Supply Chain Effects of Implementing Blockchain Technology for Logistics
The blockchain technology continues to gain recognition in the international logistics industry following the successful adoption of Bitcoin and other cryptocurrencies as modes of settling transactions. The technology ensures the security of transaction data through the decentralized storage of the transaction details as well as increasing the difficulty of changing the data. Currently, a number of businesses have adopted the blockchain technology in their supply chain management to enhance their operational efficiencies and consistency in meeting their quality demands. The current paper focuses on identifying some of the effects of adopting the blockchain technologies in contemporary logistics activities as well as the suggested applications in the future.
Keywords: Blockchain, supply chain, logistics, Bitcoin
The primary concept in supply chain management is the management of the flow or distribution of information, goods, and services effectively to minimize risks and enhance performance. Managing contemporary supply chains is a highly complicated activity due to the number of payments, information shared, the magnitude of distribution networks, and geographical extent that affects company logistics. As argued by Soosay & Hyland (2015), the rapidly occurring changes in the economy have necessitated various organizations to cooperate more closely to enhance the efficiency of their processes and increase the overall performance of the supply chain. Tsou (2013) observes that the supply chain collaboration offers a number of benefits that include enhanced service levels and cost reductions in addition to efficient and faster response to changes.
Nonetheless, the success of the collaborations between firms primarily depends on the levels of commitment and engagement by the partners involved in the supply chains (Moreira, Ferreira, & Zimmermann, 2018). Ralston, Richey, & Grawe (2017) point out some of the challenges in realizing successful such as differences in the application of information technologies in the supply chains, contrasting organizational objectives, varying or conflicting financial decisions, and power differences. The increasing numbers of stakeholders involved in the supply chains are partially responsible for such problems (Casey & Wong, 2017).
Blockchain continues to receive significant amounts of attention by logistics experts following the acknowledgment of the contributions of early cryptocurrencies such as Bitcoin, Litecoin, and Ethereum in the financial sector. Staples et al. (2017) insist that the blockchain technology has the far-reaching consequences that include changing industries, supply chains, and company cultures among others. The blockchain technology is widely considered a secure method of conducting transactions between multiple entities through digital decentralized ledgers while eliminating the need for mediators (Swan, 2017). The technology is important because the intermediaries could introduce bureaucratic processes that lead to unnecessary disruptions or delays in supply chains. Logistics experts tout blockchain technology as an appropriate solution to trust problems encountered in supply chains in addition to suggesting that companies should adopt the blockchain applications to sustain their competitive advantages (Kshetri, 2018).
Companies such as Maersk and Walmart have already initiated plans to incorporate the blockchain technology in their operations due to the benefits of the application in supply chain management. Understanding the implications of the blockchain technology in logistics and supply chain management is important despite its application by firms still being in its early stages. According to Kshetri (2018), researchers already acknowledge the potential of blockchain in improving the quality measurement solutions and enhancing tracking and tracing activities. Moreover, firms involved in the logistics business have numerous opportunities with the expansion and uptake of the blockchain technology in their operations (Nowinski & Kozma, 2017). A potential benefit of blockchain is the enhancement of the collaborations and increase in the number of solutions to supply chain partners (Nakasumi, 2017). Thus, the objective of the current paper assesses the impacts of adopting the blockchain technology in supply chains in contemporary companies as well as analyzing the background of the technology.
How Blockchain Works
Heutger & Kuckelhaus (2017) describe blockchain as a technology that involves a distributed ledger and with the capacity to permanently and securely record any transactions completed between entities. The technology eliminates the need for mediators whose previous responsibilities in traditional supply chain models included verifying, documenting, and coordinating transactions (Swan, 2015). Blockchain achieves this by allowing various parties to share databases without the need for third parties thus changing the supply chains into distributed systems rather than centralized or decentralized systems. As such, the blockchain technology has the effect of freeing data from centralized storage systems and enhancing the sharing of information between business partners (Nakasumi, 2017). As Pilkington (2016) observes, the completed transactions are secured through the application of cryptographic methods and this eliminates the risks of hacking or data losses. The three important features of the blockchain technology include decentralization, verification, and immutability.
