Logistics and Supply Chains: Monitoring Shippings Leveraging Tokens and DLT
Tracking production steps, parameters and transportation is relevant to many industries. To achieve this goal, many technological methods exist. In this article, we will shed light on the use case applying the blockchain. While it is not the most straightforward case, it might inspire some to rethink their current practice.
Authors: Marcel Kaiser, Philipp Sandner
The status quo: inefficient and costly quality controls
Tracking the movement and status of a good at every stage of production will not only help to achieve more detailed analytics, but it will also eliminate fraudulent behavior and save costs (Li, 2013). Quality assessments of industrial products happen in many stages of the supply chain in production because quality has to be assured along with certain, partly critical steps. Often, these processes are costly and time-intensive which finally ends up costing consumers more. These costs in terms of personnel as well as in time have the potential to be reduced. Some may suggest a federal quality control agency or more legislation. We think that the blockchain could be more effective as a neutral, market mechanism.
A blockchain solution approach takes into account that multiple parties might have similar quality criteria but they do not have trust in their adjacent parties in terms of quality controls and status of the goods after transportation. In a less drastic case, they have to re-check if their freight changed status. The solution that was proposed has been about saving measuring results of certain normed tests as well as live data on the chain on a digital twin and creating transparency and traceability in the supply chain. This way, (e.g.) material parameters, location can be shared for each individual part of the supply chain with the digital twin. There are ways to directly transmit immutable measurement data with the help of smart oracles. Oracles have ways to make sure that data is directly recorded and unaltered. Moreover, their sensors are capable of triggering smart contracts that use measurement data as parameters.
The result of such implementations would make trustless, faster supply chains possible and subsequently result in more cost-efficient production. Screening processes are not losing effectiveness but do not occur redundantly.
Technical precursors and feasibility for participants
For this use case to be relevant, it is required that there is a broad distribution of smart oracles, as mentioned above. There has to be a correctly specified blockchain system and the acceptance of it. Moreover, blockchain- and data-expertise have to replace the diminishing quality control branches of several companies. To generate the required knowledge, programs like this can be used in the enterprise context. Moreover, digital infrastructure in Germany needs to be improved for large amounts of mobile devices being connected throughout entire routes.
The maintenance of the system requires not as much attention as some industrial managers might expect. A properly set up blockchain system does not require special maintenance. Any type of configuration which has to be dealt with is company-internal. In the future, nearly any business process can be realized with the use of smart contracts. The programmable business logic takes care of the injection of own, encrypted measurements, analysis of other entry data, and possibly even the status of each smart oracle. Thus, the maintenance of the system actually is not more than installation, guaranteeing uptime, and not damaging or falsely implementing any process.
Requirements for blockchain implementation
Establishing which type of blockchain system is required in this case is relatively straightforward in the first steps and more complicated in the later ones. It is required to store state, there are multiple known writers and we have to assume they do not trust each other completely. Thus, the question of public verifiability comes into play. Production tracking is more of an internal process, however, since there are lots of regulation and documentation requirements that might (in future) be relevant, public tracking might be required. Since production and process information might go into this record, public accessibility might be undesired. On the other hand, consumers are growing more interested in the backgrounds of their products. For the time being, all we can say is that for such use cases, permissioned blockchains (enterprise blockchains) are required. Also, the type of consensus might depend on the requirements of partners and the depth and relevance of the new system in the respective companies’ strategic plans. A poorly chosen consensus mechanism can compromise the data recorded on the blockchain or make the entire process extremely slow. Proof of work, as in Bitcoin will not be applicable due to all parties being authenticated nodes already in a private blockchain system. Alternatives could be proof of elapsed time, proof of stake, or a BFT variant (Baliga, 2017).
It is vital for this use case to work that a direct link between data detection and transfer on the blockchain is guaranteed. Processes at companies might have to be adjusted accordingly in order to guarantee untampered data. It should, however, be possible to adapt the DLT system accordingly in order to keep proven processes the way they were. More generally, the initial tokenization of material needs to take place adequately, depending on how early in the production stage this tokenization will occur. The creation of a digital twin will be assigned special relevance. Since a physical object’s status is mirrored in the digital twin, its proper treatment is a binding condition for the entire use case to work.
