Blockchain capabilities in logistics

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Overview

In his 2008 white paper, that first proposed bitcoin, the anonymous Satoshi Nakamoto concluded with: “We have proposed a system for electronic transactions without relying on trust.” He was referring to blockchain, the system behind bitcoin cryptocurrency.

To simplify, blockchain can be defined as a distributed ledger technology that can record transactions between parties in a secure and permanent way. It essentially removes the need for middle men who were previously required to verify, record, and coordinate transactions by ‘sharing’ databases from multiple parties. By facilitating the move from a centralized to a decentralized and distributed system, blockchain effectively liberates data that was previously kept in silos.

In the context of logistics, many have said that blockchain can be possibly harnessed in two key ways:

  • Drive efficiency: Blockchain can potentially improve efficiency in global trade by greatly reducing bureaucracy and paperwork. For example, a multi-stakeholder process with a lengthy paper trail could be replaced with an automated process storing information in a tamper-evident digital format.
  • Enable new business models: Micro payments, digital identities, certificates, tamper-proof documents and much more can be introduced and radically improved using blockchain-based services. For example, driver training organizations could replace easy-to-fake paper-based certificates with tamper-proof digital versions that can then lead to new identity-related services. Just as the Internet began a revolution of communication, blockchain technology could disrupt current business practices and models.

With these possibilities and more, the overall market for blockchain is expected to rise with some estimates projecting growth from USD 411.5 million in 2017 to USD 7.68 billion by 2022. The rise in banking, financial services, and insurance applications including digital currencies and identities, as well as the continuing development of this technology and growth from major vendors can be identified as the major reasons. And although blockchain hasn’t matured fully, it has huge potential in the future. Companies need to understand how blockchain technology can empower groundbreaking innovations, what obstacles must be overcome, and the likely value and tangible rewards it can deliver, especially in logistics.

Blockchain impacts in logistics

There is a significant amount of trapped value in logistics, largely stemming from the fragmented and competitive nature of the logistics industry. For example, in the US alone, it is estimated that there are over 500,000 individual trucking companies. With a huge number of stakeholders involved in the supply chain, this often creates low transparency, unstandardized processes, data silos, and diverse levels of technology adoption.

Many parts of the value chain in logistics are also bound to manual process regulated by the authorities. Often, companies must rely on manual data entry and paper-based documentation to adhere to customs processes. This aging process makes it difficult to track the movement of goods and the shipments status along the supply chain. Potentially, blockchain can help to overcome these problems and realize substantial gains in the process efficiency and also enables data transparency and access among relevant stakeholders, making the vital data easier to trace and enhancing the trust between stakeholders. Furthermore, it can help companies to achieve cost savings by powering leaner, automated, and error-free processes. Adding visibility and predictability to the day-to-day operations, blockchain can accelerate the physical flow of goods.

Faster and leaner logistics in global trade

It’s estimated 90% of world trade carried out by the international shipping industry every year, making logistics very vital to modern business. But the logistics behind global trade is highly complex as it involves many parties often with conflicting interests and priorities as well as the use of different systems to track shipments. Therefore, achieving new efficiencies in trade logistics is likely to have significant impact on the global economy. According to one estimate from the World Economic Forum, reducing supply chain barriers to trade could increase global gross domestic product (GDP) by nearly 5% and global trade by 15%.

Ocean freight is one of the most complex area within supply chain with over 50,000 merchant ships involved in the global shipping industry and multiple customs authorities regulating the passage of freight. Just to ship refrigerated goods from East Africa to Europe can go through nearly 30 people and organizations, with more than 200 different interactions and communications among these parties.

Maersk and IBM have started a venture to establish a global blockchain-based system for digitizing trade workflows and end-to-end shipment tracking to optimize the flow within ocean freight. With the new technology, stakeholders can view the progress as the goods move through the supply chain. They can monitor the status of customs documents and view bills of lading and other data. Blockchain ensures the data exchange is secure and the repository for the documentations are tamper-proof. The two companies expect they can track up to tens of millions of containers annually. It has the potential to reduce delays and fraud, which could lead to billions of dollars in savings in the industry.