The decentralization results from the operation of the network by members rather than depending on a centralized infrastructure or authority that established trust in the traditional supply chain models. Any transaction added to the digital ledger has to be shared inside the peer-to-peer network in blockchain and all the members retain local copies of the contracts. The requirement for all entities in the network to use public-private-key cryptography prior to sharing transactions with other partners over the network ensures that blockchain is verified. Furthermore, only the firms or individuals who hold the private keys have the ability to initiate the transactions and this helps in eliminating interference in the system by unauthorized persons. Nonetheless, the observed risk of the technology is that the disassociation of the private keys from real-world identities allows the partners to remain anonymous and this creates the risks of abuse (Staples et al., 2017).
The immutability of the blockchain technology results from the application of consensus algorithm that allows various transactions to be sorted together into new blocks. The created blocks are accessible to the network members who have the authority to assess and confirm the recorded transactions. A block is rejected in situations where the network members cannot agree on its validity following its addition to the chain. The block is confirmed and added to the network if the members reach a consensus on the validity of the recorded transactions. The verification of each block leads to the generation of a cryptographic hash that connects different blocks created earlier. Consequently, the connection and interdependency that exists between the various blocks result in the formation of a chain. The attempts to retroactively change the recorded transactions are impossible due to the need to manually change the local transaction records entered in the members’ devices as well as changing each block’s cryptographic hash throughout the entire chain.
Blockchain addresses a number of shortcomings associated with centralized architectures in supply chain management due to its distributed nature. For instance, the technology allows all the network members to access similar and verified information in addition to increasing the trust levels among the members without the need of third parties. Moreover, the technology automatically records all transactions between different entities in the network while eliminating the role of mediators. Smith (2018) suggest that such transactions could include various deeds of ownership, carbon credits, and digital money among others. The recording and distribution of all transactions over a number of nodes ensure that the blockchain technology is highly transparent to all members while the elimination of a central authority in managing the blockchain ensures that it is scalable and efficient. The records cannot be erased and this also enhances transparency. Blockchain also helps organizations to complete transactions without relying on traditional banks or exposing themselves to the effects of currency exchange rates. However, the early stages of adoption of blockchain in supply chain management, data security concerns, low acceptance by industry stakeholder, regulatory uncertainty, and limited throughput are some of the challenges that are associated with the technology.
Background of Blockchain Technology
The successful operations of industries and governments depend on vital transactions such as process coordination, registration, voting, notarization, escrow, and payments. Various trusted third-parties including banks, service providers in particular industries, accounting firms, legal firms, banks, and government agencies had central roles in facilitating such transactions in traditional models. According to Heutger & Kuckelhaus (2017), the idea of a distributed computing has existed for almost three decades following its introduction in the early 1990s. Pilkington (2016) observes that the initial purpose of introducing the concept of the distributed computing aimed at preventing double-spending although issues such as anonymity and lack of compatibility between centralization reduced its early incorporation in supply chains. However, the roots of blockchain can be traced to Satoshi Nakamoto who invented Bitcoin and pioneered the idea of the technology to develop decentralized digital ledgers that could be operated through anonymous consensus in 2008. The introduction of blockchains revolutionized the approaches used in supporting the transactions by eliminating the need for trusted third parties. Instead, the entities involved in a transaction would depend on the blockchains operated on a technology platform. This resulted in the creation of the Bitcoin cryptocurrency that was used as the public account of the transactions completed on the blockchain network.
Petersen, Hackius, & See (2017) suggest that an increased recognition of the blockchain technology in financial activities occurred during 2015 although the logistics and supply chain community was slower in realizing the importance of blockchain in their processes. The original paper published by Satoshi Nakamoto initially separated block and chain although the two words were joined to form “blockchain” around 2016. The original application of blockchain was in supporting the Bitcoin cryptocurrency although the application of the technology has expanded significantly in other platforms. The concept of blockchain 2.0 was first introduced in 2014 to describe a number of emerging applications based on the technology. An example is a newly developed programming language that supports the creation of sophisticated smart contracts that feature self-paying invoices following the delivery of shipments as well as the automated share certificates that release dividends to shareholders when their profits exceed specified limits.
The financial sector has undoubtedly been the most significant adopter of blockchain technology. However, the blockchains can be used in representing information or transactions conducted by entities in any society or industry in a similar fashion as the traditional databases. Nonetheless, the blockchains have significant unique properties that distinguish them from the traditional databases. The blockchains are widely categorized as private, consortium, and public blockchains depending on the level of participation in the use and operation of their use (Staples et al., 2017). The private blockchains incorporate strong access control to reduce the influence of the public in the databases. The stability of the blockchains depends on the technical protocols and system’s software’s correctness, confirmation of integrity criteria, application of strong cryptographic measures, and various incentives to increase the participation of members in the system.
