Blockchain Technology for Supply Chains - A Must or a Maybe?

Everyone has been talking about blockchain for the last few years. The potential of blockchain technology is broad, and it can help bring the logistics industry to a new level and make supply chains sustainable and transparent.

A few years ago, tech enthusiasts mostly talked about blockchain, but now technology is entering the economy. The World Economic Forum sees blockchain as a tool to help fix global supply chains undermined by COVID-19 and improve the global economy. Market trends are also pointing in that direction. MarketsAndMarkets estimates that while the market for blockchain-based supply chain solutions was only $253 million in 2020, it will grow to the $3.3 billion mark by 2026. This is a revolution for the entire supply chain industry.

Why do logistics and supply chains need blockchain? What opportunities does blockchain offer to supply chains? Let's discuss.

How does blockchain work?

We will not dive deep into the technical side, just some essential points. The essence of blockchain is reflected in its name - it is a “chain of blocks” with information (transactions). Each block in the chain contains data about the previous block, and a hash function protects the information in the block.

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In practice, we are talking about a distributed registry with data that is equally accessible to all network participants. In other words, secretly changing records in a blockchain network is impossible. Network participants do not need an intermediary or a regulator responsible for information safety because the blockchain structure guarantees the security of transactions.

Obviously, for logistics, the keywords here are “intermediary,” “regulator,” and “security.” With blockchain, at the very least, the supply chain can be protected from corruption risks and human error. It is also possible to build a system of settlements without the involvement of officials and banks. How do you achieve that? With the help of smart contracts.

Smart contracts are algorithms that run autonomously and synchronously (without human involvement). They work on the blockchain principle, subject to several conditions. Almost any business logic of interactions between counterparties can be packaged into such an algorithm: exchange of information and documentation, settlements, etc.

According to a report by audit and consulting firm Deloitte, blockchain can solve 4 major logistics industry problems:

• Poor governance
• Poor traceability
• Lack of compliance
• Lack of flexibility

Blockchain can give logistics operators a secure platform for transactions. Security can be achieved without the involvement of a cumbersome government apparatus or legal institutions.

How are smart contracts used in supply chains?

Researchers from South Korea and India have tested whether using blockchain technology in the supply chain will improve the efficiency and transparency of operations. As the researchers point out, typically, data exchanges in supply chains are conducted by two entities with each other, and their findings are not available to other participants. This makes it impossible to determine the history of a product, so the end customer has no way to verify the origin of the goods. In contrast, the proposed solution prevents a single trader from taking control of the transaction. The contracts are visible to every participant in the exchange. Moreover, they can all communicate and don't need intermediaries, and counterparties can access historical data and preview the course of contracts for a particular product.

A blockchain structure can guarantee transparency of all transactions for all participants in the supply chain, eliminate human error and corruption risks, help inventory control and simplify freight dispute resolution. Smart contracts allow the building of an autonomous and reliable settlement system between counterparties. They can even be used to build a system for tenders or an electronic document management system.

Today, one of the main areas for blockchain deployment is maritime transportation. In 2018, Danish shipping giant Maersk and IBM launched TradeLens to digitize the supply chain. The platform is based on the Hyperledger Fabric blockchain: the system allows participants to track cargo movement online and exchange customs information and electronic documents without delay. Today, hundreds of partners worldwide have joined TradeLens, and almost half of all container cargoes in the world pass through the system. At the same time, TradeLens has a competitor on a comparable scale - the GSBN blockchain platform, created in 2020 by a consortium of nine maritime operators.

But there are successes on land as well. A major U.S. retailer, Walmart has used blockchain to create an automated billing management system with third-party freight carriers. The problem of invoice and payment management has traditionally been a sore point for the company and requires a lot of resources because the retail chain works with dozens of partners.

The same, IBM launched the Food Trust project, which helps track the origin of foodstuffs and monitor their transportation and status in real-time. Food Trust members include Nestle, Kroger, and Walmart.

The Swiss SkyCell develops and manufactures thermal containers for pharmaceutical products that require temperature control (Pfizer vaccine). In this case, the blockchain network receives data from IoT sensors in the container and ensures that temperature limits have not been exceeded in transit.

BMW's PartChain project uses blockchain to track the delivery of parts and raw materials. Mercedes is using the technology to monitor carbon emissions in its cobalt supply chain and verify contractors' activities for legal compliance and ethical operations.

Problems with blockchain in supply chains

With all the advantages of the technology, blockchain adoption in supply chains is not yet widespread. Proper use of blockchain requires a company to have technological expertise and data analytics. Finally, it is useless to implement smart contracts in companies where processes are closed manually by managers and data is recorded on paper and in spreadsheets.

On the other hand, blockchain technology itself does not yet offer universal solutions. The most massive public blockchains, Bitcoin and Ethereum, are poorly suited for logistics today. The largest blockchains have problems with scalability, speed, energy consumption, and high transaction rates.

Logistics operators either have to join off-the-shelf platforms like TradeLens or invest in developing their product on one of the public blockchains. As you may understand, it is difficult for over 90% of logistics companies to develop their blockchain-based product today. It is too time-consuming and expensive.

Platforms look promising where you can run a separate blockchain capable of working with external networks. They are called parachains. Parachain and cross-chain platforms like Polkadot and BTC Relay could be very useful in developing various business solutions.

Conclusion: the future of blockchain in logistics

Logistics and finance are changing in today’s world significantly thanks to blockchain technology. Blockchain in the supply chain, logistics, and other industries is no longer a maybe, but a must. At least in container shipping. Prominent players or small daring startups launch blockchain projects for logistics, but the technology will become more widespread in the next five years.

Blockchain should not be reduced to crypto and NFT. Today's logistics operators should closely follow industry trends: train specialists and infrastructure, and look for reliable partners or competent outsourcers with technology expertise and industry experience. Only in such a way can you stay competitive in the market and improve your logistics business following the technology development pace.