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.