Smart contracts ‘no cure-all for supply chain weaknesses’

Smart contracts offer businesses several key benefits, which include verification, visibility, lower costs, self-execution, clarity of agreement terms, fraud protection and connectivity.

However, a newly-published brief from independent research firm Chain Business Insights also identifies key challenges that come along with implementation. Among them are legal standing, lack of standards and protocols, privacy fears, error intolerance and resistance to change.

The research brief, entitled ‘Smart Contracts in Supply Chain: Making Sense of a Potential Game Changer’, explains the concept of smart contracts, their application in supply chains and highlights their pros and cons. It also lays out an initial path for gaining expertise in these tools.

“A smart contract is computer code hosted on a blockchain that defines and executes the terms of an agreement between parties,” says Ken Cottrill, co-founder and research principal at Chain Business Insights. “Given their versatility, the range of potential applications in the supply chain domain is vast.”

A case study on a cotton supply chain proof of concept (PoC) – in which 88 bales of cotton were shipped from the US to China – illustrates how smart contracts work in practice. The shipment, completed last October, was undertaken by Australia’s Brighann Cotton Marketing and involved Wells Fargo and the Commonwealth Bank of Australia (CBA) in its processing and execution through blockchain.

The participants announced it as the first global trade transaction between two independent banks to combine the emerging disruptive technologies of blockchain, smart contracts, and Internet of Things (IoT), for a real transaction and shipment of goods.

“Several companies recognise the applicability of smart contracts to the supply chain space,” says Peter Harris, co-founder and research principal at Chain Business Insights. “IBM, Maersk, Microsoft and SAP Ariba are among the first to engage in proof of concepts, but we expect that list to expand rapidly.”

The brief’s authors stress that despite their many advantages, smart contracts are by no means a panacea for fixing inefficiencies in supply chains. The rationale for using them depends on the type of agreement under review, as well as its scale and scope. The brief offers several pointers for exploring this solution and discusses likely future developments.

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