Author: Dr. Jean-Paul Rodrigue
Blockchains, which are distributed electronic ledgers, can help support the transactional complexity of logistics and intermodal transportation.
1. The Emergence of Blockchains
The digitalization of transportation through the integration of information technologies to the processes of transport management and operations is well underway. While many aspects of the introduction of information technologies focused on issues such as vehicle performance and navigation, the transactional aspects remained mired in complex procedures, particularly when international transactions are concerned. Many attempts were made to improve transactional performance, such as Electronic Data Interchange, but remained partially effective in terms of reach and barriers to entry.
Firms were able to digitize and automate several of the management processes, but transactions between firms and the increasing amount of information required for their successful conclusion remained a challenge. The emergence of blockchain technology in the 2010s provided a new impetus to address the growing transactional complexity of transportation, particularly as it concerns logistics.
A blockchain is a distributed electronic ledger shared across a network of servers that records transactions in cryptographic units that are called blocks in a permanent and verifiable manner. They are often referred as digital ledger technologies (DLT).
Each block is a unique digital object which is stored on multiple servers (nodes) in a peer-to-peer network that verifies if each block copy matches its equivalent on all nodes. Once a record on a block has been changed, it is excessively difficult to alter. The uses of blockchain technologies can fall into the general categories of record-keeping and facilitating transactions. This helps establish issues such as ownership and rights over any physical or information objects such as a unit of currency, a ticket, a good, or an asset. It also includes the capability to use (or transfer) such an object in a secure fashion.
The novelty of the blockchain is that because of its distributed nature it does not require a central clearing house (e.g. a bank) to approve and record the transactions. Thus, intermediaries can be removed from the transactional system without in theory compromising its integrity. The conventional concept of trust (compliance to expected norms) leaning on an intermediary can be bypassed since trust is embedded in the network. Blockchains can thus conceptually provide better support for:
- The replacement of processes that tend to be slow and manual with automation.
- The origin and characteristics of passengers and cargo (raw materials, parts, and final goods).
- Information about passengers and cargoes to ensure a continuity of payments, insurance, and customs duties.
- Information about the conditions of the passengers and cargo to ensure their integrity it terms of the mode and their locations in transit.
- Information for regulatory authorities about the passengers and cargo, the actors involved (importer, exporter) and the carriers.
2. Value Creation Through Blockchains
The main purpose of a Blockchain is to provide value to the domain of its application. The following elements help articulate its value proposition:
- Principles. The core principles of blockchains involve information blocks that are stored and encrypted on a distributed network. Smart contracts improve the flexibility of blockchain with the capability to automatically verify and execute predefined terms of a contract.
- Functions. By its principles, a blockchain fulfills several functions related to the information stored in its distributed database. This information is verifiable, which means that data and transactions can be tracked. Further, the information cannot be changed without approval of the involved stakeholders (immutability), all of which can see the information and the transactions (transparency or visibility). This means that ledgers can be public, where all the information is visible, or private with information is visible through permission among involved actors.
- Information use. The main use of the information in blockchains is for transactions (sharing) that are able to take place because of the functions and principles identified earlier. This improves the visibility of the assets subject to transactions since both the users and the providers can see attributes such as quantity, price, and availability. Another important use is the ability to trace back all the transactions involved in a specific blockchain with an audit.
- Processes. Contract management is one of the processes supported by blockchains since contracts are now visible, traceable and shareable among the involved parties while the information is immutable and verifiable. Smart contracts enable an automated resolution mechanism. This further enables better coordination of the supply and the demand, as well as the possibility of disintermediation as centralized information ‘clearinghouses’ is not necessary.
- Outcome. Among the possible outcomes, it is expected that the efficiency (cost), effectiveness (reliability) and resilience (errors) of the processes supported by blockchains will improve.
For the transportation sector, this value proposition is particularly important considering its asset intensiveness, the mobility of these assets and the intensity of transactions.
3. Blockchains and Intermodal Transportation
In spite of the benefits of intermodalism, processing and managing international trade documents can account for up to 20% of the transportation costs and one-third of the transport time (e.g. waiting for documentation). Therefore, an important component in improving the efficiency of intermodal transportation resides in its transactional dimensions. It can be implemented on the transportation processes and the products being transported and transformed. In the first case, the focus is on digital intermodalism, while on the second case the focus is on digital supply chains.
Blockchains are particularly relevant to supply chains since they share many similarities. Supply chains are transaction-intensive entities where multiple actors and stakeholders are interacting where each physical flow is related to supporting information flows. They are organized as sequences where the integrity of the orders must be maintained, enabling supply chains to fulfill their function (right product, quantity, condition, location and time). A similar issue applies to intermodal transportation since there are organized as sequences of modes and terminals.
The bill of lading is a fundamental element to intermodal transportation since it involves the booking of carriers along a sequence of modes to carry freight (containers) on behalf of their customers. It is a key component of the integrity of an intermodal transport chain as it sets the responsibilities and liabilities of carriers and terminal operators (and other actors such as warehousing) for the cargoes under their care. Conventionally, bills of lading were transferred to different actors (manufacturers, shippers, insurers, banks, brokers, terminal operators) in paper format, a process subject to costs, delays, errors and potential tampering. Electronic bills of lading have been introduced since the late 1980s to improve the situation but required a central repository managed by a trusted third party. Parties who wished to be involved in these transactions must be registered members. When a non-member is involved, an electronic bill of lading needs to be replaced by a paper bill of lading. The management of bill of ladings thus remained a cumbersome endeavor.
Blockchains technology involves the integration of the bill of lading as well as the letter of credit into a continuous electronic chain of verifiable information and transactions. For the bill of lading, it enables a consistent document that cannot be effectively tampered with and can thus perform more effectively its legal function (a document of title, a contract of carriage and a receipt for goods). For the letter of credit, blockchains enable the automatic settlement of contracts once stated terms have been met (right time, quantity, location, and condition) and depending on the Incoterms of the transaction. This is particularly relevant since many firms pay additional demurrage costs because containers exceed free dwell time at terminals as a consequence of delays in the issuance of documentation or proof of payment. Thus, electronic proof of delivery enables faster transactions and to reduce the cost of capital.
Since a product is handled and transformed many times along a supply chain, traceability can become important to identify quality and integrity issues. This is particularly relevant to cold chain transportation of perishables such as fruits and vegetables, as well as pharmaceuticals. Large retailers such as Walmart are implementing blockchains in order to be able to quickly identify the contamination source of a tainted product and act accordingly, instead of discarding a whole product range. A similar potential applies to insurance where a blockchain could contain cargo insurance validation and the liabilities related to the cargo type and the intermodal transport chain.
Although Blockchains remain at this point a relatively experimental and unproven technology, it is part of a digitalization wave that is transforming the transportation sector, particularly through a more effective synchronization of its assets with the related information and transactions. Thus, the propensity of blockchains to by applied to segments of the transport sector is related to their transactional intensiveness. Blockchain technology is likely to be implemented in stages depending on the needs of the respective transportation sectors. The tracking of assets through the transport.chain such as containers, pallets, individual items or passengers is an approach that is likely to be implemented first.