Companies that sell physical goods eventually runs into a problem — inventory management.
Every time a product order comes in, they have to fulfill the order, send an invoice, and ship the product. Then they wait for the invoice to be paid. At the same time, they’re also receiving shipments of raw materials, parts, or other products from upstream partners.
Currently, all of this is handled is through enterprise resource planning (ERP) systems. ERP providers ask companies what functionalities they need, customize software to fit those needs, and help the company implement that software.
It’s a costly and time-consuming process that can take months to set up at large organizations.
But supply chain systems are changing. Blockchain is creating new opportunities for companies to gain visibility into their supply chains, and that’s going to affect how companies think about their ERP systems.
There are good reasons for that:
ERP systems have limitations.
These systems are solutions, not products. We’re not talking about generic software that any company can take off the shelf and use immediately.
ERP systems go through massive amounts of customization to fit each individual organization.
And that customization raises a few issues. For one thing, it’s difficult to change the system later on. Adding new features or overhauling the entire system is expensive, so only large companies can really afford it.
There’s also the issue of interoperability. Every party along a supply chain has their own custom ERP system. The manufacturer, wholesaler, and retailer usually operate on different software.
That creates a situation where no one has more visibility than the activity one step to their left or right. Each company’s “trust boundary” only extends to their own system. They know who sold them the product, and they know who they sold it to. But they don’t have exposure to the entire supply chain.
A blockchain network extends this trust boundary.
Blockchain has the potential to unite a large supply chain network using a decentralized system.
By integrating blockchain solutions into existing ERP software, the two systems can work together to improve the automation of supply chains.
This means every company can maintain their own internal ERP system, while joining one rule-enforced blockchain network.
This has a few distinct advantages.
First, it solves for visibility within the supply chain. Each participant can trace the product’s journey from the manufacturing floor to the retailer’s shelf, helping to eliminate product diversion and counterfeiting.
It’s also cheaper, given that the manufacturer, distributor, and retailer can all use the same solution. They don’t each have to pay for a complex installation just to access data on the blockchain.
So, the data and business rules that currently reside with three companies would be available in one network. And each transaction between the companies would automatically be recorded on the blockchain. Companies can still keep and record the private data that’s relevant to them, meaning they won’t have to share business intelligence. But they would finally have visibility into the entire chain of custody.
That visibility closes what are known as “trust gaps” between companies.
Most companies have a set of processes and people they trust, which includes their own ERP system. But that sphere of trust doesn’t always overlap with the next company in the supply chain. And it’s within those trust gaps that fraud, counterfeiting, and other illicit activities exist.
Blockchain fills those trust gaps between siloed and disconnected ERPs by providing visibility throughout the supply chain. It can also act as an ERP system for an entire supply chain or industry by keeping a shared system of record for intercompany transactions.
Blockchain also has the potential to automate business processes.
Encoded in a blockchain, there is something called a smart contract — a protocol that automates a business transaction.
Using smart contacts is similar to setting up an automatic payment for your credit card. On a specific day each month, funds are automatically withdrawn from your bank account to pay off the balance built up by your transactions. No website login or confirmation required.
For companies, the benefit of smart contracts is gaining faster and hassle-free business processes. Multiple smart contracts can be set to automate huge amounts of manual, time-consuming tasks.
For instance, when a business gets a product order, a smart contract can automatically trigger a shipment of the product. And when that shipment leaves the building, it can trigger an invoice. When the payment goes through, the invoice is automatically recorded and closed.
Invoices are just one part of current ERP systems that can be standardized on a blockchain system. But as the blockchain network expands, there will be more and more ERP processes that can be automated by the blockchain system.
For now, blockchain and ERPs will interact.
Blockchain is additive technology. It’s not going to replace the need for internal ERPs. Rather, ERPs and blockchain will work together to strengthen the integrity and automation of supply chains.
We still don’t know for sure that blockchain can process the same number of transactions as current ERP systems. It hasn’t proven its performance at scale. But there are plenty of efforts underway to prove blockchain’s capabilities. And once the technology matures, adoption will increase.
And we can’t ignore the fact that ERP systems are expensive. Companies that spend millions to implement them are betting on using those systems for many years to come. They are not investments to get rid of at the drop of a hat.
That’s why we’re more likely to see ERP companies develop modules or connectors that work with existing blockchain networks to give their customers access to the new technology — without throwing everything else away. The future will be more about integration than replacement.
But as adoption increases, the benefits of using blockchain will also grow. As more users work with blockchain, the network effects will multiply.
Most companies will keep their customized ERPs, but piece by piece, they’ll begin to identify what can be done in a standardized way across the industry. Those are the processes blockchain will be used for.
Down the line, blockchain-connected ERP systems will offer the best supply chain management option for most companies.
By Ajit Kulkarni
Syndicated content featured from Harvard Business Review.
