Blockchain and the Future of ERP Systems

While blockchain technology is most commonly associated with cryptocurrencies like Bitcoin, it is a distributed ledger system with uses that are far more wide-ranging than simply providing a basis for the cryptocurrency trading market. In fact, given its inherent characteristics, blockchain technology is expected to play an ever-increasing role in evolving enterprise resource planning (ERP) system rollouts. As is true with many new technologies, the uses for it are still expanding and are expected to continue to increase as companies better understand how it works and what it can offer to address their unique challenges.

This article looks at blockchain and its potential impact on ERP systems. We will address what blockchain is and how it works. We will also define and explain ERP systems. Some software vendors have already begun to integrate blockchain technology into their ERP solutions, and this is likely to happen more and more in the future. Business owners, managers, and IT professionals will need to know the ins-and-outs of these two solutions.

Defining Blockchain and ERP

What is Blockchain technology?

Blockchain technology refers to a distributed, or decentralized, ledger system that displays several characteristics that make it both unique and highly useful for any number of applications. It provides transaction consensus (meaning no one can dispute the legitimacy of a recorded transaction), provenance (meaning it records when/where/by whom a transaction is made), immutability (meaning that once a transaction is recorded, it cannot be altered), and finality. Together, these characteristics make it uniquely transparent and tamper-proof. With blockchain, traditional ideas of trust and information ownership can become largely irrelevant, and this is primarily why the technology is expected to disrupt traditional ways of managing business transactions.

As the name “blockchain” suggests, it is a way to store and distribute digital information using a chain of ever-growing, encrypted “blocks”. Each block possesses cryptographic data extracted from the block before it. The blocks are unchangeable and include time stamps. Much like cloud computing, blockchain networks can be public, private, or permissioned. The latter is a type of private blockchain that allows authorized or anonymous participants to verify the transactions on the chain.

Following its initial development to serve as the public transaction ledger for bitcoin cryptocurrency, the technology has since proved itself useful in many other fields.

What is ERP?

Enterprise resource planning (ERP) is a software system widely used both in small and midsize businesses (SMBs) and large-scale companies to integrate their major business processes and provide automation by consolidating data in an all-in-one system. For example, imagine a manufacturing operation where a sales order triggers the production of a finished unit, which in turn triggers various actions that include inventory management and the purchasing of new materials, to shipping, to billing, and so on.

Businesses usually implement an ERP system to realize improved speed and efficiency across their organizations, while also controlling costs and better serving their customers. An ERP solution that is properly matched to a business’ particular requirements will normally offer a significant return on investment (ROI) and substantial increase in productivity.

Blockchain’s Impact on ERP

Blockchain technology brings new thinking to how systems linked by ERP communicate. The fundamental purpose of ERP software is to integrate disparate business processes to increase speed and efficiency. Blockchain can take this further by fully securing the communication between systems at each transactional step. This process strengthens security and simplifies transferring data between parties.

Supply Chain Management

In supply chain management, ERP has established itself as a software solution that helps businesses better handle managing inventory, processing orders, handling invoices, and organizing shipments. Of course, different businesses may use different ERP solutions, but their ERP systems must be able to communicate with each other when, for example, one business is acting as a supplier to another.

Often, an electronic data interchange (EDI) system is employed to enable this communication, but it is limited to one-way and point-to-point messages and requires functional acknowledgements. Using the decentralized, peer-to-peer network of a blockchain system, users can view the status of products within their ERP system. This layer of shared visibility comes with the ability to collaborate and to provide a synthesized record; importantly, no sensitive business intelligence is shared without authorization.

Blockchain Works with ERP to Strengthen Security

The concept of blockchain eases business transactions, applying an increased level of data security. Using a blockchain network, such transactions would draw information stored on an ERP system, sharing only the necessary data agreed upon by the parties involved. One reason everyone is so excited by blockchain technology is because it can be managed and shared with either an open or limited set of users, as deemed appropriate for that particular set of circumstances. As a result, businesses will be able to generate transactions on blockchain networks with full confidence that sensitive information will not be shared inadvertently, which could pose a risk to their competitive advantage or compromise the security of their customers’ personal data.

Reforming Product Recalls

Together, blockchain and ERP have the ability to transform how businesses handle recalls. With the two combined, it is possible to pinpoint solely the product that needs to be recalled. This stops companies having to recall every item, which can result in devastating losses.

Automated Business Processes

Blockchain technology has a feature called “smart contracts.” A smart contract is a computer protocol that verifies and enforces actions needed to satisfy a contract, following the logic of a contractual clause. For example, the verified payment of an invoice could enforce the shipment of the product that was ordered, with no room for either party involved to dispute exactly what happened and when. The smart contract sets the wheels in motion for smoother handling of shipments, invoices, and payments. This concept will be applied to other ERP processes in the future.

Blockchain technology is fresh on the scene, and businesses and software developers alike are still figuring out the best ways to use it. With data security a major concern for everyone, it is no surprise that the ERP software industry is looking to blockchain’s unique data security benefits as a compatible technology to complement what ERP systems already have to offer. In the near future, ERP systems will very likely begin to integrate blockchain technology, thus reshaping how we think about business processes.

Deeana Radley, Business & Technology Writer at Technology Evaluation Centers, Areas of Expertise: Enterprise Resource Planning (ERP) | Customer Relationship Management (CRM) | Business Intelligence (BI). Deeana Radley is a business and technology writer with over 5 years of industry insight. She has written extensively on technology trends, software solutions and market developments, and particularly enjoys rendering complex topics accessible to beginners.