Purchase orders are supposed to keep the purchasing process free from disputes. However, purchase orders often cause chaos and confusion in manual PO processing.
Outdated tools, neglected processes, and friction in internal communication haunt every step of the manual purchase order lifecycle.
What is Purchase Order Cycle?
The purchase order life cycle is the key step in processing an order. It begins with an approved purchase requisition, which is then converted to a new purchase order and sent through the purchase order approval process.
The PO lifecycle includes steps that range from cross-checking budgets to PO matching and closure.
The first purchase order life cycle step is creating a purchase order. Once a purchase request is approved and authorized, it is converted to a purchase order. In the case of multiple line items, each item will be transferred to a new purchase order.
While any employee can raise purchase requests, purchase orders can only be created by the procurement team in an organization.
Reflecting the PO on the Blockchain
Blockchain can increase the transparency of the supply chains because the business rules written in smart contracts assure that actual transactions are carried out under the original agreement.
Whether a smart contract represents a product licensing agreement, bill of material requirements, or some other agreement between the parties, the sequencing of blocks in a transaction can only occur if a given step in the process is consistent with the smart contract rules.
Nowadays, there is a range of time and space between the terms of a contractual agreement and the execution of a corresponding transaction.
If a seller and buyer agree to a contract doesn’t guarantee that the parties will carry out their responsibilities to the letter of the agreement.
It is common in global trade to discover that the operational details of a transaction vary considerably from its original business rules.
In the early days of globalization, the only way to confirm that a transaction was being carried out under contractual terms was to either track a given activity in real-time or trace proofs and audit each step in operation.
Of course, the large number of international agreements at any given time makes this activity challenging. Add to this fact that weeks or months can go by from the moment an agreement is signed until transactions are effected. The probability of mistakes, inconsistencies, or even intentional shenanigans becomes very high.
For example, take the case of a Negotiated Rate Arrangement (NRA) between a shipper and a Non-Vessel Operating Carrier (NVOCC). Whereas NRAs for ocean transportation are negotiated annually, the actual booking and shipment of containers happen every week.
The potential for errors or discrepancies in this type of scenario is high because shipment-level details can sometimes vary in areas that include shipping rates, free time at the port of arrival, demurrage fees, or detention charges.
When the NRA is set up as a smart contract on a blockchain ledger, any transactional inconsistencies are detected immediately because the details found in shipment-specific bills of lading are linked to the smart contract.
This Linkage Principle helps the Beneficial Cargo Owner manage its relationship with the ocean carrier and requires considerable financial and administrative savings to be reaped because billing errors can be avoided ahead of time.
The good news for international trade is that the Linkage mentioned above applies to any facet of business where agreements, business rules, and transactions exist.
Apart from applications that have already been developed for areas like letters of credit, one can envision where the management of Free Trade Agreements and how goods are determined to qualify for duty-free treatment will reside on the blockchain.
The same can be said for other mission-critical facets of supply chain management like third-party product inspections and the classification of goods per customs regulations.
Purchase Orders as Smart Contracts
Smart contracts apply to many trade-related situations. The most obvious is that a PO is a contractual agreement between a seller and buyer that, when executed, results in an exchange of value. Second, the sheer volume of purchase orders in global commerce far outnumbers all other examples of smart contracts.
With millions of POs being issued worldwide daily, the magnitude of the benefits derived from putting purchase orders on the blockchain can be naturally foreseen.
Another motivation for converting POs to smart contracts is related to the number of business rules embedded in the trade environment. With terms that cover price, currency, quantities, last ship dates, and more, the complexity of purchase orders makes them stand out in the blockchain world.
When compared to the terms of a domestic purchase order, for example, it is easy to see that international PO’s contain many more business rules, all of which have ramifications for underlying the Smart Contract.
International purchase orders are not only detailed; they tend to change over time. As any purchasing professional knows, it is not unusual to receive news from a vendor that they don’t have the production capacity to complete an order and that a split shipment will result.
In other cases, a vendor can experience dramatic increases in raw material costs and be compelled to approach the buyer for a price adjustment.
When visible on the blockchain as a smart contract, any changes in purchase orders can be proactively uncovered, addressed, and indelibly accounted for.
Because a PO is created so early in an agreement, other downstream activities and business rules become a natural consequence of its content. As a standalone document, the timing and complexity of purchase orders make them an ideal candidate for management on a blockchain ledger.