Blockchain in Logistics / Supply Chain

 

Even as blockchain continues to be tested and implemented in many different areas, there has been growing caution about its practicality. The most common claim is that blockchain is a “solution in search of a problem”, and that companies tinker with it, investing significant amounts of money only to discover little practical benefit. This point of view contends that blockchain is a fashionable technology, and that many companies embark on blockchain initiatives because of the buzz around it, but are unable to create viable and commercially justified solutions. Indeed, most announcements surrounding enterprise blockchain  projects only concern plans of experimentation. On the one hand this is an indication that the technology is only in its infancy, but on the other hand, one would suspect that if the technology was a powerful solution to many problems, there would have been more news by now of its commercial adoption. The question then becomes, are the critic’s claims justified?

There is a weakness inherent to any blanket claim regarding blockchain’s viability. The practical and financial viability of a given technology is not an abstract or theoretical question, it can only be answered for specific industry use cases. The strongest argument against blockchain is not that is not a solution, but that it is not the simplest solution. Roughly speaking, the main defining feature of blockchain is its decentralization. This provides a unifying platform for disparate and independent actors seeking to register transactions between themselves. This is accomplished by a peer to peer network, and at the high cost of consensus.

LOGISTICS

One of the most promising areas for blockchain has been logistics, as there is a high volume of transaction data exchanged between parties with no centralized trust authority. In the case of shipping, much of the transaction processing is still paper based, and will involve separate workflows, where financial data will be separate from administrative. A blockchain based solution would allow the separate parties in the shipping cycle to contribute data to the common ledger, without having any centralized data processing mechanism. Traceability is also a major concern in supply chain, for example with a need for accountability around contaminated food products. 

As a data sharing and standardization mechanism, blockchain is taking off in the logistics industry. In shipping specifically, the Tradelens network now includes the world’s largest shipping firms, which in aggregate account for half of global ocean container data. This is clearly an example where blockchain is used according to purpose. The very decentralized nature of the network answers a key business requirement: aggregating data between parties that have no shared IT systems. In the shipping container example, this works well, as the data volumes are relatively low. In other supply chain cases, with current technologies it is unfeasible; traceability of auto parts involves amounts of data that make using current blockchain solutions impractical. It must be said however, that blockchain is still in its infancy, with Bitcoin released only in 2009. There is  a continual effort to create blockchain protocols that can handle much higher transaction rates; in fact the “blockchain” term might become outdated as different types of consensus, like those based on a directed acyclic graph. All this to say that we cannot make projections on future capabilities of distributed ledger technologies based on current versions. The directed acyclic graph consensus mechanism shows that novel technological solutions can be found to seemingly intractable roadblocks. 

 

SUPPLY CHAIN

In addition to data sharing and decentralized transaction validation, there is another application for blockchain that is not typically discussed, but in a supply chain context could prove to be of great commercial interest. Logistics firms are often small in size, for example more than 90% of US trucking firms have less than 6 trucks. With these small firms, there will be at best rudimentary information systems, and the organization size does not permit the hiring of staff devoted to technology. In this context, data storage becomes much more complicated than in the context of a large corporation. The small firm will not have the resources to host its own servers, but neither does it desire to have everything hosted on one computer. Does the company then resort to storing everything on the cloud? This is likely not be suitable for a number of reasons. First of all, there is a concern about data ownership: remote storage raises the question of what happens with the data should the cloud provider go out of business, or change its fees and terms. Secondly, the cloud based approach may be too technically advanced for a business where the staff specialize in logistics, and not IT. Lastly, cloud ownership creates yet another cost on top of software licensing fees. A private blockchain resolves these issues, as it creates a distributed ledger on a local network of devices, bringing the data entirely “in-house”. At the same time, this solution is not dependent on one single server or computer, and security is ensured by the cryptography of the blockchain protocol.

The local data ownership issue could well prove to be a feature that will be greatly prized, even though it isn’t particularly discussed at the moment. For more than a decade there has been a drive towards cloud technologies, but the current geopolitical environment has turned somewhat unfavorable to them.

Although we are not in the midst of a mass disruption, globalization is no longer as unstoppable as one thought. A logistics firm seeking to invest in information systems for future years needs to account for the possibility that current trends will strengthen in the future. In this sense, a blockchain based logistics solution could be a smart play in a world where globalization has gone into reverse.