The Application of Blockchain in Supply Chain and Logistics Industry

In today’s world, managing Supply Chain can be extremely complex. Right from producing goods to distributing them the supply chain can span over several stages, multiple geographical locations (international), have several individuals and entities involved, and a multitude of invoice/payments which could take several months. In 2008 a solution was invented to help solve all of this: blockchain, and it was the product that resulted from the invention of Bitcoin. It was made to organize data without the need of a central server giving access to all.

In 2008 Bitcoin was created by an unidentified person that goes by the nickname of Satoshi Nakamoto. It started out small but in December of 2017 it reached its highest peak of $19,666 (Marr, 2018). That is a ton of cash for something that physically does not exist, which begs the question; why was it valued so high? To start off, Bitcoin is a cryptocurrency that is powered by blockchain technology. Blockchain was created specifically for Bitcoin, it is an open decentralized ledger that permanently records transactions between parties without the need for third-party authentication (Marr, 2018). This means that everything is extremely fluid and efficient allowing for the costs of transactions to be dramatically reduced. This is what led Bitcoin to be valued so high and become the #1 cryptocurrency in the world. Up until 2013 blockchain was used exclusively for cryptocurrency, then in 2014 people started to realize the potential that blockchain could have outside of the cryptocurrency market (Marr, 2018). The open concept that blockchain offered could dramatically impact industries of all kind; there would be a blockchain revolution around the globe! Improving the supply chain industry, healthcare, transportation and so much more. That’s when people and companies started investing in blockchain technology which brings us to today: The application of blockchain in supply chain and logistics industry.

How Blockchain works

In order to grasp how blockchain came to be and exactly how it works it is important to understand the basics of Bitcoin since the two are so intertwined. In 2008 during the midst of the financial crisis a paper titled “ Bitcoin: A Peer-To-Peer Electronic Cash System” was published by Satoshi Nakamoto. This publication elaborated on a peer-to-peer cash payment system that would eliminate the need for a third party intermediary. A few months later an open source program with the new protocol was released creating the first ever Bitcoin. Before Bitcoin all commerce conducted on the internet had to go through third party financial institutions. These third parties were entrusted to safeguard, validate, and record the transactions. These third parties are compensated for their service by charging a fee. Fee’s can drastically increase the cost of doing business and they are highly susceptible to hacking. Unfortunately until recently arbitration by third parties has been the only reliable method available to avoid fraud. Bitcoin uses cryptographic proof to eliminate the possibility of fraud occurring during the transaction. Cryptographic proof is a method by which one party is able to prove to another party that they know value x, without conveying any information apart from the fact that they know the value x. A form of cryptographic proof Bitcoin uses is called a “Digital Signature”. A digital signature offers decisive advantages in terms of security. A digital signature cannot be hacked without being altered(What Is a Digital Signature). If someone were to hack a digital signature it would doctor the original rendering it invalid. Digital signatures also identify the user sending it. Even the most experienced of hackers cannot fake a digital signature, it is mathematically impossible. Bitcoin also uses public cryptography to to ensure to ensure the source of transactions are legitimate. Public cryptography systems rely on a set of keys called a “public key” and a “private key”. The private key is only known to the computer the message/transaction originates from, while the public key can be given to everyone the originating computer desires to communicate with. Messages/transactions can be taken with a public key but can only be read with an additional private key that is unique to that computer. Here is an easily understandable example of public cryptography(Crosby , Michael).

Say Marty has a box with three positions: A (locked), B (unlocked), C (locked). This box has a pair of keys. A private key that turns A to B to C, and a public key that turns C to B to A. Marty keeps the private key to himself but distributes dozens of public keys to individuals he does business with. One of Marty’s business associates Liam, wants to send Marty confidential company information. So what does he do? Liam grabs a public key of mine, opens the box since its in the unlocked in position B, puts the document in, and uses my public key to turn it to position A. Marty is now the only one that can unlock the box because his private key is the only one able to change the box from position A to position B. Now say I want to prove to a client that it is actually me sending them messages. To prove it was me I would put a message in the box and using my private key turn it from position B to position C. All my client would need to know if it was actually me sending it would be to use my public key and unlock the box by using my public key to move it back to position B(Ryonis, Panayotis).

