When I talk with friends and family about how blockchain technology is used for more than just buying or selling cryptocurrency, the usual response is a long silence followed by a blank stare of disinterest. To a certain extent I don’t blame them because the truth is, most people don’t care about how blockchain technology works; they only care that it works and that it works for the things they care about. Another reason most people don’t care is because there is a dearth of easy-to-understand examples of how blockchain technology is used to make a meaningful difference in consumer and business applications. In this post I’ll provide a straightforward, real world example of how blockchain technology is being used in the shipping and logistics industry to help operators operate more efficiently, which ultimately helps to lower costs to end users.
Since the beginning of civilization mankind has been involved moving products from one place to another. Merchants in ancient times kept track of their goods in handwritten logs that provided information on what it was they were transporting, where it was going, when it needed to be there, the quantity of the product(s) they had, and who they needed to give the product to at the final destination. When those products were delivered the merchant would be paid.
In today’s modern world, all of the aforementioned activities are done using computers and software tracking applications. The use of computers and software is great, but with so many different shipping companies and so many different types of software, the process of reconciling goods shipped from one place to another is tedious and time consuming. For example, I live in a moderately-sized city of ~1.2 million people and a quick google search showed that there are 19 independent, national freight shipping companies. This doesn’t the include smaller, intra-city or intra-state shipping companies, of which there are about 40-50. What this shows is that shipping is a highly competitive and fractured market, hence the need for a system to help make the interoperability of this global network more efficient.
Enter blockchain technology. As a refresher, “blockchain is a digitally distributed ledger (i.e., a record of activity), transactions, or executed events that are shared across the participating parties. Each transaction is time stamped and verified by a consensus of a majority of participants in the system (1).” As this pertains to shipping and logistics, blockchain technology can “help participants to record price, date, location, quality, certification, and other information to effectively manage the supply chain (1). Information within the blockchain makes it easier for shipping companies to trace/track materials, lower losses from counterfeiting, improve visibility, and reduce paperwork and administrative costs (1).
Blockchain also enables an effective audit of supply chain data. Currently, these audits can take weeks. In some use cases, using blockchain can shorten the process down to a day or a few days.
I read a couple of interesting case studies describing how Walmart is using blockchain technology to 1). manage its supply chain to handle the invoices and payments of third-party freight carriers and 2). to track the shipping of raw food products.
According to the first case, “Walmart Canada uses its own trucks and third-party transportation companies to supply over 500,000 shipments to distribution centers and stores across the country annually. More than 200 data points have to be independently calculated and accounted for in each invoice.” As a result, there are a multitude of errors and 70% of invoices require reconciliation efforts (2). As I previously mentioned, the majority of shipping companies use different software applications and consequently they can’t communicate with each other. “As a result, the reconciliation process has to be done manually (2).”
To fix this problem, Walmart created its own blockchain network that “automatically gathers and synchronizes data at every step,” effectively reducing the invoice error rate from 70% to 1%; literally a 98% decrease in invoice errors! This change significantly reduced the costs of reconciliation efforts and allowed carriers to get paid faster (2).
Within Walmart’s blockchain network there a set number of parties who administer transactions with each other. And instead of using the blockchain to mint (or create) cryptocurrency, they use the technology to mint “a range of transaction-related data, yielding unique and easily verifiable identifiers for purchase orders, inventory, etc.. Every participant in the blockchain has a unique digital signature which is used to authenticate the tokens moving through the chain. Everyone has a copy of the digital chain which enables transparency, thereby creating a built-in audit trail that cannot be altered (2).”
In another case, Walmart is using blockchain technology to increase transparency in the shipping of produce and other farm-based products. Walmart asked its suppliers of farmed goods to start tracking their produce using blockchain technology. “When a piece of permissioned information (or “block”) gets entered into the chain, other computers are notified. This process makes falsifying information difficult because the change of information is open for all to see. The technology could allow customers to scan a bag of salad and know with certainty where it came from (3).” This level of traceability is critical especially if/when there are contaminated products in circulation that should not be consumed.
The benefits of using blockchain technology in the supply chain are that it lowers the risk of fraud and counterfeit sourcing, increases traceability, improves visibility and compliance, and helps to reduce paperwork and administrative costs (1). However, the challenge of implementing an effective blockchain network is gathering a critical mass of participants to fully optimize its performance. One could argue that Walmart’s success using blockchain-enabled shipping solutions is because they benefit from having a large, closed network of users eager to jump on board to use the technology. And therein lies one of the core challenges – blockchain solutions (can) require significant changes to existing systems to work effectively. Walmart spent over two years rigorously integrating and testing its system before it was fully rolled out to the carriers within its network. I don’t know how much it cost Walmart to fully implement the technology, but its probably safe to assume it was neither easy nor inexpensive. Further, there are “cybersecurity breach concerns that need to be addressed before the general public will entrust sensitive data to a blockchain solution. The use of blockchain technology represents a significant shift to a decentralized network, which requires the buy in of its users and operators (1).”
We are in the very early stages of blockchain integration at the industrial level and like with any new technology, there’s still work to be done to perfect it. However, the successful implementation and utilization of blockchain technology within closed networks demonstrates the usefulness and power that lies in the technology. Supply chain and logistics is just one of the many industries utilizing blockchain technology and as more users join these types of networks the system only gets better.
Cheers – KM