Blockchain is a powerful intelligent technology that provides businesses with greater transparency and collaboration capabilities.
Industries that perform processes such as manufacturing, 3D printing, spare parts management, procurement, logistics, finance, etc. can all fall victim to limited visibility and lack of trust among stakeholders, which can lead to process inefficiencies, misuse, fraud, theft of intellectual property, and disputes. Blockchain technology can address these needs with its ability to facilitate immutable data sharing across all participants while providing process automation with the use of smart contracts. This blog post will highlight some blockchain use cases and how they relate to SAP solutions.
Procurement with SAP Ariba
Supplier management is a complex process today. Buyers work with multiple suppliers, and suppliers work with multiple buyers, in a multi-tiered supply network. Onboarding new suppliers is a lengthy process for buyers as they need to ensure that the supplier information is current and accurate for validating their claims and certifications. Various compliance and risk requirements need to be checked, like ISO certification; labor and fair trade practices; conflict minerals usage; sustainable, green, LEED, and renewable energy usage claims; sanctions; and watchlist-related information, etc.
In addition, company and financial information must be verified to conduct business with a supplier, and information must be passed on to secondary and tertiary suppliers, if needed. Multiple teams across legal, audit, risk, finance, supply chain, and procurement departments need to be involved, and they all need access to various information. Similarly, suppliers will have the same needs in relation to their own suppliers.
Given the huge supplier network available on SAP Ariba, SAP is investigating how to bring suppliers, buyers, third-party content providers, governments, standards bodies, and certifiers together and to augment SAP Ariba with blockchain to share supplier information on the blockchain. Some information can be public and available across all players in the network, while other information can be maintained as private and can only be shared with certain players to address their specific needs.
Logistics with SAP TM, SAP GTS, and SAP S/4HANA
Given the global nature of supply chains, cross-country shipments of goods are an inherent part of the process. The end-to-end process today suffers from a great deal of inefficiency given that numerous participants must be involved as goods move from sellers to buyers or to consignees, such as freight forwarders, logistics providers, port authorities, customs, agents, brokers, banks, etc.
Further inefficiencies stem from the need to exchange several documents during the process like letters of credit (LCs), commercial invoices, packing lists, export declarations, export customs clearances, bills of lading, import declarations, release orders, import customs clearances, pickup instructions, etc. These documents are transmitted over fax, via emails, or even hand-delivered. Often, these documents are paper-based, involving a lot of manual handling.
Such a slow, error-prone process suffers from limited or even no visibility, which leads to delayed shipments; fraud; high costs; and an enormous amount of time, effort, money, and resources spent reconciling disputes and discrepancies. Blockchain for international trade, with integration to enterprise processes, promises to revolutionize the international trade process as it exists today by addressing all these shortcomings and by providing complete visibility and digital transparency to all participants in the blockchain network.
Working with its customers in a co-innovation project, SAP has developed a percentage of completion (POC) using Hyperledger Fabric on SAP Business Technology Platform to model the end-to-end process as four phases: initiate trade, initiate shipment, shipment delivery, and trade settlement. Smart contracts were used to specify which parties needed to be involved at each step, specify which documents needed to be provided and by whom, provide secure visibility to these documents with digital signatures, and ensure all prerequisites were satisfied for a trade to move to the next phase.
In the future, with integration to SAP Transportation Management, SAP Global Trade Services, SAP S/4HANA, and SAP Global Track and Trace, as well as the ability to integrate information from third-party applications, blockchain has the potential to provide significant value in terms of cost savings and process efficiencies for all parties involved in international trade.
Financials with SAP S/4HANA Finance
Several use cases for blockchain technologies in finance are relevant, and at the time of this writing, SAP is augmenting SAP S/4HANA Finance with blockchain. For example, payment fraud is a serious threat in international payments, but the approval process to change a supplier master data account is a tedious and error-prone process, also susceptible to hackers and social engineering attempts. Supplier data can be stored as a hash on the blockchain, and at the time of the payment run, that data can be cross-checked against the data found in SAP S/4HANA to ensure its accuracy.