Current Effects of Blockchain Technology on Supply Chains
The blockchain technology has had significant impacts on the financial sector following the introduction of several cryptocurrencies that continue to gain recognition as acceptable alternative payment methods in many regions. Blockchains are currently used widely as distributed accounts for various cryptocurrencies such as Litecoin, Bitcoin, and Ethereum among others. Maintaining track of financial records is a critical activity in logistics due to the importance of such data in planning processes and assessment of an organization’s performance (Dobrovnik, Herold, Furst, & Kummer, 2018). The stability, reliability, and security of the Bitcoin cryptocurrency demonstrate the potential of the blockchain technology in overcoming the shortcomings of traditional systems. For instance, most of the centralized infrastructures associated with the traditional supply chain management systems have been exposed to hacking and other malpractices from the central authorities. However, many firms involved in the logistics and supply chain management businesses show considerable levels of reluctance in incorporating the technology in their critical operations due to fears of risks.
Trust is an integral concept in global supply chain management as various entities build their relationships with their foreign partners based on this trait (Moreira, Ferreira, & Zimmermann, 2018). In traditional supply chain models, third-party mediators such as lawyers and various government agencies used signed contracts to help in ensuring organizations delivered the services and goods. However, the introduction of the blockchain technologies has resulted in reduced reliance on the third parties in completing the international transactions as the contemporary organizations use established networks to maintain the trust levels. The terms of exchange during the international transactions are also important due to the legal implications of failing to adhere to agreed conditions as well as the influence of foreign governments in business activities. One of the current effects of the blockchain technologies in supply chains is determining the nature of the exchanges and their working through established network protocols. The technology also ensures that the members of the shared networks understand the possibilities and limitations of their international transactions.
Firms in the logistics industry understand the importance of committing to binding agreements when doing business with international partners. Breaching the contracts can have several adverse consequences on companies and their suppliers, and these include incurred financial losses as well as lawsuits and damaged reputations. The adoption of the blockchain technologies allows organizations and their suppliers to form binding contracts on established blockchain networks through applications such as smart contracts. The smart contracts allow the partners to recall the agreement terms as shared in the networks(Moreira, Ferreira, & Zimmermann, 2018). Nonetheless, the new technology does not entirely eliminate the role of third parties in business contracts although it changes how such agreements are recorded. Furthermore, the consensus on the accuracy of the data stored in the networks is also important during the reconciliation of the records.
The blockchain technologies have revolutionized how organizations in the global supply chains achieve agreement on the transacted information stored in their networks. For example, meeting specified conditions grows the block chains and ensures that these remain in the official records for future reference. The stability of the blockchain technologies increases when the number of members increases due to the triggering of the network effect. Thus, the increased implementation of the blockchain technologies by companies in the logistics and supply chain management is important in ensuring that the number of members exceeds the critical levels to enhance the acceptance of the technology. Nonetheless, the initial requirements associated with blockchain continue to inhibit the adoption of technology.
Application of the Blockchain Technologies in Contemporary Businesses
The ability of entities to engage in the global transfer of funds through blockchains without relying on traditional banking systems has increased the convenience for organizations that have globalized supply chains. For instance, Tomcar – an Australian automaker – has adopted Bitcoin as its primary currency for paying its global suppliers and this helps in ensuring that the company does not incur additional costs and easing its international transactions. The company uses the CoinJar payment gateway in receiving payments to ensure that its overseas customers would not have concerns over high fees charged on credit cards as well as the changes in exchange rates. The move is significant because it reduces the transaction fees from 5% to about 0.03% when the international customers used the cryptocurrency instead of credit cards (Marr, 2018). Moreover, opting to use the stable and secure cryptocurrencies helps in reducing the costs of acquiring vehicle parts to Tomcar from international the international suppliers and this reduces the costs Tomcar vehicles thus increasing the company’s sales volumes. Other notable companies that use cryptocurrencies in facilitating international payments include Baidu and Bitfash.