Every transaction made on the bitcoin network is broadcast to every “node” and then put in a public ledger after authentication. A node is any active electronic device that is connected to the internet and supports the network by maintaining copies of transactions or processing them(What Is a Node). Nodes validate transactions by ensuring the person requesting the processing of a transaction owns cryptocurrency and has enough in there account to complete the transaction. Unfortunately transactions do not come in the order they were generated. This calls for a system that can organize transactions in the correct order. Bitcoin solved this problem by creating Blockchain System. Blockchain puts individual transactions into “blocks” and then connects those blocks into linear “blockchains”. Every block is linked in chronological order and each block contains a “hash”( A hash is an encryption algorithm used to protect data) of the previous block. Blockchain systems are able to put every block in correct order by using an intricate mathematical puzzle. A block will only be accepted into the blockchain if it can solve a time consuming and very specific math equation. In order for an attacker to make a fraudulent transaction they would have to generate more fake nodes than all the other legitimate nodes as well as solve the mathematical puzzle in record time. Blockchain systems will only accept the longest blockchain as valid, this makes it nearly impossible to for a hacker to replace authentic blocks with forged ones(Crosby , Michael).

In summary blockchain is blockchain is a database that records all transactions on a public ledger and every transaction is authenticated by the majority of the the community in the system. Information is secure and once entered can never be erased. Blockchain technology is so revolutionary because it is like going to the kitchen and trying to steal an oreo from the cookie jar with thousands of eyes on you. It just can’t be done.

Some of the advantages of Block Chain are as follows:

• Disintermediation: The primary value of the block chain is that it allows the database to be shared directly, without the involvement of the central administrator, Since, the block chain itself is a distribution ledger which has its own cryptographic algorithms along with the co-ordination among the nodes in the network. Thus, using block chain will eliminate a lot of cost and efforts spent on the intermediary control and also helps from baring the risk of sharing the data with third-party entities.
• Resistance to failures: In Block chain the expected point of failure is distributed among the nodes in the network which makes the whole system more failure resistant because its easy for a single node to go wrong, but, all the nodes cannot be wrong at the same time.
• Transparency: Any changes made in the block chain will be visible to all the nodes, due to which no single node can make any changes or delete a block without the knowledge of the nodes in the network which makes the whole system transparent.
• Simplified ecosystem: In Block chain all the transactions involved are maintained in a single public ledger, which eliminates the complications, efforts and costs of maintaining multiple ledgers.
• Scalable: The network of block chain is highly scalable. As the number of peers or nodes increases, the computability capability of the block chain network increases or scales up accordingly.
• Eliminates Clearing house: In the traditional way, processing a transaction needs trust between the two parties entering the transaction and a clearing house or a bank which is a mediator between the two parties involved as a keeper of all the transactions that are involved. Whereas in block chain all the transactions are maintained in a distribution ledger were the transactions are being processed having the specific consensus protocols as the base, due to which its not necessary for the parties to trust each other which eliminates the clearing house from the system.
• Faster Transactions: In the traditional method, the interbank transactions took days to clear the final settlement, but in the block chain the transactions are done in minutes and it can be processed 24/7.

Some of the disadvantages of the block chain are as follows:

• Fast Block: The new blocks are created very quickly, which indeed creates a lot of stale blocks which do not contribute the real block chain.
• No reversals or modifications: One of the advantage of Block chain i.e. transparency or immutable can also be a disadvantage, because if a node has made an error and wants to go back and modify it, the block chain does not allow him to do that.
• High Initial cost: The Block chain technology will definitely reduce the transaction cost, but at the same time it demands a tremendous high initial investment.
• Cultural adoption: The Block chain technology characterizes a decentralized network, it will be very hard for the users and the operators to adapt to it as it is a complete paradigm ship.

Future Possibilities of Blockchain

With the popularity of cryptocurrency rising, more people will begin to learn what blockchain is and how much it can benefit businesses in many industries around the world today. There are many industries that would benefit from blockchain. One industry is considering blockchain to help it better inform itself, suppliers and customers. The food industry has been slowly finding ways to incorporate blockchain in data gathering of where suppliers’ products end up. Recently, romaine lettuce has sparked a scare in the food industry causing consumers to get e coli. Thus, “Walmart has announced that its suppliers of leafy greens will be responsible for capturing digital, end-to-end traceability information using the technology by 2019.” (Crowe, 2018) Walmart will be able to see exactly where all of their leafy greens have been and came from by using blockchain. Carrefour, a French retail company, has also announced that they will be using IBM’s technology to track its eggs, tomatoes and chicken from the supplier to the store. With blockchain, the food recall process would improve tremendously because the food could be traced to its origin and destination in a matter of seconds. Restaurants and grocery stores alike could immediately account for and remove the recall-affected items from the shelf or menu. “Walmart conducted a test in which they traced a package of sliced mangoes from the store shelf back to the farm,” the company explained. “Using traditional methods, this trace took more than six days. When done using IBM Food Trust, the solution was able to identify the exact source of the fruit in 2.2 seconds.” (Crowe, 2018) But blockchain has the potential to do more than just help the food industry.

