This is Part 2, click here to read Part 1.
At Source Intelligence, we are often asked a similar question from our clients regardless of their industries. “How can I ensure the products on our shelves comply with both the relevant legal requirements enforced by governments as well as internal quality and CSR requirements.” Most of clients understand that the risk of non-compliance can result in financial litigation, and a severe hit to your brand’s reputation.
To address the issue of supply chain compliance, the key activity is to engage all of the suppliers of a given product. Companies must engage the supplier of the product not only to learn about the status of the product but equally importantly, to gauge the status of the corporation that that supplier represents.
Selecting a supplier usually comes down to meeting some fundamental requirements:
- Price
- Quality
- Delivery
In 2018, compliance is quickly joining the list of fundamental requirements.For the supplier, however, they have much more motivation to focus on product quality, keeping costs under control and delivering on time.
Herein lies the problem. Most all of the companies in the supply chain and the people that work for them are far more motivated to focus on their core business of delivering a quality product on time for a good price, than they are to address compliance. On top of due diligence, compliance measurement frequently come out of the suppliers pocket - you can see the path of resistance.
“But I thought this was all about Blockchain,” I hear your cry! Okay, back to it. It is thought that because the Blockchain provides an immutable ledger of transactions and the ability for smart contracts to be executed, every exchange that happens through the supply chain will be recorded on Blockchain (possibly with some smart contracts executed through IOT devices) and everything will be better and more reliable than it was before.
While this idea certainly makes a lot of sense in terms of how to store a set of transactions related to the supply chain, it doesn’t address the key problem of engagement or ‘getting all parties to participate. Supplier engagement is really the critical issue surrounding supply chain compliance, and certainly the wider issue of supply chain transparency, without participation, communication and data collection, transparency cannot be achieved.
How Can Blockchain Improve Supply Chain Compliance?
Let's consider this point:
Blockchain can incentivize stakeholders to move in the same direction. Let’s think about how we can leverage this characteristic to solve the key problem of supply chain compliance.
The supplier would be given a set of required supply chain compliance activities, such as entering data on their corporations’ regulation status, product composition or product attribute information (i.e. tagging). Every time one of these activities was completed and verified via a smart contract, the supplier would be automatically issued a cryptocurrency token.
While this idea certainly makes a lot of sense in terms of how to store a set of transactions related to the supply chain, it doesn’t address the key problem of engagement or ‘getting all parties to participate.
What if instead of paying a service provider (or having suppliers pay a service provider) to gather data from suppliers and products to meet supply chain compliance requirements, a company could use a Blockchain based platform and issue tokens to their suppliers in return for compliance related activities?
Well what value does that have you may ask? The answer is that it can have value from the issuing company. For example, the issuing company might say that it will exchange tokens for better payment terms, or for lower insurance rates through its broker. Or they might demand less of a discount on purchased products. Further, if you are a supplier who values cash more than better payment terms, etc, perhaps you can sell your token to another company who would has a greater need for the better terms and will pay you cash. Or you could even sell your token to someone who is just betting on the fact that the token will have more value in the future. Which can in turn raise the value of the token. Even though this external trading can be considered speculative, the company who can redeem the token to the issuer is able to gain real value.
This token mechanism not only allows a supplier to be incentivized for supply chain compliance activities, but allows the company requiring the compliance to very tightly couple the value of compliance to the value gained. The company never exchanges any value with a supplier who doesn’t meet compliance requirements. And with those who do, the company can carefully control what value they are willing to exchange. Thus, efficiently tuning the supply chain risk from non-compliance with the value gained.
The service provider now moves from a blanket fee for compliance to a transaction fee model, where they get paid each time a token is exchanged. Thus, they are strongly motivated to build a platform that drives activity by all participants.
While this may sound like a complex system, there are dozens of companies being launched every day that are adapting this model. ICO’s or Initial Coin Offerings change the way the world does business in a plethora of ways. While it is certain that many of them won’t succeed, many will and just as at the dawn of the age of the internet and websites, good things will come of this.
While Blockchain by itself will not solve all your supply chain compliance challenges (you’ll need real people to initiate interactions), it may revolutionize how you manage compliance with your suppliers.
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