Companies in the food business require solid records that would assist them in tracing various ingredients or products from their sources. Moreover, the increased customer awareness of food production practices and the demand for ethically sourced ingredients has led to a shift in food production practices. Consequently, a number of companies have adopted the use of the blockchain technologies in their supply chains to help in enhancing accountability and ensuring consistency in quality. For example, Walmart has adopted blockchain as a method of keeping track of the quality of various meat products such as beef and pork acquired from its suppliers in China. The company uses the blockchain technology in ensuring that it maintains all the processing, storage, and sell-by-dates of all pieces of meat used by Walmart. The transparency that results from using blockchain technologies helps in ensuring that the customers understand that they are dealing with firms that support sustainable production, environmental stewardship, avoid genetically modified organisms, and oppose animal brutality. The technology also helps in determining the accurate sources of food contaminations and identifying the appropriate remedial measures. Other notable companies that use the blockchain technologies for the same purpose include Dole, Tyson, Nestle, and Unilever among others.
Tracking and maintaining data is also critical to companies in the mining sector due to the high prices of quality minerals in the international markets. Various organizations adopt different strategies to eliminate the risks of purchasing fake or forged prized minerals such as diamonds and gold from their suppliers. The blockchain technology has been cited by stakeholders in mining as a method of overcoming such malpractices and ensuring that the customers receive quality products. For example, BHP Billiton – a leading mining company – has adopted the blockchain technology in its operations to enhance its ability to collect and store data from its international suppliers in all stages of the mining process. Moreover, the BHP Billiton considers the blockchain technologies as critical in enhancing the company’s interactions with global partners.
De Beers, a large South African Diamond producing company, also applies the technology in tracking the mined diamond stones from their points of origin to the point where the polished products are sold to its customers. The use of the blockchain technology, in this case, helps in ensuring that De Beers avoids dealing in diamonds sourced from conflict zones (commonly referred to as “blood” or “conflict diamonds”) while ensuring that its clients receive genuine products. Another application of the blockchain technology in the logistics industry is the monitoring of specific vehicles in an organization’s fleet. The logistics companies can use the technology in verifying the data on each vehicle’s previous performance as well as their maintenance histories.
The adoption of the blockchain technologies in supply chains has also created investment opportunities to a number of entrepreneurs and startup supply chain businesses. For example, Cloud Logistics has invested in expanding the adoption of blockchain by offering various supply chain solutions based on the technology to reduce costs and enhance efficiencies to organizations in the supply chain industry. Experts in the logistics business suggest that the number of vendors offering the supply chain solutions based on the blockchain technologies will increase in the future following the demand for novel solutions to the logistics challenges encountered by multinational companies. Additionally, established freighters such as Maersk have already adopted the blockchain technologies to assist them in effectively tracking the movement of containers and goods through secure and authenticated data. Maersk acknowledges that using traditional methods of recording and storing important information based on application programming interfaces and electronic data interchanges are unreliable due to the risks of their manipulations by unscrupulous entities.
Expected Future Effects of Blockchain Technology
The blockchain technology has the advantage of simplifying the storage of transaction data of exchanged assets as well as the execution of the stored transactions in an organization’s digital ledger using various computer programs. Such ledgers are referred to as “smart contracts” although such data may be inapplicable in monitoring or executing legal contracts (Asharaf & Adash, 2017). Smart contracts can be described as self-executing agreements written in codes and binding between sellers and buyers on the contract terms that are distributed and contained in a decentralized blockchain network (Gerard, 2017). The smart contracts allow the completion of trusted agreements and transactions to be conducted by anonymous and disparate parties while eliminating the need for external enforcement mechanisms, legal systems, or central authorities. The Bitcoin blockchain technology facilitates the formation of smart contracts using simplified computer languages while various competing technologies that include Litecoin and Ethereum use the “Turing complete” computer language (Iyer & Dannen, 2018).
Despite the identified advantages of the blockchain technology in contemporary supply chain management, the adoption of smart contracts as substitutes to traditional legal contracts remains underexploited. Stakeholders continue to debate on the practicality of adopting the smart contracts created using blockchain as alternatives to legal contracts. Additionally, the diversity of the computer languages used in creating the smart contracts raises problems to organizations due to the computational complexities involved in the blockchain technologies. The low uptake of the blockchain technologies by organizations in the logistics business also creates challenges in using the smart contracts in business agreements. Nonetheless, industry players observe that smart contracts and other blockchain technologies have the potential of revolutionizing logistics operations in the future.
