Operational and Strategic Value of Blockchain Technology: Integrating Smart Wholesale Contracting with Realtime Market Shift Analysis

Abstract

This paper proposes and explores a smart wholesale contract embedded with realtime market shift analysis as a potential solution to improve supply chains' responsiveness to volatile market conditions. We examine the operational and strategic value of smart contract to supply chains when they engage in a Cournot competition in a market where the customer demand can shift (for downstream retailers) and/or a production cost can shift (for upstream suppliers) over a planning horizon. We find that the value of smart contract is shaped by intra-supply-chain effect, spillover effect, and inter-supply-chain competitive effect of smart contract adoption by a supply chain. A comprehensive analysis of these effects reveals that supply chains' incentives to adopt smart contract depend on three key factors: a magnitude ratio that compares the magnitudes of the demand and cost shifts, a timing ratio that compares the timings of the demand and cost shifts, and a contract execution lag that measures the degree of contract automation. We find that a low magnitude ratio generally favors smart contract adoption. In the absence of competition, smart contract adoption is more likely when the demand shift is expected to occur earlier (later) than the cost shift and the execution lag is large (small). In the presence of competition, supply chains' incentives to adopt smart contract can diminish as the competition intensity grows; moreover, their incentives to reduce the execution lag enhance as the competition intensity grows if smart contract is indeed adopted.