Cover Page

Abstract

Achieving excellence in logistics involves working collaboratively with others to optimize the flow of
physical goods as well as the complex flow of information and financial transactions.

Many parts of the logistics value chain are also bound to manual processes mandated by regulatory
authorities. For example, companies must oftentimes rely on manual data entry and paper-based
documentation to adhere to customs processes. All this makes it difficult to track the provenance of goods
and the status of shipments as they move along the supply chain, causing friction in global trade.
Blockchain can potentially help to overcome these frictions in logistics and realize substantial gains in
logistics process efficiency. This technology can also enable data transparency and access among relevant
supply chain stakeholders, creating a single source of truth. In addition, the trust that is required between
stakeholders to share information is enhanced by the intrinsic security mechanisms of Blockchain
technology.
Introduction

In 2008, Satoshi Nakamoto created a fully distributed digital currency system using Block chain
technology. For several years, this system was unnoticed by the society, but after the breakthrough of
Bitcoin, many scientists and developers became interested in the technology that allowed Bitcoin be the
best cryptocurrency in the market. (Nakamoto, 2008)

Nowadays, a large amount of people think that Block chain could be as revolutionary as Internet was.
They see many ways to adopt such technology. Therefore, many different applications appear on the
market.

One of such applications is an application for logistics and supply chain. The current situation of these
industries can be described as challenging. There are many difficulties concerning the transparency,
security and visibility of various operations across the supply chain or transportation.

1- Supply chain definition

A supply chain is a system of organizations, people, activities, information, and resources involved in
moving a product or service from supplier to customer. Supply chain activities involve the transformation
of natural resources, raw materials, and components into a finished product that is delivered to the end
customer. (Council, n.d.)

Supply Chain Management encompasses the planning and management of all activities involved in
sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes
coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party
service providers, and customers. In essence, supply chain management integrates supply and demand
management within and across companies (Gattorna, 2006). Supply Chain Management is an integrating
function with primary responsibility for linking major business functions and business processes within and
across companies into a cohesive and high-performing business model. It includes all of the logistics
management activities noted above, as well as manufacturing operations, and it drives coordination of
processes and activities with and across marketing, sales, product design, finance and information
technology (David B. Grant, 2017).

2- UNDERSTANDING BLOCKCHAIN:

2.1 The Emergence of Block Chain Technology

For centuries, businesses and in some cases entire industries have been built on the simple principle of
trust between multiple parties. However, this business of trust is about to be disrupted and transformed
with the advent of block chain technology.
Block chain can be defined as a distributed ledger technology that can record transactions between parties
in a secure and permanent way. By ‘sharing’ databases between multiple parties, block chain essentially
removes the need for intermediaries who were previously required to act as trusted third parties to verify,
record and coordinate transactions. By facilitating the move from a centralized to a decentralized and
distributed system (figure 1), block chain effectively liberates data that was previously kept in safeguarded
silos. (DHL Trend Search, 2018)

Figure 1: Going from a centralized to a decentralized, distributed database using block chain; Source: DHL

In healthcare sector for example, sensitive data from all stakeholders ranging from patients to medical
companies could be shared using the highest levels of encryption and data protection to greatly improve
service efficiency and quality. Or in finance, companies and customers could potentially adopt a common
digital currency as an alternative to traditional money, reducing the cost of transfers and enabling micro
transactions. And in logistics, data sharing across the supply chain could enable higher levels of
transparency, empowering consumers to make better choices about the products they buy. These are just
some of the many opportunities that Blockchain presents.

Despite its brief history (figure 2), Blockchain is currently enjoying a rapid rise to prominence in corporate
agendas as well as in the media. Mainstream awareness can be largely attributed to its original application
as the underlying technology of digital currencies, in particular bitcoin (DHL Trend Search, 2018).
 Figure 2: Blockchain technology history, Source: Accenture

2.2 How Blockchain Technology Works

Blockchain technology does not introduce an entirely new paradigm. Rather, it builds on the old template
of a ledger something that is used to log transactions over a period of time. Traditional ledgers are owned
by one entity (such as a business, organization or group) and controlled by a designated administrator (for
example, an accountant). This administrator can implement changes to the ledger without requiring
consensus from all of the ledger's stakeholders.