The adoption of the Bitcoin cryptocurrency as an alternative form of payment to traditional methods remains in its early stages. However, financial experts suggest that the digital currencies formed using the blockchain technologies will have far-reaching effects and exerting significant changes in industry practices. The blockchain technology facilitates the secure transfer of digital currencies between entities without such transfers being subjected to recording or processing by payment services or banks. Consequently, the experts suggest that the blockchain technologies have the ability to create and supporting “programmable money” that comprises of various currencies with policies that are automatically enforced (Staples et al., 2017). Moreover, firms involved in logistics and supply chain management can use the digital currencies and blockchain technologies in making or receiving international payments from suppliers in other countries. One of the projected advantages of using Bitcoin and other digital currencies in international payment is that it protects logistics companies from the problems associated with currency fluctuations due to inflation, natural disasters, or political interferences. The logistics and supply chain management industry can also use the blockchain technologies in registering, clearing, and settling securities.
Anonymity is a key feature in the blockchain technology because the real-world identities of individuals or organizations involved in various transactions are not mandatory following the use of cryptographic keys. For instance, the blockchain technology allows agents transacting Bitcoins to identify themselves pseudonymously and this raises the risks of financial malpractices and other unethical practices. As such, the use of blockchain technologies in receiving or making payments with foreign-based partners faces significant challenges due to international regulations such as the Counter-Terrorism Financing and Anti-Money Laundering policies. Another significant problem that continues to inhibit the adoption of the blockchain technologies in logistics and supply chains is the issue of loss in confidentiality and privacy during the integration of personal data in various blockchain-based systems to conform to the CTF/AML requirements.
Summary and Conclusions
The objective of the current study was identifying the effects of adopting the blockchain technology in logistics, and the paper reviews some of the current and future effects of blockchain on supply chains. The blockchain technology is an important emergent technology that has the capacity to enhance operational efficiencies and lower transaction costs to firms in the logistics business during supply management activities. However, Heutger & Kuckelhaus (2017) suggest that the idea of distributed computing has been in existence for more than two decades although the recognition of Bitcoin and other cryptocurrencies based on blockchain increased significantly around 2015. The current study reveals that the blockchain technology has a number of potential benefits in supply chain management and logistics operations. One of the advantages of adopting the technology is that it eliminates the role of third parties in mediating transactions thus overcoming the problems associated with trust issues between partners while hastening the completion of business agreements. Supply chain management primarily focuses on managing the flow of goods and services effectively to eliminate the risks of losses. However, the numbers of payments, the quantity of shared information, and the extent of distribution networks have made logistics a complicated operation in contemporary organizations. Consequently, industry players point out the need for the introduction of innovative solutions to address some of the challenges in modern supply chains. The blockchain technology is widely regarded as one of the future technologies that have the potential of changing supply chain management activities following the introduction of cryptocurrencies such as Bitcoin, Litecoin, and Ethereum (Staples et al., 2017).
Swan (2017) argues that the blockchain technology offers a safe platform for conducting transactions with multiple entities via digital decentralized ledgers while concurrently removing the roles of third-party mediators. This is important in contemporary organizations due to the need to prevent unnecessary disruptions and delays in supply chains that can be caused by the bureaucratic processes associated with traditional methods of conducting transactions. Moreover, Kshetri (2018) observes that experts in the logistics industry widely consider the blockchain technology as the most preferable solution in addressing trust issues between partners. Decentralization and immutability are important features of the blockchain technology because they help in ensuring the validity of the completed transactions while increasing accessibility to network members. Another important benefit of adopting the blockchain technology in logistics is that it helps in simplifying the storage of transaction data of exchanged goods. Asharaf & Adash (2017) propose that organizations in the logistics business should consider adopting the “smart contracts” applications to automate the completion of business agreements. Cryptocurrencies based on the blockchain technology have also proven stable and secure since Bitcoin was first used as a mode of payment in 2009. The stability is important in logistics because it helps in protecting organizations in the logistics business from problems associated with issues such as currency fluctuations, exchange rates, and inflation among others.
However, the adoption of the blockchain technologies in supply chain management remains low due to the number of challenges that must be addressed before blockchain receives widespread approval from logistics companies. For example, the transactions conducted through the blockchain technology are anonymous in nature and this prevents authorities from reviewing the activities of some of the users to identify criminals and fraudsters. Bitcoin’s anonymity has been accused of facilitating illegal activities on the dark web and this raises serious concerns among the industry players in the logistics business. Nonetheless, gaining acceptance in the logistics industry is critical because it determines the effectiveness of blockchain technology in changing operations and business practices.
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