Blockchain: a boon for logistics?
Logistics is one of the world’s biggest industries. It is the backbone of the world’s major manufacturing facilities, which depend on the movement of goods to the right place at the right time. Over the years, most industries have experienced rapid innovation – for example consumer electronics, automotive, aerospace, and pharmaceutical – yet logistics has typically tended to lag behind.
Challenges in the logistics industry
The logistics industry is currently facing the following key challenges:
- Too much paperwork: The amount of paperwork required for a single shipment is a nuisance for everyone involved. It increases the overall shipping cost and can cause unnecessary delays if documentation is lost or damaged. There is also a very real risk of handlers forgetting or misdirecting crucial documents.
- Lack of control over transportation: Most goods require proper care and careful handling on long journeys, especially perishable goods. The transportation process has become faster and safer over the years, but still lacks complete, end-to-end control. Products may get damaged many times during a long journey, and the lack of transparency during transportation can disrupt the buyer’s schedule and lead to disputes between the transacting parties. This causes unnecessary delays and increases overall transaction costs. What customers need are devices that would allow them to monitor key parameters such as location, ambient temperature, humidity, light sensitivity (to check if their consignment has been opened during the journey) and shock levels. Combined with definitive time stamps, this information would allow them to pinpoint what went wrong at which stage of the journey, and who is responsible. This information would provide an invaluable means of reducing unnecessary conflicts and improving the processes involved.
- Long payment settlement cycles: The time taken for the buyer to complete payment to the seller is currently between 30 and 45 days. In the event of a dispute, this may stretch to as much as 60 to 75 days. Big companies typically deal with this situation reasonably well, but smaller businesses often run into financing difficulties and may have to resort to invoice discounting, in other words getting a short-term loan from a bank with their invoices as collateral. Invoice discounting helps businesses meet their daily operating expenses but comes at a high price. Shorter payment cycles would result in lower working capital and would be a great help to businesses of all sizes.
There has been a great deal of excitement about Industry 4.0 in the logistics sector since the term was coined in 2011. A number of innovative technologies have emerged since then that promise to solve the problem of tracking goods during transportation, including data loggers, sensor labels, and similar solutions. However, adoption rates for these technologies remain very low, and we are still a few years away from seeing their wholesale adoption in day-to-day business.
How blockchain complements Industry 4.0
However promising these innovations are, they fail to address some of the industry’s biggest concerns. Data security and integrity are key concerns, with server robustness close behind. Most of the data is stored on centralized servers. Any damage to these servers can clearly have a huge impact on day-to-day business operations. On February 28, 2017, the Amazon Web Services servers experienced a massive outage that had a major impact on many internet service providers. Blockchain technology can be a great help in this respect, offering the following key benefits:
- Data security and integrity: The core design of a blockchains makes it very difficult for someone to tamper with the data. This fact helps maintain data integrity, while the use of cryptographic keys makes it difficult to steal the data.
- No single point of failure: Data is stored in multiple locations, so you can still access it even if one of the servers fails. This avoids unnecessary delays in day-to-day business.
- Added level of trust: No single party exercises complete control over the data, so the level of trust between the transacting parties is greater. This results in lower transaction costs and greater efficiency.
- Smart contracts: Blockchain technology opens up the possibility of drafting smart contracts, which can help to reduce human intervention and ensure payments are settled quicker.
- Document depository: Blockchain acts as a safe and secure depository of documents, largely eliminating the problem of paperwork.
Limitations of blockchain
Although it offers many benefits, blockchain technology also has some limitations. Key concerns include the following:
- Longer processing times: Consensus-based systems take longer to reach decisions than authority-based systems.
- Storage space: Multiple copies and the inability to delete information lead to very long chains, so more space is needed to store data. This is manageable for financial transactions, but unmanageable for data from IoT devices such as data loggers. One way to solve this problem, however, is to only store the hash value of the data on the blockchain.
- High electricity consumption: Currently, the consensus mechanism that is used most frequently is Proof of Work, which consumes huge amounts of electricity and computing power and is not environmentally friendly. However, researchers are already searching for better consensus mechanisms.
Example of how blockchain & IoT could be applied in logistics
Tracking perishable goods
Imagine a scenario in which a five-star hotel in Bangalore is ordering wine from a French vineyard. The shipment is handled by numerous intermediaries and traces a complicated path before it finally reaches Bangalore. First, the wine is transported by truck from the vineyard to the nearest seaport or airport. Here it is handed over to the freight forwarder for the next stage of the journey. Finally, when it reaches the airport or seaport in India, another truck is required to transport the wine to the warehouse in Bangalore.
Blockchain technology makes it possible to generate and store all the necessary documents online on a single platform accessible to all. Since all the parties have access to the same information, there will be far fewer disputes and reconciliation problems, so the process will be quicker and more efficient. Blockchain allows parties to use smart contracts, so in this case that would mean drafting the conditions required for the wine to be transported safely. Data loggers would monitor the condition of the wine during the journey and continuously feed this information into the blockchain database. Once the shipment reached its destination, it would be easy to check the information against the contract conditions and pay the shipping company immediately. If the wine had suffered any damage during the journey, the relevant penalties would be levied and the information could immediately be shared with the insurance companies for further processing.
The road ahead
Blockchain certainly looks like the next big thing in the business world. In fact, some reports are already referring to 2018 as “the year of blockchain”. At this stage, it is difficult to say how successful the use of blockchain technology will be in the logistics industry. But it raises the exciting prospect of some big changes on the horizon.
Dominik Schiener on blockchain
Dominik Schiener is one of the co-founders of IOTA, a revolutionary distributed ledger technology for the Internet of Things. The IOTA Foundation is a non-profit organization based in Berlin, Germany. We asked Dominik to share his thoughts on blockchain with us.
I first came into contact with blockchain…
“…in 2011 via a gaming community. At that time, I was selling services and earning money via PayPal. I was 14 years old and wasn’t even legally allowed to use this service. Needless to say, I had my frustrations with such a centralized service provider as I wasn’t able to participate in this economy. However, Bitcoin and blockchain allowed me to do just that. As a cryptocurrency, Bitcoin has no barriers and is permissionless. Anyone can contribute to the ecosystem. That’s when I started to fully understand the potential of blockchain.”
What I really like about blockchain…
“…is the concept of permissionless innovation. The internet has enabled the free flow of information. With blockchain, you now have a free flow of assets, allowing everyone to participate in and contribute to these new ecosystems. A good example of this is the machine economy. The owner of a weather station is now able to sell data to a machine that needs the data for predictive analytics. This is only possible through distributed ledger technologies.”
What drives me nuts about blockchain…
“…is the speculation going on in the community. We’ve kind of lost track of why we developed this technology. Initially, it was developed to solve fundamental problems in society. But over the last few years, the focus has turned to speculations and the question of how to get rich using these cryptocurrencies. People are not focused on innovating anymore – it´s all about making money instead. This is really setting us back. I think it is time for us to regroup. We should focus on where we can apply this technology, in industry or elsewhere, to really solve problems.”
The biggest lesson I learned with regard to blockchain was…
“…that no one truly understands where this technology is headed. We are still in the early stages of development and haven’t fully defined this technology. We haven’t yet found a way to make it scalable and production-ready. I’ve realized that the only way to make blockchain a success story is to bring the entire ecosystem together. This means industry and the community have to sit down at one table and work together to push blockchain forward.”