In contrast, Blockchain is a shared, distributed ledger among a network of stakeholders that cannot be
updated by any one administrator. Instead, it can only be updated with the agreement of network
participants and all changes to the distributed ledger are auditable. To illustrate how this operates, (figure
3) shows a financial transaction recorded on a Blockchain. A similar process can be used to trace other
types of asset transfer, to commit new data to a Blockchain, and to update data in a Blockchain (DHL
Trend Search, 2018).
 Figure 3: Blockchain transaction; Source: DHL / Accenture

This ‘ mutualization of data’ in a Blockchain-based system is only possible with strong cryptographic
techniques that make certain that copies are identical, transactions are not duplicated, and specific
permissions are enforced to access stored data (DHL Trend Search, 2018). Here, public and private keys
are used to ensure confidentiality and privacy. In simple terms, a public key can be likened to the address
of a physical mailbox, which is publicly known by senders. A private key is similar to the key or password
required to unlock the mailbox; it is safeguarded at all times by the owner and must not be shared with
third parties.

The transformative power of Blockchain comes through the unique combination of its differentiating
features and characteristics. Below is a summary of the four key features – these are data transparency,
security, asset management and smart contracts (Kareem, 2018).

1. Data transparency – Blockchain technology includes mechanisms to ensure stored records are
accurate, tamper-evident, and from a verifiable source. Thus, instead of multiple parties
maintaining (and altering) copies of their own dataset, now every stakeholder receives controlled
access to a shared dataset creating a single source of truth. This gives confidence to everyone
working with this data that they're using the most recent, accurate, and reliable dataset. (DHL
Trend Search, 2018)

2. Security – Traditional ledgers typically provide a blanket layer of security which, once breached,
allows access to all stored data. In a Blockchain-based system, the security mechanisms make sure
that individual transactions and messages are cryptographically signed. This ensures essential
security and effective risk management to tackle today’s high risks of hacking, data manipulation,
and data compromise. (DHL Trend Search, 2018)

3. Asset management – Blockchain technology can be used to manage the ownership of digital
assets and facilitate asset transfers. For example, it can be used to track the ownership of titles
(e.g., land titles and diamond certificates) and rights (e.g., copyright and mineral rights). It can
also be used to manage the digital twin of a physical object in the real world. (DHL Trend Search,
2018)
 4. Smart contracts – Manual processes that are normally guided by legal contracts can be
automated with a type of self-executing computer program called a smart contract. A smart
contract is a component of a Blockchain-based system that can automatically enforce stakeholder-
agreed rules and process steps. Once launched, smart contracts are fully autonomous; when
contract conditions are met, pre-specified and agreed actions occur automatically. These
capabilities can be deployed across two types of Blockchain-based system: public permission less
Blockchains where anyone can participate (e.g., the bitcoin network) and private permissioned
Blockchains where participants must be safe listed. (DHL Trend Search, 2018)

2.3 Technical Concept

It is important to consider the technical concepts of block chain to understand the consequence of the
various architectures with respect to regulation, security, performance and privacy. There is a variety of
different technologies based on Block chain that were developed to solve various problems. Thus, for
different needs there are more or less different available technologies. (Hossein Kakavand, 2017)
Generally, Block chain is a digital platform that keeps the whole history of all transactions between users
across the network in a tamper- and revision-roof manner. Also, Block chain is a database for providing
transactions in digital currency such as Bitcoin and Ethereum networks.

All transactions that were created between users or counter-parties are checked by cryptographic
algorithms and then grouped into blocks that are added to Blockchain. No one can change the information
in blocks because they are chained to each other. Concerning Bitcoin, every node in the network has its
own copy of Blockchain, synchronized with other nodes using a peer-to-peer protocol. This demonstrates
the uselessness of a central authority and consequently leads to confidence of participants in the integrity
of any single entity (BitFury-Group, 2017). Blockchain enables to process different transactions and
securely reach consensus without third parties.

