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Blockchain in Logistics

Editor’s Note: Charles Intrieri is a consultant with over 25 years of experience in Operational Excellence, Supply Chain & Logistics, and Metrics-driven Management.  He has made available a number of reports and tools related to these areas on Flevy, which can be viewed here.

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pexels-photo-730569Blockchain applications in the logistics industry are currently at a pilot stage. However, I believe many of these applications show real potential. The most tangible benefits I see in our industry are:

  1. Tracking of items provenance and the visibility on handling conditions
  2. Facilitating interaction between multiple parties within a supply chain

1. Tracking of provenance and handling conditions

How does this work? All parties involved in a manufacturing and logistics process can trace the process steps in a blockchain application. The data is disclosed to all stakeholders within the value chain, including the end-consumer. This gives the consumer visibility on the shipment origin and handling conditions. Smart sensors and the Internet of Things (IoT) can facilitate this information flow.

Such a function delivers tangible value by providing proof of legitimacy for pharmaceutical shipments, or proof of authenticity for luxury goods. Walmart showed the way by cooperating with IBM to test blockchain solutions for tracing the provenance of products such as Chinese pork and Mexican mangoes. In case of contamination, the source can be identified easily.

2. Facilitating interaction between multiple parties

The processing status of all parties involved in a specific logistics process is automatically tracked and saved digitally on the blockchain application. All parties have direct access to the data, which creates mutual trust and makes a trusted ‘coordinator’ superfluous. This results in a faster and more transparent process.

The port of Rotterdam, for example, tests applications to share trusted information amongst their numerous stakeholders (customs, port authorities, stevedores, freight forwarders, road carriers, shippers, consignees, banks and more). Speeding up their processes ultimately reduces the time a vessel spends in the harbor.

Blockchain solutions are used to integrate all stakeholders in the commercial process to make import-export activities more efficient. Ultimately, paper-based contracts would be replaced with smart contracts where supply chain stakeholders would be able to access information about the location and status of their goods in real time.

The Outlook

Blockchain is regarded as a disruptive trend. The use cases are still at the experimental stage and the technology hasn’t matured yet. However, the applications described, show that this trend has the potential to reshape the structure of logistics processes and the handling of information flows. Blockchain solutions enable peer-to-peer networks based on mutual trust. This removes the need for middlemen and is very likely to impact logistics companies whose value is to act as a ‘trusted’ party coordinating other supply chain players. Today, the logistics data is held proprietarily by the logistics company who shares it further with its customers. In the future, this same logistics company will add its information to the overall information pool shared with the customer by the blockchain application. Contrary to today, the information will become public and accessible by all within the network.

Moving forward, providers of blockchain applications for overall logistics processes are expected to gain in importance and their profit share in the logistics industry is likely to increase. Tapping into the opportunities that blockchain provides rather sooner than later is a must to ensure competitiveness and sustainable industry growth.

The freight and logistics industry incorporates a large number of brokers and significant amounts of hidden information across complex supply chains. No single party can access all aspects of the chain. Currently, the freight and logistics industry is heavily controlled by freight brokers, which exist to facilitate transactions of loads from shippers to carriers. Brokers seek out loads, tag on a markup, and then sell it to carriers. This not only increases costs for carriers, it also leads to increases in downstream prices that directly affect consumers.

The lack of efficiency, transparency and security across the global networks is precisely the problem blockchain technology is designed to solve. Blockchain, if adequately leveraged, will give customers the opportunity to participate in a freer, more transparent global trade, and potentially limit the need for brokers and lower intermediary costs.

For those reasons, Linda Weakland, UPS’s Director of Enterprise Architecture and Innovation, is long on blockchain. She says, “It has multiple applications in the logistics industry, especially related to supply chains, insurance, payments, audits and customs brokerage. The technology has the potential to increase transparency and efficiency among shippers, carriers, brokers, consumers, vendors and other supply chain stakeholders.”

One effective way transparency and efficiency can be increased is by leveraging smart contracts, the core innovation behind the Ethereum blockchain. Smart contracts are essentially self-executing contracts that are fulfilled when predefined stipulations are met. This is particularly useful when it comes to increasing the efficiency of shipping escrow by removing or limiting the intermediaries involved, and therefore bypassing the markups they post.

Blockchain also can increase the tracking and transparency of the supply chain. Shippers can gain more visibility across their supply chain and communicate important information such as loads, geo-waypoints and basic compliance information with carriers.

Once a shipment is confirmed and recorded on the blockchain, it is immutable, meaning no party can dispute the validity of the transaction or fraudulently manipulate the records. Once transactions are logged, smart contracts can then release any payments in escrow instantaneously, limiting the time and costs associated with intermediary processing.

Given the nascent nature of blockchain technology, corporations and consortia around the globe are starting to invest in and partner with startups that are building proofs of concept in order to test solutions prior to commercialization. One example of a startup working on this is ShipChain, which aims to apply blockchain technology to the logistics space.

The company, which is part of BiTA, is building a fully integrated supply chain management system that gives insight into each stage of the logistics process. In addition, the company aims to create a decentralized brokerage system — essentially an open marketplace for shippers and carriers. Leveraging the transparency of information on the blockchain, the marketplace will let shippers optimize cost and time for every shipment.

In other words, shippers can track the capacity, cost and estimated delivery times for different routes for a given shipment before making a decision on the marketplace. At the same time, carriers can continually post information about their capacity for shipping vehicles and lanes, thereby dynamically adjusting the fairest pricing based on supply and demand. The transparency and efficiency afforded by the blockchain benefits all parties by allocating resources in the most effective way without artificial markups by rent-seeking brokers.

About Charles Intrieri

Charles Intrieri is subject matter expert on Cost Reduction, Supply Chain, and 3rd Party Logistics. He is also an author on Flevy (view his documents materials). Managing his own consultancy for the past 25 years, Charles has helped dozens of clients achieve leaner and more efficient operations. You can connect with him here on LinkedIn or email him directly ([email protected]). Charles also has a presentation Why Lean Fails in a Company? available for free download here.

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