The logistics industry is starting to see blockchain’s upside as well. Particularly, a company named SpotSee is helping logistics companies bring better service to their customers. “While supply chains are highly complex global environments within the transportation industry, blockchain can help mitigate many common issues that companies are currently facing.” (Engineering, 2018) If using this technology, many supply chains will start to see a decrease in asset handling issues and even fraud. While doing so they will also be able to reliably track assets throughout their journey by giving the supply chain an unalterable and permanent record of the asset’s whereabouts while third part companies handle it. Customers will be able to reject a shipment (and/or payment) if the blockchain reports the condition as having too much damage. This will minimize the amount of resources that are used on returning or rerouting products that are being handled by third parties. This technology doesn’t seem far away at all.

Technology is changing by the second and with blockchain being at the forefront of this change, society stands only to gain from it. Soon, companies will be able to instantly know who and what has touched their product and where and when their product has been at a certain location down to the second. Whether it is a food retailer, a restaurant, or a logistics company, blockchain will soon be a seamless part of day to day business operations.

Example of Maersk using blockchain in their supply chain

The concept of using blockchain in the supply chain is not just theoretical nor is it in a very distant future. In fact, there have been several test project done by various industry giants to take advantage of the Block Chain Technology.

In cooperation with IBM, Maersk has introduced a Blockchain Shipping Solution called TradeLens. Currently, the world relies on a trade ecosystem of unprecedented scale and complexity which is too uncoordinated and disjointed. Especially, in the shipping and logistics industry where several relevant information is still not captured or is managed or shared in manual paper-based process. More than $ 16TN of goods a year are shipped across the world and 80% of the things that we use every day is arrived by ship (IBM, 2018). Due to the lack of having a coordinated ecosystem shipping industry faces several challenges such as shipment delays, inaccurate information, and traceability issues, unpredictability and fraud with an untapped potential of $1.8TN (IBM, 2018).

TradeLense would help manage the company’s cargos with real-time, end-to-end visibility among cargo owners, transportation providers, 3PLs and beyond. Also, reduce the risk and maximize asset utilization using the blockchain all while promoting more efficiency with automatic data capture and secure global trade with a unified global ecosystem. Maersk has successfully completed the first test of TradeLens.

TradeLens platform is built on open standards with 94 organizations including DHL, DAMCO, CEVA Logistics, Agility, Kotahi, PLH Trucking Company, Ancotrans and WorldWide Alliance are currently participating on it. TradeLens has an ecosystem which contains over 20 port and terminal operators which would account for approximately 234 marine gateways worldwide that are actively participating on TradeLense (Maersk, 2018). Pacific International Lines (PIL) has also joined Maersk Line and Hamburg Sud as global container carriers along with the customs authority, and customs brokers in several countries are also actively participating on TradeLens (Maersk, 2018).

In a recent test by Maersk, Shipping a single container of flower from a port of Kenya to a port of Rotterdam resulted in a stack of nearly 200 communications (David Kariuki, 2018). Maersk was able to use TradeLens, a blockchain solution to foster trust and security in a digitized document work workflow and improve the efficiency of the global supply chain. There are several entities involved in the transaction including the farmers, export authorities, customs, and importers. Shipping from the port of Mombasa requires signatures from three different agencies approving export and six document that describes the origin, chemical treatments, quality of the produce, and customs duties. Firstly, the growers or the farmers in Kenya uploads the packing lists using their mobile devices or personal computers that become visible to all participants. This action initiates a smart contract that enforces an export approval workflow between the three agencies. As each agencies reviews and sign the status is updated for all the participants to view. Simultaneously the information about the inspection of the flowers, the ceiling of the refrigerated container, the pick up by the trucker and the approval from the customs is communicated to the port of Mombasa all electronically which allows them to prepare the container. All actions relating to the documents and the physical goods are captured and shared which include the information like which documents were submitted, when and by whom, where the flowers are in real time and who is in possession of the flowers and the next steps in the journey. Since flowers are perishable, it becomes crucial that there are no delays or missteps. TradeLens, a blockchain based solution provides a secure data exchange in a tamper-proof system for these documents. This system could significantly reduce delays and frauds saving billions of dollars annually. According to WTO, reducing barriers between international supply chains could increase worldwide GDP by 5% and trade volume by 15%. (WTO, 2017).

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