Leveraging the Blockchain to Improve the Supply Chain

The Covid-19 pandemic exacerbated supply-chain challenges for companies around the world. Microsoft’s cloud supply chain group had developed sophisticated risk management practices over the years but nevertheless was challenged by the global supply-chain issues resulting from Covid.

Microsoft’s cloud supply chain includes millions of servers in more than 200 data centers around the world. Each server, in turn, consists of a range of components sourced by Microsoft’s supply-chain team. Microsoft had excellent visibility into purchases from its direct suppliers, as that data resided in the company’s internal systems. However, like many other companies, Microsoft struggled to gain visibility into transactions between direct suppliers and their vendors.

“The scale of the Microsoft supply chain is just tremendous,” explains Mohamad Masri, senior program manager, blockchain. “Six years ago, we realized that traditional methods used in our supply chain no longer met the needs of our rapidly growing business. We needed a new way to handle supply-chain risk management.”

Microsoft and each vendor in the cloud hardware pipeline were managing their own data on orders, deliveries, payments, and other aspects of the relationship. “There was a lot of manual reconciliation,” Masri says. “What we wanted to do instead was to build an ecosystem of common data. If all the parties privy to a transaction are using the same data to run their business, then there is a de facto nullification of reconciliation.

“We saw the potential for a shared-ledger experience, powered by blockchain, to remove a lot of the manual effort,” Masri continues. “All those reconciliations between databases and supply chains are, by their nature, very horizontal. We have many suppliers, many integrators, many hubs. We wanted to create an orchestration through which our common data could be shared without requiring a lot of state management between all the different datasets of all the different partners.”

The Microsoft blockchain team that includes Masri and Yorke Rhodes, director of digital transformation, blockchain, launched an initiative centered on three key goals. First, they wanted to create stronger systemic controls that would enable growth without generating more risk as the cloud business scales up. Second, they wanted to create a contiguous, scalable process from capital sourcing through procurement in order to reduce the business’s planning-to-cash-to-product cycle times. And third, they wanted to utilize emerging blockchain technologies to capture adequate granularity in the data without requiring external partners to expend effort providing that data.

They formed a project team that included representatives of sourcing management, supplier resilience and risk, corporate finance, and supply-chain groups, as well as the technical teams who would build the solution. They started by identifying the data fields needed to create a transaction-by-transaction view of inventory for Microsoft’s cloud business.

“Any supply chain has numerous data fields,” Rhodes says, “and all that data has the opportunity to be reconciled. The more you can get a common view of data, the less reconciliation you have to do.”

The team saw a particular opportunity to improve Microsoft’s rapid dispute resolution (RDR) processes. “RDR processes are not going away, but we can improve our reaction to them,” Masri says. “In a world where we get an offline report once a week from our first partner, then have to get a competing report from our second partner, then figure out where the differences are so we can reconcile those partners’ reports—in that world, it takes a long time to get an answer. But if we are all using a shared space for information about a shipment, there would be a single place we could all go to get the same data. Our business would be accelerated because we would no longer need to do so much reconciliation between all the different data points.”

The team started by building a blockchain solution that included answers to such questions as: Where are the goods in transit? Has the transaction been invoiced? Has the invoice been paid? And where is the documentation—the purchase orders and invoices—associated with these goods?

“The blockchain essentially serves as an integration layer where we can share data, responsibly, without having to pull competing reports from different partners to understand what happened,” Masri says. “Incorporating the blockchain into these processes truly simplifies access to the data.” The team secured this sensitive data by carefully crafting permissions so that each entity up and down the supply chain can see only the information it needs.

Next, the team began layering in financial controls. “Partway through creation of the physical inventory tracking, we were presented with a new use case—to add our financial controls and working capital numbers to the blockchain model,” Masri says.

They built a shared transaction ledger that parties to the transaction can access. Partners connect their internal systems of record to the blockchain ledger using application programming interfaces (APIs). “The blockchain isn’t a system of record; it’s a source of truth,” Masri says. “The transactions are still happening inside everybody’s respective ERPs [enterprise resource planning systems], then they are transferred to the shared ledger.” The data is trustworthy because it is immutable—once written, it can’t be changed. “We treat our structured blockchain transaction ledger just like a typical ledger,” Rhodes explains. “If there is an error, we don’t go back and change the source; we post a compensating transaction.”

The team also built dashboards within the PowerBI data visualization tool to give a variety of end users access to the information in the blockchain. These custom dashboards connect with the blockchain solution via API, which means they are updated in nearly real time. In making decisions such as whether to change payment terms with a particular partner, staff can easily access the information they need.

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“Treasury teams can make these decisions in a matter of minutes now, versus trying to go back and investigate the relationship with that partner,” Masri says. “The customer service they can provide to that partner, and the ease with which they can access the data they need to make decisions confidently, are a result of this blockchain initiative.”

On the cash management side, the shared ledger enables accounts payable (A/P) to more precisely time cash disbursements to suppliers. “There’s a natural timing to accounting,” Masri says. “The A/P desk typically does a lot of reconciliation, and all that double-checking slows down payments. With the data we now have in the blockchain, we can see the order, the shipment, the receipt, and the invoice. That doesn’t change the nature of what the accountants are doing, but the shared-data experience reduces the amount of work they have to do before they can disburse or apply cash confidently.”

Moreover, having better real-time visibility into supply-chain data enables Microsoft to improve the precision of timing for funding decisions and reduce the excess capital it maintains. “When you don’t have detailed visibility into the movement of goods and the transactions, the way you lend money has to be much more coarse,” Rhodes points out. “Now, we are privy to data around the transactions among our partners in the supply chain. Getting this detailed data in real time allows us to make funding decisions that are faster and more granular.”

Masri adds: “If you’re looking at data in a monthly block, then you are managing month to month, which is less precise than managing individual transactions. Using our new shared transactional ledger enables us to manage at a transactional level, which saves us some headaches. For example, if we can see the invoice, goods receipt, and order in nearly real time, we won’t cut a check for inventory that wasn’t received and then try to recoup it through a credit memo process. We can be a lot more responsive to events as they happen, rather than waiting until the closing of the books. Pulling data from the reporting layer into the business process layer like this is empowering because it makes us proactive rather than reactive.”

In fact, organizations up and down Microsoft’s supply chain are feeling the benefits of this project. “We think of this as an ecosystem of value, in which we can pull levers all along this shared-data structure,” Rhodes says. The team foresees this type of approach to information sharing among partners as revolutionizing the entire supply chain, to bring value to Microsoft’s suppliers, their suppliers, and so on.

“Traditionally, we were always trying to communicate with our suppliers while holding up a hand of cards, like in a game of Go Fish,” Masri says. “With the shared-data experience, we can all see the cards on the table, and it makes communication and collaboration a lot simpler.”