By Jeff Stollman

Blockchain technology appears to be ideally suited as an underlying technology for a wide variety of software tools to improve operations within a supply chain. While this novel technology presents wide-ranging opportunities to improve supply chains in almost every industry, it poses a serious threat to the 3PLs who stand in the middle of most supply chains. The threat to 3PLs is not the disintermediation that is a source of concern to “middlemen” in many industries. Rather, it arises from the instantiation of dozens of unique supply-chain solutions and the resources required to 3PLs to support them.

The Promise of Blockchain for the Supply Chain

Blockchain technology facilitates the creation of an immutable transaction log. Such a log provides a number of innovative solutions applicable to the supply chain. Because of all the potential benefits that blockchain technology can provide, a multitude of firms have initiated widespread development of blockchain solutions for various industry supply chains to enhance visibility and to reduce the time and cost of moving both finished goods and their components through the supply chain.

Chain of custody

One of the most important functions provided by the blockchain is the creation of an immutable transaction log. If the transactions being recorded document transfer of custody (or ownership), this results in the creation of an immutable chain-of-custody log. Such a log is ideal for identifying the source and dispersion of goods including currency, commercial products, artwork, and even legal evidence. Such a log supports the identification of the source of authentic, counterfeit, and gray-market goods. If we record all transactions in the widget industry and find that distributor A has purchased 50 authentic widgets from their manufacturer and later sells 51 widgets to retailer B, where did this 51st unit come from? Absent a “loaves and fishes” miracle, there is reason to be suspicious of the distributor, or its sources. The problem may be as simple as an administrative error. But a blockchain application can be programmed to alert users (including regulators) when such suspicious events occur, prompting further investigation to definitively resolve what happened. For unique one-of-a-kind products (including serialized products), the blockchain’s immutability further provides a reliable source of truth, identifying the provenance of each individual package. It can identify not only products with inauthentic serial numbers, but also products that duplicate legitimate serial numbers.

Component Integrity

Similar to the tracking a final product as it moves downstream from maker to consumer, a blockchain transaction log can also track upstream transactions of components and ingredients to ensure that each of the components within a system meets the specifications of the manufacturer. It can also be used to verify that the sources of such components use fair labor practices, and comply with health, safety, and environmental laws. This allows producers of brand-name products to avoid both the legal and reputational risks that can arise from sourcing products from less vigilant or unscrupulous suppliers.

Trade finance

Trade finance is another area where blockchain has the potential to save time, disintermediate certain “middle-man” functions, and save money. By placing various trade information on an immutable blockchain, the data can be accessed by appropriate parties to verify the existence, ownership, and the provenance of goods without requiring mountains of paperwork by intermediate inspectors, customs agents, etc. As a result, products move through customs barriers rapidly, reducing the time payments for products are held in suspense. The faster processing enabled by the blockchain may even preclude the need for obtaining intermediate trade financing for products in transit.

Government processes

Governments are notorious for requiring massive amounts of paperwork in various serial processes where customers or constituents have to go from agency to agency and re-prove some fact (e.g., a person’s identity or authorization; or the national provenance of an imported good), accumulating various sign-offs to complete certain transactions – especially in international trade. If these facts were logged on an immutable blockchain record, the facts could easily be reviewed and accessed by each authorizing agency concurrently and the effort and time invested in dealing with such bureaucracy could be reduced.

The Threat of Blockchain to Third-party Logistics Firms (3PLs)

Blockchain is a nascent technology. But it has already been recognized as having wide-ranging applications to various industry supply chains. Many technologists are devising unique infrastructure, tools, and processes to support blockchain’s range of applications. Developers include traditional information-technology firms, startups, and firms who depend on the supply chain to bring their products to market, as well as 3PLs, themselves. As a result, in the early stages of blockchain solution development, a plethora of unique solutions are being brought to market. For example,

• — Everledger has developed a system for tracking the chain-of-custody of diamonds
• — Peer Ledger is developing a system for tracking the chain-of-custody of refined minerals
• — RMTM is developing a system for tracking the chain-of-custody of pharmaceuticals
• — Maersk is developing a system for tracking and expediting marine shipping paperwork
• — IBM is developing a system for tracking the chain-of-custody of food products
• — Seven European banks are collaborating to develop a novel trade-finance platform.

