Benefits of blockchain in logistics
In 2020, an outbreak of colibacillosis occurred in 19 states of the USA, causing 40 people to be hospitalized. Researchers were unable to identify the name of the leafy green that caused the disease. One thing was clear: the product came to the shelves from an infected area.
Now large corporations like Walmart have made it mandatory for suppliers to upload data to a blockchain to track product quality. This is one of the steps toward new technology, but there are more options for using blockchain in the supply chain. Let’s consider them in detail.
The essence of blockchain
A blockchain is a distributed database in which information is not stored on a centralized server but is distributed across nodes. These nodes automatically check the correctness of the information and accept it or not.
It is an inseparable chain of blocks that store records of transactions. You cannot change or delete data. Imagine the process of delivering flowers in pots. If a couple of them freezes, the carrier cannot fake the figures. The blockchain stores an archive of records of the number of colors. You will have to add a new block with information telling there is less production and for what reason (the flowers died).
A blockchain transaction is based on a model shown in the infographic below. When participants initiate a transaction or make a record, the blockchain encrypts it, authenticates, and creates a new block. The transaction is then completed and the ledger (database) is updated.
Logistics is suitable for the implementation of blockchain technology, and we will tell you why.
What challenges does logistics face?
Many companies in logistics are involved in the delivery of raw materials to manufacturers and products/goods to end-users. These are:
- carriers or couriers;
Each participant has a database. They monitor what is produced, at what stage, and in what quantity and control activities in the system and documents exchanged between members. If information is not recorded, changed, or stored, there will arise confusion.
The supply chain works well even without blockchain: planes fly, trucks drive, and cargo arrives at designated locations. But there are drawbacks to the process:
1. Too many intermediaries. The chain involves many unnecessary intermediaries that take a share of the profits. These are forwarders who organize transportation and dock participants or banks issuing letters of credit to partners who do not trust each other.
2. High cost of transportation. This problem is partly related to the previous issue. The more intermediaries, the higher the cost of delivery. Also, there is no transparency in determining the price.
3. A high barrier to entry for small businesses. It is difficult and expensive for SMEs to enter the supply chain, so they prefer to serve local markets.
4. Poor supply chain transparency. The situation is such that neither the sender nor the consignee can independently find out where the cargo is located. To do this, you need to contact the delivery manager. They call the counterparty to find out the delivery details. Then they call the customer again to transfer information. If the latter asks additional questions, the procedure is repeated. The process resembles a series of chaotic interactions.
How blockchain in the supply chain is solving industry problems
Blockchain is transforming logistics. A decentralized ledger records and secures transaction data. Each transaction is fixed, and the audit trail cannot be faked, because the participants receive a copy of the chain.
Thanks to this structure, the blockchain helps to solve the following problems:
- It reduces the cost of the supply chain.
Savings are achieved in several ways. For example, through smart contracts. An ordinary contract for foreign economic activity with prescribed conditions for execution is translated into computer code, recorded on a blockchain, and executed. The information gets into the blockchain, and the interested parties make a profit.
Automation using smart contracts eliminates the need for data verification, reconciliation, and calculations. They are expensive and time-consuming, and if you eliminate them, you can save money. For example, in the container industry, paperwork takes up to half of the transportation costs.
Costs are reduced because unnecessary links in the supply chain disappear. Pricing becomes transparent. Carriers control the quality and quantity of products, so fewer goods are lost on the way to customers. Improved communication helps to avoid unnecessary expenses, duplicate orders, and invoice fraud.
- It ensures the transparency of processes.
Blockchain in the supply chain gives the industry what it critically lacks – the transparency of stages when each participant knows with whom and how to interact and independently checks the delivery status. They can control the movement of cargo and its location at a particular moment. It is easy to track records of transactions in the blockchain: from production to delivery to end-users. The shipper understands how goods pass through each subcontractor.
A delay in one stage will cause failures in others. Operations are visible in real time, so the supplier will respond before the problem becomes serious. Since the data in blocks is immutable, participants trust the information they see on the blockchain.
With this feature, customers will be able to track the origin of products in the future. For example, they will scan a QR code on a coffee package and study information about where the coffee tree grew and under what conditions, when the crop was harvested, and how the coffee was roasted. Buyers will be able to make sure that they are using high-quality products.
- It saves time and improves working efficiency.
The history of transactions is stored by each participant in the chain. So, if there are inconsistencies, they can quickly find the one who is guilty. For example, a refrigerator manufacturer finds a malfunction – a broken valve in the compressor. To solve the problem, they will have to contact the compressor manufacturer and other participants in the chain until they find the supplier of the non-working valve.
When manufacturers and suppliers are on the same blockchain network, there is no need to spend time investigating. Transactions are registered, and it is easy to find the person responsible for the valve or other product/part. No need to write emails and call partners to find contacts.
Documents are stored in a digital ledger, so time-consuming paperwork is eliminated. Going paperless saves money on materials, storage, and documentation.
How to understand if blockchain is needed in the supply chain
The hype around blockchain does not mean that this technology needs to be implemented everywhere. PwC has created a questionnaire to help determine whether a company should order blockchain development. The company must decide:
- if it needs a shared database;
- if many parties are involved in the work;
- if partners trust each other;
- if there is an objective need for the immutability of information in the database;
- whether the rules outside of transactions change frequently.
If the enterprise manager answers “No” to these questions, you can try working with the technology. If the majority of answers are “Yes”, you should reconsider the need for blockchain implementation in the supply chain.
Three steps to implementing blockchain
The new technology improves the efficiency of business processes. For this to happen, you need to carefully consider the implementation steps. A logistics software development plan might look like this:
Step 1. Set a goal.
Initially, you should decide which logistics processes need to be improved and describe how to enhance supply chain management. You can set the following goals:
- increase the transparency of the supply chain;
- reduce delivery time;
- reduce costs;
- accelerate document flow;
- track the location of goods.
Step 2. Design the architecture.
Now you must choose the type of blockchain (decentralized or combined) and the platform. To understand this and start blockchain development, you should:
- choose the right technologies;
- identify stakeholders and their roles in the chain;
- find out what data is valuable for chain participants;
- establish mechanisms for consensus, authentication, data privacy, and so on.
The architecture includes a blockchain registry for recording data, access to information for all users, smart contracts, digitized proof for operations (consensus), and a client interface for subscribing to external events and transactions.
Step 3. Develop a blockchain app.
You should decide who will create and implement the technology. It could be a blockchain development outsourcing company like Andersen that has a portfolio of similar projects and positive feedback from clients.
The blockchain development team takes over the previous steps when approached right away. IT specialists will do the following:
- they will analyze requirements;
- prepare documentation;
- estimate the timing and cost of project work;
- prepare an MVP;
- select a team of specialists (developers, testers, and designers);
- implement the project on time, with the required quality and functionality;
- put the product on the market;
- support the blockchain application after the release;
- improve the functionality of the application.
Most entrepreneurs choose to hire a blockchain development outsourcing company because having one’s team with a lot of experience is difficult and expensive. Such a partner has a full staff of specialists of different levels and competencies. They will be able to implement the project on time.
The customer pays only for the work of developers. The manager does not need to buy equipment, pay wages and utility bills, and rent premises. Therefore, outsourcing becomes the best option for temporary projects.
Blockchain in the supply chain is gaining momentum. Leading companies are benefiting from logistics industry software based on this cutting-edge technology. But it will take time for other logistics participants to learn how to innovate and replace existing technologies.
For businesses that are ready to modernize their supply chain management, blockchain will be the key to lower costs, efficiency, and competitive advantage.