A new report explains the concept of smart contracts and their application in supply chains, as well as highlighting their pros and cons. It also lays out an initial path for gaining expertise in these tools.

Chain Business Insights, an independent research firm focused on the application of blockchain in supply chain management and trade finance, published its latest research brief, “Smart Contracts in Supply Chain: Making Sense of a Potential Game Changer .”

“A smart contract is computer code hosted on a blockchain that defines and executes the terms of an agreement between parties,” said Ken Cottrill, co-founder and research principal at Chain Business Insights. “Given their versatility, the range of potential applications in the supply chain domain is vast.”

The research brief identifies and elaborates on several benefits of smart contracts including verification, visibility, lower costs, self-execution, clarity of agreement terms, fraud protection and connectivity. It also notes the challenges that come along with implementation. Among them are legal standing, lack of standards and protocols, privacy fears, error intolerance and resistance to change.

A case study on a cotton supply chain proof of concept in which 88 bales of cotton were shipped from the US to China illustrates how smart contracts work in practice. The participants claim that this was the first global trade transaction between two independent banks that combines the emerging disruptive technologies of blockchain, smart contracts, and Internet of Things (IoT), for a real transaction and shipment of goods.

“Several companies recognize the applicability of smart contracts to the supply chain space,” said Peter Harris, co-founder and research principal at Chain Business Insights. “IBM, Maersk, Microsoft, and SAP Ariba are among the first to engage in proof of concepts, but we expect that list to expand rapidly.”

The authors emphasize that despite its many advantages, smart contracts are by no means a panacea for fixing inefficiencies in supply chains. The rationale for using them depends on the type of agreement under review, as well as its scale and scope. They offer some pointers for exploring this solution and discuss some future developments. Finally, a useful appendix lists smart contracts vendors.