The number and variety of solutions threatens the efficiency of 3PLs. These various systems are being developed independently and have no inherent interoperability. As conveyers of almost all products on the market, 3PLs sit in the middle of most of these solutions. If the handbag industry devises its solution, the shoe industry develops another solution, the pharmaceutical industry comes up with its own solution, and yet other solutions are used to address import/export paperwork and trade finance, 3PLs may find themselves obliged to support multiple diverse supply-chain solutions – each of which has its own procedures and interfaces. The chain-of-custody solution is also much more complex for 3PLs than for their clients. Shippers frequently need only record receipt of a package and then its ongoing shipment. 3PLs, on the other hand, have to track pickup, receipt at a local distribution center, multiple transfers to other vehicles and distribution centers, and eventual drop off at a destination. Many 3PLs already have their own systems for internal tracking and transparency while goods are in their hands. These systems go a long way toward providing transparency in the chain-of-custody within the 3PL’s environment. But these systems are just another standalone system that will need to be integrated into larger supply-chain systems. And this integration may be non-trivial. Most current 3PL tracking systems rely on an identity label generated by the 3PL itself upon receipt of a package. This label is not correlated to the contents of the package. The 3PL can report that package/pallet ‘12345’ is at distribution center 32, but it cannot tell the shipper which of six packages/pallets destined for the same customer ‘12345’ is. Is it the one containing the emergency medicines or the one containing cough drops? In addition, some industry blockchain solutions may require information above and beyond what is currently tracked in the 3PL’s own system, such as verification of manufacturer-generated serial numbers whose format can vary from industry to industry, and, sometimes, from firm to firm. Supporting the volume and variety of these new systems will be costly to 3PLs. For all the benefits that will accrue to shippers, these systems will create new inefficiencies for the 3PLs that serve them. 3PL firms may need to develop expertise in each system and have these experts available throughout the firm’s network on a 24×7 basis to support multiple shipper-designed solutions. Because a single truck or container load may include products from a wide variety of industries, it may be impossible to concentrate this expertise efficiently. Accordingly, each distribution center may need to have expertise to support each of the systems required by the 3PL’s diverse clientele. In fact, these skills may be necessary at the driver level to effectively verify receipt of packages at both pickup and drop-off. How to Address the Threat 3PLs need to be proactive, and recognize that this future disruption also represents a rare opportunity for forward-thinking companies. By taking action now, a 3PL can become a transformation leader of the next iteration of logistics. It can use this impending crisis to expand market share in the transition to Logistics 4.0. To become a leader in the next major transformation of the logistics field, RMTM believes that innovative firms need to become recognized experts in the new technology and drive the transformation. This process requires the following four steps:

1. Develop the skills

The first step to becoming a leader in Logistics 4.0 is to develop the skills necessary to support the transformation. Firms will need to gain an understanding and expertise in blockchain technology. As observed by Greg Aimi, Gartner’s director of supply chain research, “Today, global operational transparency requirements and digital business drivers from their shipper customers are just going to increase the need for 3PLs to be top dogs when it comes to tech and innovation.”

A small-scale pilot should be developed. The experience of building a working model will allow participants to delve into the details of the technology in order to gain a comprehensive understanding of the power and flexibility of blockchain technology and what it can and cannot accomplish. Furthermore, the experience will highlight most of the hurdles that will need to be overcome – both technically and politically — to develop a comprehensive solution.

One way to jump-start this effort and to reduce a firm’s investment is to form strategic partnerships with blockchain providers. But such partners must be selected carefully. Many current blockchain developers are hammers looking for nails. They view the world through a single porthole and lack the broader vision of leveraging blockchain technology in the various contexts with which it will interact.

It is not necessary at this stage to develop THE solution that will ultimately carry the industry into the next level of logistics. But just working with the technology will allow firms to begin to develop the rare skills needed to work with blockchain solutions – whether internally or externally developed. Because these skills are likely to be in short supply, fostering in-house capabilities will prepare 3PLs to cope with this new process paradigm.

2. Understand the tools

Blockchain technology today has a wide range of shortcomings. But this is true for most nascent technologies. No one today is using Java 1.0. No one today is using SSL 1.0. Technology evolves. Technologists identify shortcomings and develop solutions to fill the gaps.

Not all gaps will be filled. This is not unique to blockchain solutions. We still don’t have a good system for high-assurance digital authentication more than two decades after the deployment of Public Key Infrastructure (PKI) and more than a decade after the development of Security Assertion Markup Language (SAML).

Currently, a plethora of new blockchains are being implemented. The original Bitcoin blockchain remains healthy and proven, but newer blockchains such as Ethereum and Hyperledger offer new benefits a variety of additional benefits. But beyond the blockchain core, additional tools are being devised that offer enhanced confidentiality and improved querying. And as the vision of the future of logistics evolves, it will become clear that certain new tools will also need to be developed.

Leading logistics firms will be involved in the development of tools to fill these gaps, further building up their intellectual capital and establishing thought leadership. Additionally, it is vital that 3PLs know what tools are being developed by others that can immediately fill remaining gaps, without the costs and risks of internal development.

3. Formulate the vision

Once basic blockchain skills have been developed, and an understanding of the wide range of tools available and under development, firms should be watching developments in the field from the myriad startups and pilots being conducted by others. These will lead to the evolution of a vision that could become the unifying vision for the logistics community.

4. Foster Collaboration

Collaboration is the key to success in the supply chain. Leveraging the thought leadership gained from internal explorations of the technology, firms need to drive collaboration with customers and selective competitors alike. Even the best solution will be unsuccessful without widespread support from the rest of the industry. And enough competitors will need to support the effort for it to carry through and become an industry standard. The intellectual capital already developed will help the firm maintain its leadership in this collaboration.

As Gartner’s Ami points out, the next generation of logistics “mandates a transition in the roles and responsibilities of tomorrow’s logistics professional from being a master of logistics execution to a master of provider orchestration; and it puts an importance on the relationship between customer and 3PL.”

About the Author

Jeff Stollman, principal consultant at RMTM, is a technology futurist who reviews new technologies with particular emphasis on separating the reality from the hype and forecasting the unintended consequences they present. He has been working with blockchain technology since January 2015 and has designed several blockchain applications to gain a deeper understanding of the technology’s promise and shortcomings.