Improving transparency and traceability in supply chains

Many blockchain-related projects are in development to improve transparency and monitor provenance. These initiatives collect data about how goods are made, where they come from, and how they are managed. The information will be stored in the blockchain-based system to ensure the data is permanent and easily shared and to assist stakeholders to track-and-trace more comprehensively. Companies can use this information to provide proof of legitimacy for products in pharmaceutical shipments, for example, and proof of authenticity for luxury goods. These initiatives also deliver consumer benefits – people can find out more about the products they are buying, for example, whether a product has been ethically sourced, is an original item, and has been preserved in the correct conditions.

Companies like Unilever and Wal-Mart are exploring the use of blockchain as well. Wal-Mart is focusing on food tracking, traceability, and safety. Together with partners, Wal-Mart has conducted a test to trace the origin and care of food products such as pork from China and mangoes from Mexico. This way, Wal-Mart can easily address any case of contamination, should this arise. Secondly, the test defines the mechanisms in place to identify and rectify any improper care of food throughout the journey from farm to store. For example, since shipping of meat has to be within a certain temperature, the test took temperature data from sensors attached to the products and sent the data to the blockchain-based system. Automated quality assurance will then notify relevant parties in the event of suboptimal transport conditions.

Automating commercial processes in logistics with smart contracts

Current industry estimates that 10% of all freight invoices contain inaccurate data which leads to friction between stakeholders within supply chain. This problem is so prevalent that in the oil and energy industry alone, Accenture expects that at least 5% in annual freight spend could be reduced through improved invoice accuracy and reduction of overpayments.

Blockchain has the potential to improve the logistics and settlement process including trade finance and help to resolve disputes in the industry. As digitized documents and real-time shipment data become embedded in blockchain-based systems, this information can be used to enable smart contracts. These contracts can automate commercial processes the moment that agreed conditions are met.

ShipChain is one of the first startups to pursue such smart contract applications in the logistics industry. The startup has designed a comprehensive blockchain system to track and trace a product from the moment it leaves the factory to final delivery at the customer’s house. An important element to automating the settlement process is through ShipChain’s digital currency called “SHIP tokens”. Participants of ShipChain’s platform purchase these tokens in order to pay for freight and settle transactions on the platform.

The combination of blockchain and the Internet of Things (IoT) will enable smarter logistics contracts in the future. For example, a connected pallet will be able to automatically transmit confirmation and delivery time estimation as well as the condition of the goods to the blockchain system. The goods will be automatically verified and checked whether they meet the conditions agreed (e.g. temperature, humidity, etc.). Then, the correct payments will be released to the appropriate parties, greatly improve the efficiency and integrity.

Another example of smart contracts in the logistics industry is the digitization of letters of credit (L/C) in order to accelerate the preparation and execution of a standard paper-based L/C – a process which currently tends to take from a few days to a few weeks.

Conclusion

Unlike the significance of cryptocurrency, blockchain technology has its influence in many industries including logistics and supply chain. Already many projects are underway to apply blockchain to global logistics in the hope to add value by creating transparency and automated operations. In the future, blockchain might become more common technology and will be utilized even more in the industry. Imagine how the physical flow of goods can be more effectively orchestrated and synced with information and financial flows when blockchain is combined with the IoT, artificial intelligence, robotics and more.

Despite all the hype surrounding blockchain today, we believe that the logistics industry needs to leverage new technologies and embrace ways of rethinking old processes in the digital era. While there are still many challenges to overcome, we invite you to explore with us the opportunities that blockchain presents. By joining forces, we can create the right foundations for successful industry adoption of blockchain and we can ultimately unlock new value in logistics.

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