Fundamental technical concepts of Block chain technology are the following (Hossein Kakavand, 2017);

Node. Peer or Node is a computer with the special software that maintains a Blockchain. All nodes are
connected to the Blockchain network so they can receive and submit transactions.

Network. It is a result of cooperation of all nodes that run Blockchain software to communicate with each
other.

Smart contracts. These are contracts converted into codes to be carried.

Submit transaction. When users submit transactions, they are sent to the nodes on the network who
subsequently send them to other nodes.

Transaction Validation. All transactions are cryptographically validated by the nodes on the Blockchain
network. Invalid transactions are ignored.

Block. It is a group of transactions collected by nodes into a bundle. To be valid blocks must be formed
according to pre-determined set of rules: They must not exceed a maximum size in bytes, contain more
than a maximum number of transactions, and must reference to the most recent valid block.
Blockchain. It is a chain of blocks that is organized by the following system: Each new block is attached
to the most recent valid block.

Consensus. It is an agreement of all nodes in the Blockchain. To enable distributed system operation,
multiple processes cooperate with each other. Faults in such systems can occur anywhere, which is why
they use consensus protocols.

Hash function. It is a one-way function that reflects an input of selectable size to a fixed sized output
called hash.

Properties of a cryptographic hash function:

1) Easy to generate the hash given the input,
2) Infeasible to generate the original input given the hash,
3) Virtually impossible for two similar inputs to have the same output in a so called “collision”.

3- Application on Blockchain on the supply chain.

Besides the adoption of this technology in powering cryptocurrency networks, there are open questions
about where Blockchain is headed, when it will yield positive results, and who will benefit most from it.
What’s clear at this point is that Blockchain applications may have one of the most profound impacts on
the logistics industry, especially the supply chain. Vipul Goyal, an associate professor at Carnegie Mellon
University, states “a lot of companies are interested in Blockchain for creating more efficient workflows,
but supply chain management is one of the big killer apps” (Mearian, 2108). This is because global supply
chains are highly complex (figure 4), with diverse stakeholders, varying interests, and many third-party
intermediaries’ challenges that Blockchain is well suited to address.

Figure 4: Normal information flow in international trade; Source Accenture

In the logistics industry, Blockchain can be harnessed in two key ways, namely, to drive efficiency and
enable new business models:

Drive efficiency: Blockchain can potentially improve efficiency in global trade by greatly reducing
bureaucracy and paperwork. For example, a multi-stakeholder process with a lengthy paper trail could be
replaced with an automated process storing information in a tamper-evident digital format.
Another example is the automation of services that currently require an intermediary such as insurance,
legal, brokerage, and settlement services. Blockchain could be used to track a product’s lifecycle and
ownership transfer from origin to store shelf, even as it changes hands between the manufacturer,
logistics service provider, wholesaler, retailer and consumer.

It would facilitate and automate each business transaction, enabling a more direct relationship between
each participant (e.g., automating payments and transferring legal ownership between parties).

Enable new business models: Micro payments, digital identities, certificates, tamper-proof documents
and much more can be introduced and radically improved using Blockchain-based services. For example,
driver training organizations could replace easy-to-fake paper-based certificates with tamper-proof digital
versions that can then lead to new identity-related services. Just as the Internet began a revolution of
communication, Blockchain technology could disrupt current business practices and models.

With significant benefits in sight, the overall market for Blockchain is expected to boom with some
estimates projecting growth of Blockchain technology from USD $411.5 million in 2017 to $7.68 billion by
2022 (Markets and Markets, n.d.). Two Reasons for this rapid growth are the rise in banking, financial
services and insurance applications including digital currencies and identities, as well as the continuing
development of this technology and growth from major vendors.

Blockchain can achieve cost savings by powering leaner, more automated, and error-free processes. As
well as adding visibility and predictability to logistics operations, it can accelerate the physical flow of
goods. Provenance tracking of goods can enable responsible and sustainable supply chains at scale and
help to tackle product counterfeiting. Additionally, Blockchain-based solutions offer potential for new
logistics services and more innovative business models (DHL Trend Search, 2018).

