Blockchain seems to be a new miracle in IT. Basically, the technology is an answer to a common quest: how to protect data or at least detect data from being hacked, attacked or simply being broken? In a database, entries are stored in a sequence, but how to protect data from being moved? And exactly here, blockchain is really helpful.
Originally invented as a base technology for cryptocurrencies like Bitcoin in 2008, blockchain itself has become a hype topic. Following first applications in the financial sector, companies from different industries, including logistics and supply chain management, have recently started experimenting with blockchain technology in applications that lead far beyond the original scope of cryptocurrencies. In consequence, the technology has passed its climax in the Gartner hype cycle (as of July 2017), as real-world experiences take the air out of inflated expectations by revealing the actual potential and pitfalls. However, there are still many people who strongly believe that “blockchain has the potential to redefine transactions and change everything,” as bankers Goldman-Sachs said. It’s about time to demystify blockchain. From a technical point of view blockchain, is one way of implementing a database that can serve as a distributed ledger by providing a specific set of characteristics:
• public (not owned)
• append-only (no update, delete)
• shared/distributed between many nodes (decentralized, not centrally stored)
• constantly synchronized/replicated (keep all transactions up to date)
• secured by state of the art cryptography (tamper-proof, hacker-proof)
Well, just another database, you may think. Don’t we have enough of them? Yes, indeed, we do, but in contrast to existing approaches, blockchain enables an infrastructure that is capable of facilitating transactions between peers in a network, without any intermediary or governing body. That means all peers are treated equal, no one has priority and the transactions themselves are secure, trustable and transparent. Obviously, these characteristics create some fantasy for highly valuable applications. Just to give you a glimpse: in the case of Bitcoin, blockchain enables the execution of financial transactions without any authorities in the middle (banks) for a market capitalization of more than $40bn.
Having an IT background, you now might be interested in how blockchain technically achieves such a distributed ledger. First of all again, instead of a central authority, all members of the network can keep an own copy of the common ledger. Upon the submission of transactions by participants, the network nodes holding the ledger use a consensus algorithm for creating blocks from the submissions. If they agree, a valid block is signed and added to the chain. In addition to the transaction data, each block also contains a cryptographic hash of its preceding block. In this way, a chain of cryptographic interdependencies is created, which protects the chain’s data against tampering. Any change in a block up the chain immediately alters the cryptographic hash of every downstream block. Hence, blockchain technology allows for distributing the same verified information among all network participants without the need of any superordinate authority.
Today, we mainly see two different types of blockchain setups, i.e. public or consortium-based chains. The public approach is used for cryptocurrencies like Bitcoin, which have a huge number of nodes in combination with open, un-permissioned access. This setup suffers from delays in validation of transactions induced by the consensus mechanism as well as from a highly CPU-burning procedure for signing blocks. In contrast, consortium chains are applied in networks with a defined number of participants and few nodes that hold copies of the ledger. Here, access to the ledger as well as privacy of transactions can be controlled. Also, more efficient and therefore much faster consensus algorithms are applicable.
Now let’s take a look at the requirements of the logistics industry. Even though we continuously work on digitization and seamless integration, transport remains highly dependent on a flood of paper that is often never digitized. Sending a bulk shipment of flowers overseas can generate as many as 200 paper documents from a dozen vendors. Just as an example, the bill of lading is used by exporters and importers, insurance companies, customs agents, terminal operators, freight forwarders, carriers, and many others for operational as well as financial purposes. Typically, the physical bill of lading is couriered overnight after the seller receives word that the shipment has arrived. A single small error on one of these paper documents can result in delays that spoil a shipment or hold up payments. Experts estimate the resulting cost of inefficiency to up to $38bn annually.
So, how can blockchain technology, a neutral distributed ledger for unalterably recording transactions with transparency on data integrity for all participants, help under these circumstances? In a blockchain-based supply network (see Figure 1), data that is required to be looked into and updated by various supply chain partners is stored in the ledger instead of replicating, exchanging and storing peer-to-peer data several times individually. This is similar to our efforts in SALOG where we moved 102 CIEL environments into one central system for imports and exports around the globe, the so-called ‘one-file concept’. From this perspective, blockchain enables a ‘cross-enterprise one-file concept’.