Multiparty collaboration on such an immutable, single source of truth, with built-in alert mechanisms, can help all involved parties to gain transparency. Your account information, as well as your supplier relationships, can be kept private, and any tampering of data will be immediately visible and preventable.
Another use case for blockchain in finance is in optimizing days sales outstanding (DSO). Revenue recognition requires that the chance of collection be “probable” or “reasonably expected” according to accounting rules, and for certain types of contracts, revenue is recognized only when an invoice is paid. For the services industry, considerable delays can result because of disputes over the invoice. By sharing open items on a blockchain, the parties won’t need to wait for the net payment terms in the contract, and buyers can accept an open item prior to the net payment date. In this way, a vendor can recognize the revenue much earlier while a buyer can continue to make payments per the agreed-upon dates.
In a similar fashion, a buyer, who is likely a vendor for another customer, can in turn leverage blockchain in a similar fashion to reduce its own DSO. Once the movement of cash is no longer the way revenue recognition is triggered, the actual payment may be unnecessary with regard to multiparty accounts receivable/accounts payable netting. Instead of all parties paying through the bank, data on the blockchain can be used to net revenue amounts against credit owed by a buyer as well as against credit owed by third parties.
With the visibility and security provided by blockchain, a vendor may decide to allow credit-worthy customers to accrue amounts owed for longer periods. Blockchain can also be used for accounts receivable (AR) factoring. If your company, for example, has difficulty in finding loans to grow their business, you can engage in selling your AR (called factors) to third parties, at a discount to obtain funds.
Silent factoring can be initiated by a vendor without your knowledge, whereas reverse factoring would be initiated by you, the customer. A vendor can sell its open items to a factorer at a discount either before or after the buyer accepts the liability. Blockchain reduces the risks involved in factoring by eliminating fraud and increasing transparency for the parties involved. This mechanism can help small vendors or vendors with poor credit ratings to access cheaper financing because financing cost is highly correlated to risk and blockchain minimizes risk.
Another variation of this use case is using blockchain for third-party collections. If a vendor posts an invoice on the blockchain, but the invoice is disputed by the buyer, the vendor can turn around and sell its accounts receivable for the disputed invoices to debt collectors. Blockchain can help reduce the effort involved in third-party collections and increase transparency.
Other use cases like processing letters of credit (LCs) and requests for quotations (RFQs) go hand in hand with the international trade and procurement areas described earlier in this section.
Letters of credit often involve a lengthy process of back-and-forth exchanges between multiple parties: the buyer, the seller, banks, customs, logistics service providers, freight forwarders, inspectors, etc. A large degree of paper-based reconciliation and validation had to be done manually, slowing down the receipt of goods and payments. Letters of credit using smart contracts on blockchain can help reduce costs, prevent fraud, and facilitate faster payments by providing transparency into the shipment statuses, inspection results, and required documentation, as per the terms of the purchase order, on the shared ledger thus automating the effort for the bank’s review and approval.
RFQ processing in procurement involves a buyer initiating an RFQ and suppliers creating and submitting bids. A considerable time lapse before the decision deadline leaves room for manipulation and possible collusion between a buyer and a supplier if confidentiality is not maintained, which often results in expensive lawsuits when suppliers challenge bid awards. With a blockchain-verified RFQ process, a hash of each submitted bid can be stored on the blockchain, maintaining information on who opened a bid and when. With blockchain, trust and transparency is enhanced by an established audit trail open to all involved. The time stamp service in SAP Cloud Platform Blockchain can be used to achieve these objectives.
Blockchain can provide a lot of value to businesses who work with multiple partners, speeding up transactions and providing a level of security and transparency for all involved. Do you use blockchain in your SAP ecosystem? Leave a comment below with your specific use case!
Editor’s note: This post has been adapted from a section of the book SAP Leonardo: An Introduction to the Intelligent Enterprise by Pierre Erasmus, Vivek Vinayak Rao, Amit Sinha, and Ganesh Wadawadigi.