Moreover, quality assurance is now less experimental, more data-driven. Quality managers ought to be blockchain-savvy and have to be able to automate analysis on the chain since this will be their main data source. Actual practical experiments and manual tests of products will be less relevant due to smart oracles and the availability of additional, prior data.
All parties have to agree on consensus and really understand the concept they are going to participate in. This will require a considerable period of time from conceptualization to implementation. The benefit of investing time in this adoption is a decentralized, multi-party system.
Market potential of tokenizing production tracking
Of course, not any type of product supply chain is eligible for this use case. The requirements for implementation are a solid financial basis, untrusted partners and reasonable resources, and or expertise for IT implementation. Moreover, if independence from commonly used systems is required, this use case gains relevance. Especially for the food industry and cold chains, this use case is relevant. Its size is considerable with a global cold chain market value of $200 bn. Also, some industrial applications are possible if the aggregation of many parts is applied or the amount of parts does not exceed levels in which the creation of digital twins becomes infeasible. For the partners of this project, the use case has been rendered obsolete as too many parts go into production and the amount of created data without production tracking is already vast.
Cost savings: possibilities through blockchain technology
Estimating the individual savings of this use case can not be done generally. However, a statement about relevancy can be made here. With decreasing trust in partners and longer supply chains, this project becomes more relevant for producing companies. Moreover, savings could be achieved by a reduction of legal processes, capital lockup, quality assurance, and accounting. These topics make up for a major part of costs in large companies. Especially anything freight-related has been heavily hit by cyber-attacks (Schwartz, 2018) which could have been mitigated by blockchain-based supply-chain technology. Adding the aspect of automatic tracking functionality increases possible gains even more.
Cash on ledger: a prerequisite for many use cases
For most companies, it would make sense to have the Euro (or their respective currency) on the blockchain, not only for this use case (Sandner, Gross 2019). Besides production tracking, the supply chain could be completely managed within the same framework as payments can be done faster, without intermediaries and without exchange rate risk which would exist when using any crypto asset. Moreover, capital is not locked up in any process but available until used. The aim is to ensure that the euro can be used by machines and equipment in the Economy of Things. On this basis, they can work together by programming and processing transactions such as interest payments or syndicated loans as “smart contracts”. It gets really exciting when not only the euro runs on the blockchain, but also securities. Then we would have payment and delivery at the same time on a system without agents and financial intermediaries. Clearing can then take place directly “on-chain”.
Conclusion
While this use case might be more futuristic than others, it could presently already deliver value. Condition and freight monitoring are already possible, even on-chain. We critically discussed requirements like cash on ledger, more efficient and innovative cooperation, and better coordination of supply chain participants. Possible benefits are cost-savings, a blockchain platform with highly interesting data patterns, and a general upgrade for our understanding of the internet of things.
References
Baliga (2017): Understanding blockchain consensus models
Li (2013): Technology designed to combat fakes in the global supply chain, Business Horizons, 56, p.167–177.
Sandner, Groß (2020): Europa benötigt den programmierbaren Euro, Medium.
Schwartz (2018): How Maersk proved its ‘herculean resilience’ after malware devastation, CIODive.
Remarks
This research and development project was funded by the German Federal Ministry of Education and Research (BMBF) within the funding number 16KIS0906 and implemented by the VDI/VDE Innovation + Technik GmbH. The authors are responsible for the content of this publication.
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Marcel Kaiser is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His expertise is primarily decentralized finance (DeFi) and industrial blockchain applications. He analyzes the impact of blockchain technology on the economy in his master thesis. He speaks at public events about topics like Libra, DeFi and blockchain in general. Feel free to contact him via mail (marcel.kaiser@fs-blockchain.de), LinkedIn or Xing.
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de) via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).