So, what are the actual promises of blockchain technology in our domain? We divided the potential benefits into four areas. Blockchain increases efficiency by eliminating time waste and errors caused by data re-reentry. Also, waiting times are dramatically reduced by the instant sharing of data with all authorized parties. Furthermore, the single source and single connection point concept eliminates redundancies. Automation of various actions, like payments, communication, or alerts based on events, becomes possible by smart contracts that are tied to the transactions in the ledger. Regarding accuracy, Blockchain eliminates data entry errors since owners control their own data. The common master data enables everybody in the network to use in-sync and always use up-to date information. In addition, blockchain increases visibility.
Since the ledger is distributed and shared within the network trust among participants is increased without the need for upfront credit.
Furthermore, the gap towards integrators is bridged by simplifying multi-modal, cross-player, piece-level tracking. At the same time, the capabilities for performance tracking and benchmarking as well as the automatic identification of patterns and deviations are significantly improved. This leads to the final area of promises under the terms flexibility, reactivity, and proactivity, which covers the wide range of new opportunities derived from the characteristics described above.
As a first example, the always up-to-date information allows for managing occurring exceptions faster than ever by using an integrated exception handling. In addition, the common ledger fosters dynamic multi-modal re-routing, which creates new business opportunities for all participants. Setting up the consortium blockchain as a controlled but open eco-system helps connecting different parties and in consequence simplifies choosing services from a broad range of providers.
Blockchain at Kuehne + Nagel
At Kuehne + Nagel we started looking into blockchain end of 2016. In a series of workshops, Kuehne + Nagel professionals identified and rated a number of potential use cases for blockchain technology. They have been clustered into the themes provenance, trade finance, visibility, and workflow. Cases for which existing solutions already provide verifiable and trusted information like supply chain visibility, have been excluded from this overview. Aiming at customer excellence, a priority group of use cases has been selected based on customer value, value to Kuehne + Nagel, and ease of adoption. These cases are also enablers for further applications in finance. Following this initial exercise we did some technical deep-dive and started the journey of looking for potential partners in order to explore blockchain beyond flipcharts. In the area of sea freight, we are currently engaged in two proof of-concepts (PoCs) on first applications of blockchain technology. In one case we are working on exchanging shipment data between existing systems of Kuehne + Nagel and those of our partner using blockchain technology. As a next step, transport documents will be included into the scope.
In a second activity, we are participating in an initiative that works on a PoC for exchanging the bill of lading between carrier, shipper, and forwarder from import to export via a joint blockchain-based distributed ledger. Further talks with banks for PoCs in the area of trade finance are in an early stage.
If there are so many promises and opportunities, what needs to be done to leverage the potential of blockchain? First of all, it needs a business network that is interested in streamlining and simplifying its interactions. To generate value from the blockchain technology, we have to develop applications on the infrastructure. Network partners have to agree on sharing data, knowledge, benefits as well as necessary efforts that relate to the creation and application of a distributed ledger system. They must achieve consent regarding the application scenario, and which data objects they want to store on the ledger for common use. Also, roles and permissions need to be defined that fulfill the requirements of confidentiality as well as joint usage of information. This is directly connected to the definition of use cases and corresponding business rules (smart contracts). From a rather technical perspective, the different parties need to agree on the consensus mechanism, i.e. how changes on the ledger are confirmed by the participants. In summary, blockchain has the potential to make supply chains more digital and more efficient. Blockchain is an enabler of collaborative business networks and the supply chain industry may benefit from such a business model by eliminating inefficiencies and gaining speed. The still open question is what such a model might look like and to what extent it may change the roles of the different players in the market. Currently, the launch of first prototypes across different industries is about to reveal the realworld potentials and limitations of blockchains. Kuehne + Nagel is part of that journey.
About the author:
Martin Kolbe is CIO and member of the board at Kuehne+Nagel, one of the leading logistics companies in the world. Kolbe write this article for partners to the Horizon CIO podcast CIOmove. CIOmove is an opportunity for CIOs to network with European CIOs and in 2018 is organising an innovation roadshow in Isreal. Taking place between April 27 and May 1 CIOs will get three full days of insight into the Israeli technology scene and ample opportunities to network with CIOs peers from across Europe. The trip includes visits to the innovation centres of Accenture, CA, Checkpoint, Checkmarx, Dell, IBM, Skybox, Telekom and Wix. To join the 2018 CIOmove Innovation and Security, contact its head Horst Ellermann here.