Why are supply chain and logistics increasingly looking into the use of blockchain technology and DLT?
The logistics and supply chain sector is undergoing technology-driven digital transformation where emerging technologies result in a strategic response that adapts the way companies create value (Vial, 2019). This technology-push model of innovation (Rothwell, 1994) where emerging technologies are developed without a clear use case in mind and then adopted horizontally across sectors leads to the convergence of complementary technology vertically within a sector. In the logistics and supply chain sector the convergence between the Internet of Things providing the data production layer and Blockchain and DLT providing the data exchange layer enables new means of value creation for firms.
Blockchain and Distributed Ledger Technologies have particular applicability to global logistics and supply chain management as many different companies are involved in the processes of shipping and require accurate, timely and trusted data in order to conduct their operations efficiently. All of the firms accessing the data on the blockchain can trust that it is immutable, has been arrived at through consensus of the other nodes in the network, that is the other firms in the supply chain ecosystem, and has absolute auditability. Being able to trust in the data rather than rely on established business relationships offers the potential of all firms involved to establish different kinds of business relationships where firms provide business-to-business services without the need for existing business practices of price negotiation and written contracts.
Wang et al (2019) list four areas where blockchain technologies and the increased trust they provide has benefits in the logistics industry: “extended visibility and traceability, supply chain digitalisation and disintermediation, improved data security and smart contracts.” Extended visibility and traceability is a result of the trust enabled by the use of an immutable data ledger such as blockchain. With an average of 1,382 shipping containers lost at sea each year (BIFA, 2020), the ability of shipping firms to have accurate and up-to-date data about lost cargo enables them to work more effectively with manufacturers and insurance companies. EY is exploring blockchain-enabled insurance solutions, “because marine insurance is a complex international ecosystem, with multiple parties, multiple jurisdictions, high transaction volumes and significant levels of reconciliation.” (EY, 2017). The high degree of trust required in order to process insurance claims of the value and complexity that EY handles relies on multiple human processes that involve investigation and approval, processes that would become redundant if using a single, trusted, and immutable source of data in support of insurance claims and processing.
The use of smart contracts aims to reduce complexity in a supply chain by automating business transactions that rely on the verification of predetermined conditions and the execution of agreements written into the code of the smart contract. ShipChain is a logistics utility ecosystem using blockchain technology to provide smart contracts that enable “trustless contract execution, historical data immutability, and no single point of failure.” (Shipchain, 2021). The solution provides greater visibility of delivery hand-offs and so reduces loss and theft whilst enabling the transactions written into smart contracts to be executed as a delivery takes place.
IBM estimates that the cost of trade documentation is approximately one fifth the cost of shipping physical goods (IBM, 2018). This makes the cost of moving information between exporters, freight forwarders, ports and terminals, ocean carriers, authorities, transportation management and importers in the billions of dollars a year. And this does not include the ancillary costs of the data entry for good manufactures, insurance processes, etc. By providing a single trusted source of data, blockchain can reduce these transaction costs (Schmidt & Wagner, 2019) and increase profitability across the sector.
Although blockchain and distributed ledger technologies stand to offer considerable benefits to the entire logistics and supply chain sector, they do not come without risks and challenges. The introduction of new technologies into a business is a costly endeavour that risks pushing out smaller firms that are unable to invest in such infrastructure as quickly as larger firms. The use of smart contracts, for example, relies on the coding of the contract to be well-defined, deterministic, and visible to all parties, and although referred to as ‘contracts’, smart contracts are not legally enforceable (Kruse et al, 2020).
In summary, logistics and supply chain companies are increasingly exploring Blockchain and DLT as part of the digital transformation of the sector, and to enable faster and more accurate data exchange between all companies within the supply chain to increase operational efficiency and reduce costs. Emerging technologies, including the Internet of Things and Distributed Ledger Technologies stand to introduce a great deal of change to the global logistics and supply chain industry.
References
British International Freight Association. (2020). Containers Lost At Sea – 2020 Update. bifa.org.
EY. (2017) Better-working insurance: moving blockchain from concept to reality. ey.com.
IBM. (2018). Digitizing Global Trade with Maersk and IBM. ibm.com
Kruse, C. J., Villa, J. C., Mileski, J. P. & Galvao, C. (2020). Analysis of Blockchain’s Impacts on and Applicability to the Maritime Industry – May 2019 to August 2020. Maritime Transportation Research and Education Center.
Rothwell, R. (1994). Towards the Fifth-generation Innovation Process. International Marketing Review, 11(1), 7-31.
Schmidt, C., G. & Wagner, S., M. (2019). Blockchain and supply chain relations: A transaction cost theory perspective. Journal of Purchasing and Supply Management. Volume 25, Issue 4, 2019.
Shipchain. (2012). The ShipChain Ecosystem. shipchain.io.
Vial, G. (2019) Understanding digital transformation: A review and a research agenda. The Journal of Strategic Information Systems, Volume 28, Issue 2.
Wang, Y., Han, J.H. and Beynon-Davies, P. (2019). Understanding blockchain technology for future supply chains: a systematic literature review and research agenda, Supply Chain Management, Vol. 24 No. 1, pp. 62-84.