Blockchains, Smart Contracts, and Supply Chain Efficiency

Abstract

This paper examines how real-time visibility of information on blockchain can mitigate supply chain uncertainty and increase its efficiency. We model a supply chain with two suppliers and one manufacturer, where the manufacturer needs intermediate goods from both suppliers for producing the finished product, and one supplier has an imperfect technology that generates non-defective products with a random yield. Supply chain inefficiencies arise due to potential production surpluses and deficits in the intermediate products. We show that a blockchain that shares verifiable real-time production information among suppliers and the manufacturer can improve supply chain efficiency. The benefit of blockchain is non-monotonic in the random yield of intermediate products and profit margin of the final product. Furthermore, we demonstrate that, in the decentralized setting, the optimal contracts are "smart contracts'' contingent on information on the blockchain. In an extension of the model, we consider two imperfect-technology suppliers who compete with partially substitutable products and show that blockchain continues to improve supply chain efficiency with competition. Interestingly, the benefit of blockchain decreases with product substitutability.

Keywords: Blockchain, Smart Contracts, Supply Chain, FinTech, Real-Time Data, Random Yield, Supply Chain Coordination, Product Competition, Product Substitutability