4- CHALLENGES

As with many emerging technologies, considerable challenges must be overcome before Blockchain can
achieve mainstream adoption in all industries. The following the key challenges that are facing the
Blockchain technology.

1- Gaining industry adoption is the most critical challenge and this will determine the success of
Blockchain technology in logistics. Being able to accurately and safely exchange information within
a community is a key advantage of Blockchain and stakeholders benefit the most when their
community contains many relevant members. Therefore, similar to Facebook, the value of the
community increases when it is adopted by a growing number of relevant stakeholders. However, it
will be difficult at first to obtain stakeholder commitment because of differing levels of digital
readiness and the initial requirement to recognize the mutual benefits of Blockchain-based
collaboration. This will be particularly tricky when there are legacy processes, regulations and laws
governing various aspects of the business, as stakeholders will incur cost to migrate from legacy
systems and integrate with new systems and practices.

2- Development of standards and governance of Blockchain in each industry. There will probably
be not just a single Blockchain-based system in the logistics industry; instead, there will likely be
multiple private permissioned Blockchains due to the competitive nature of business.
 And of course in future there will be multiple public Blockchains. Organizational bodies will be
required to determine standards and agreements, especially in the context of interoperability
between Blockchains. To tackle this challenge, the first Blockchain consortia are now beginning to
emerge; for example, the Blockchain in Transport Alliance (BiTA) in the logistics industry.

3- Necessary progress with Blockchain technology itself in order to overcome current technical
limitations. This is especially required for companies moving from a pilot implementation to full-
scale deployment. For example, some Blockchain implementations have been known to scale poorly
and suffer from high latency although new innovations are being developed to address these
scalability and performance issues.

4- Organization and culture play a significant role in the success of digital transformation in any
industry, particularly with Blockchain technology. Therefore, within organizations, a culture of
embracing new opportunities from Blockchain technology should be fostered. Managers, particularly
those in IT functions, must gain Blockchain expertise to proactively push organizational exploration
and, if applicable, adoption of Blockchain-based solutions.

5- Recommendations

Once a company understands and recognizes the potential of Blockchain technology to drive efficiency and
value, the next step is to establish a roadmap for application. This should start from a willingness to
collaborate, and involve building Blockchain knowledge and capabilities with focus on driving value for all
stakeholders. There are three main success factors for every Blockchain initiative:

1- Create a culture of collaboration

When a company agrees to work with Blockchain technology, it is signing up for an intensely collaborative
endeavor. This is because a huge part involves facilitating trusted collaboration between multiple parties
including both public and private entities of all kinds – government agencies, industrial organizations,
regulators, partners, and even competitors.
Taking the example of the highly competitive financial services industry, collaboration platforms have been
created for competitors to work together researching the application of Blockchain technology. Although
competitor collaboration might seem counterintuitive, economies of scale impact the value of Blockchain.
When more parties agree to use a single Blockchain solution, more value is created for each participating
organization. That’s why right now several Blockchain consortia are emerging in the logistics industry.

2- Build up Blockchain knowledge and capabilities

Knowledge and capabilities enable organizations to identify and realize the value of new operating models.
So it is essential to provide empowering partner organizations and individual contributors with the time,
tools, and resources they need to successfully contribute to each Blockchain project. These contributors
must be able to liaise effectively within the Blockchain ecosystem and with relevant technology players,
implementation partners, and associations.
 3- Focus on value and engage with stakeholders on Blockchain opportunities

By participating in Blockchain-based prototypes, stakeholders are able to prove and understand the
business value of a new initiative, as well as establish technical feasibility. It is important to set realistic
expectations and acknowledge that Blockchain technology remains in an early phase of the software
maturity lifecycle. It has yet to be applied at scale. Realizing the full value of this technology depends on
collaboration with the entire stakeholder ecosystem, and participants must be ready for this.

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