Impact of Blockchain in the Distribution Wholesale Industry (Part II)
In the first part of this short series “Impact of Blockchain Technology in the Distribution Industry (Part I)” I introduced the basics of the technology, its evolution, and how it is disrupting key sectors like software, financial technology (FINTECH), logistics, and wholesale industries. In this second part, I will focus on the Impact of Blockchain in Distribution and Wholesale from two angles: what is currently being done and how else the industry can benefit from the technology.
Potential benefits of Blockchain in Distribution
Wholesale, logistics, and retailers are using Blockchain to improve efficiency and transparency in Accounting, Asset Management, Human Resources, and product traceability. Let’s take a glance at it.
Blockchain in Accounting
Standard accountancy requires a significant time investment from all the elements in the supply chain. Businesses keep their own ledger to ensure that the business financial records are accurate and compliant. This process is susceptible to human error. Three BaaS solutions have the potential to disrupt and transform the traditional accounting way.
- Smart contracts: With smart contracts, transactions automatically go through when certain conditions are met without intermediaries. This helps accounting professionals and organizations automate jobs like payroll and reconciliations, resulting in minimal manual entry errors and the reduction of administrative costs.
- Decentralized, distributed ledger technology: many accounting processes rely on a middle man to validate transactions. It happens with bank transactions, deliveries, receivings, etc. As opposed to a public blockchain network, the transaction validators in a private blockchain are not incentivized in the form of tokens (money) but in having the benefit of being a part of the ledger and being able to read data they consider valuable. Transparency becomes the main issue.
- Easily verifiable records: With blockchain, there is no need to confirm the accuracy or existence of transactions with external sources. This means the auditor’s focus can shift to how those transactions are recorded and recognized in financial statements and how elements such as valuations are decided.
As blockchain technology becomes more mainstream and accessible, all members of the HR department will likely find it disrupting their daily workflows, including the recruitment process, tapping talent pools, running background checks, verifying employment history, engaging contract workers with smart contracts, onboarding, maintaining employee data, maintaining personal data of employees, handling financial transactions and managing payroll systems.
Blockchain in distribution for Lot Traceability
For the food producer and distributor track, lots and expiration dates are critical, from raw material to end products to customer purchase. Federal regulation mandates that in case of defective product lots or damaged food, the distributor is responsible to recall the damaged or defective products within a period. In order to do that, you need to verify which ingredients make their way to your recipe, where they are from, when they arrived, and where the end product goes. The only way to do that efficiently is through lot tracking solutions, but the key issue is how to reconcile the information from all the players
Blockchain distinctive qualities that enable unique item identification, tracking, visibility, and shared logic among multi-tiered supplier relationships across three or more parties threatens to disrupt the traditional way of lot tracking. A validation of this is that companies like Walmart, Nestle, JC.com, and Carrefour are using blockchain SaaS solutions to track different portions of the lot tracing value chain.
Funds rising and cash generation with Blockchain
Even though the solutions outlined above will help to improve costs and better the profits of your operation, the most important area where blockchain in distribution and wholesale can be helpful is funding and cash flow management. Below are some of the possibilities:
On-time Payables and receivables:
Imagine a BaaS platform where companies can post their invoices and be sure that the money will be deposited on the due date, deducting it directly from the client’s account and deposited into the vendor´s account. Such a system goes against the premise that many companies have of financing their operation with the vendors´ money, but the potentials to optimize cash flow are extraordinary. For this platform to be successful the developer must secure three elements:
- Attract companies to transact payables and receivables through the platform. One incentive could be a discount for paying on time and a penalty for not doing so.
- Liquidity Providers (LPs) o persons that place some of their crypto money in the platform under the incentive of a fixed interest rate.
- Smart contract that defines the rules for each case.
Shares emission with Blockchain technology
If a new company needed seed money or an established company considered going public in order to finance their projected growth, the traditional mechanism has been venture capitalists or an IPO (Initial Public Offering), which is a rather complicated and costly process. How can Blockchain in Distribution and Wholesale applications help? The advent of blockchain has brought a new player into this field which is the ICO (Initial Coin Offering) .
ICO is the creation of digital tokens on a blockchain that is distributed through a public ledger. An IPO is the distribution of shareholdings to the public through investment banks that are known as underwriters. The table below shows the main difference between both mechanisms.
Use Smart Contracts to finance operations
The main cash-consuming section of an average distribution operation is the inventory. The financial cycle associated with the purchase of products and the raw material is a function of the minimum order quantity (MOQ), payment term (PT), delivery time (DT), and inventory rotation (IR).
Cash required = MOQ x Cost x (DT+ (IR – PT))
For example, suppose your MOQ is a 20FT container worth $25,000 that you pay in advance, the DT is 45 days and you rotate that container in 90 days. This means that you will need to finance the $25,000 for 45 + (90 – 0) = 135 days. Additionally, in order to avoid product disruption, you have to repeat that order every month. So, the total cash requirement for that product will be $25,000 x 4 = $100,000.
Blockchain gives you an alternative: you can get a smart contract with a SaaS like Uniswap, where you receive the $100,000 in cryptocurrency with a condition, established in a Smart Contract, that every time the product is sold, the BaaS deducts the sold amount from your account. This is the equivalent of inventory pledging but more easily and transparently.
Get advantage of cryptocurrency
Cryptocurrencies have been growing at a stable pace for several years and the projection is that they will continue to do so for a long time. What many companies are doing to better their financial indexes is to allocate a percentage of their capital to buy bitcoins or Ethereum and put them on their balance sheet. The trend below shows that, even though it is a wildly volatile asset, if you hold it long enough it tends to outperform just about any other asset in existence; this growing tendency will strengthen your financial indexes. Better indexes mean better access to credits and cash availability.
Blockchain is one of the emerging technologies that is bringing the most uproar about. The number of applications developed, the number of players embracing it, and the level of investment, point to a technology that is here to stay. The businesses that follow the flow of innovation will be able to save money and build a reputation in the new, trusted, digital world. Blockchain in Distribution, Wholesale, logistic and retailers, together with smart contracts and digital currencies will make the trade and governmental processes safer, faster, efficient, and scalable. And the economy will continue its path towards decentralization as more and more small players, supported by digital technologies, join the market. In the words of Ratko Stambolija “The free information flow brought unprecedented economic growth, shifting focus to the startups for the first time in recent history. Now imagine — if the exchange of information made such an impact, then what could the exchange of value do?”
I hope these two articles have been helpful. I will continue to publish information related to Warehouse Management, distribution practices, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, register to keep you updated on future articles.
You can also watch this video about the possible applications of blockchain in distribution and wholesale.