation in collaborative smart contracts with the help of IoT, RFID, temperature sensor, mobile technology, DLT, Bluetooth. Smart contracts by Modum, for example, come with a proprietary temperature logger to measure the shipments’ environmental conditions while Shipchain enables tracking shipments from the factory to the final delivery. Its smart contracts run on the Ethereum network which can be duplicated and used by sidechains for cost saving. Then there is TE-Food that integrates all the food partners for farm-to-table food traceability and fight against fraud and mistrustful supply chains.
Smart contracts for complex problems
Combining various technologies helps solve complex problems across the supply chain network. Smart contracts represent the future of automated agreements and start-ups are emerging in this field with bespoke solutions that can be leveraged to drive efficiency and automation. Learn how GEP can help with supply chain management solutions.
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