IBM says blockchain technology can reduce operational complexities

By: Anjali Behl


Blockchain expert Michael Aaron believes this technology is the way to a reliable, inviolable and cost-efficient supply chain management process

IBM says blockchain technology can reduce operational complexities
Michael Aaron

 

In its Land Transport Regulation 2040: 24 Technology, trends and other factors of change foundation paper the National Transport Commission (NTC) suggests blockchain could be the answer to achieving a secure and interoperable information-sharing system in transport and logistics.

ATN discussed the concept of blockchain and how it can benefit T&L participants with IBM Australia and New Zealand blockchain business development leader Michael Aaron.

Many processes between business-to-business (B2B) transactions are quite antiquated because they were developed during the pre-modern technology era, when the only way to transfer information between each other was using pieces of paper or talking to each other, Aaron says.

"A lot of processes we have today have, from a modern point of view, a lot of friction points in them, particularly the lack of shared and agreed information between participants in a business network.

"And so, one of the challenges facing us and opportunities in the 21st century is to be able to take the same concepts that have been used to automate the interactions between businesses and consumers, and governments and consumers, and then to be able to apply that between businesses, and government to business."

To this end, blockchain technology is showing "great promise" in helping businesses create a fast, trustworthy and cost-efficient system for B2B transactions including, payments, and asset transfer and sharing – a system that also enables accountability and transparency.

What is blockchain technology?

Here is how blockchain expert Aaron explains a concept that has generated a lot of comment and expectation recently, not least from the National Transport Commission (NTC).

Blockchain refers to distributed ledger technology and smart contract within a "private, permissioned network" that allows people or businesses to "overcome" such problems with information that are not otherwise effectively shared, reconciled or synchronised.

The idea of blockchain is to reduce cost and complexity of cross-business operations.

It uses a digital distributed ledger based on the 'blockchain code', which the NTC defines as: "a form of digital verification that relies on distributed elements so that no one computer contains all of the information needed to decode or verify any message".

This creates a cost-effective business network that enables all the elements in the chain to be viewed or traded without the need for a single point of control.

IBM says the technology can be used to "manage the flow of goods and related payments, or enable manufacturers to share production logs with OEMs [original equipment manufacturers] and regulators to reduce product recalls".

Aaron shares an example of how IBM implemented blockchain technology to better manage its dispute-resolution operations, while enabling "significant" cost savings and efficiencies across the business.

He says at any point in time IBM has around US$100 million in dispute with its suppliers, which, in the pre-blockchain period, took an average of 40 days to resolve, with the average dispute being US$5,000.

"You can imagine the kind of clerical time taken up," Aaron says.

"So what we decided to do, and this is what we recommend to a lot of our clients in the supply chain world, is we took a shadow or a mirror of our SAP [Systems, Applications and Products] system and our associated leasing system, put it on a blockchain and shared it with each of our suppliers, the information relevant to them.

"This enabled both IBM and its suppliers to rapidly reconcile information and get rid of what’s commonly called information asymmetry, where you’re both talking about the same thing, reduce disputes to under 10 days and freed up US$60 million of that US$100 million capital."

Of course, it did not change the size of the dispute, Aaron explains, but the benefits came by both sides being able to see the same information – that related to shipping, taxation, etc – both for domestic and international supply chains.

Benefits for T&L                                                    

According to IBM, blockchain technology has benefits for freight transportation, component tracking, compliance and log maintenance.

It can help all supply chain operators reduce paperwork and disputes between the suppliers and the client so that both sides can see the same information in real-time and correct any misunderstandings then and there, Aaron says.

This can result in efficiency savings for all parties because "you don’t have to spend a lot of time on the phone or the internet trying to reconcile why is my invoice different from the records that they’re telling me they have on their side.

"That whole problem of ‘Oh I forgot what my commercial terms were or you told me it was...’ such problems where people don’t have the same information" can be tackled using this technology.

 

Distributed ledger technology

Blockchain’s distributed ledgers offer an advantage of privacy of the messages and the information on a specific blockchain.

Because a blockchain is an entirely digital yet closed environment, the information is only accessible to specific certificates or certificate-holders.

"The perceived advantages of using distributed ledged technology is a private network and it relies upon cryptography – the underlying mathematics for security – to be able to provide an identification system to show who you are and what access rights you have," Aaron explains.

"In short, what are you allowed to see and what are you allowed to do, that then leads to what is called non-repudiation, which effectively means there is an electronic signature so no party can then say that I didn’t do that because there is actually a record that they did."

Additionally, cryptography provides what IBM terms "integrity", which basically means data cannot be tampered with or changed on the fly by anyone, adding another level of credibility to the system.

Smart contracts

Another aspect of blockchain technology is the concept of smart contract – a business process where the distributed ledger technology is merged with the Internet of Things (IoT) in order to improve efficiency.

IoT refers to the physical connection of everyday devices to the Internet, enabling them to send and receive data.

Aaron explains the concept of smart contract using a ‘made up’ example, where a supply chain is involved in transporting cherries from a farm in Victoria or Tasmania to a supplier in New South Wales using blockchain technology.

In this case, a smart contract would define the temperature at which the cherries must be stored inside the packages – say below 4 degrees Celsius.

IoT can enable each box of cherries to have a sensor that can confirm the temperature of the fruit inside.

Each time a box goes through certain gates (or phases of a supply chain thread) the sensors will be able to confirm whether the temperature inside the boxes remained below 4 degrees.

Once the consignment hits the market, the receiver can check whether the packages passed all the gates successfully.

If they did, they can be accepted as is, without the need for an inspection – saving time and improving efficiency. In case one of the checkpoints reported that the packages, at one point, did not stay below the required temperature, the smart contract will then identify the need for an inspection to see if the cherries are still good.

Smart contracts help maintain safe records of all aspects of production, storage and transportation, and in tracking the source of goods throughout the shipping process.

The state of transaction, including its success or failure can be updated and shared with relevant parties in real-time.

Aaron says this process "requires the security of the supply chain to remain intact".

Because blockchain offers an end-to-end transparent system of tracking, all supply chain participants, including transport operators and truck drivers have a "key role" to play because they are taking something from a paddock or a farm and ensuring that the product stayed on the truck at all times and did not get replaced by a counterfeit product. 

This allows consumers to make informed decisions and be assured that the product they are buying can be traced back to the source listed on the label.

Final thoughts

Is the process complicated and implementation complex?

Not according to Aaron.

"The last thing we need to do is use information technology to make things more complicated," he says.

"The main purpose of blockchain is to enable people to synchronise their financial information."

While he concedes there are many new technological ways of achieving this, the additional benefits of blockchain including smart contracts make it a more effective system.

He says the technology has benefits for everyone – from big to small players.

IBM Research senior vice president Arvind Krishna was earlier quoted as saying: "Over the past two decades, the Internet has revolutionised many aspects of business and society–making individuals and organisations more productive.

"Yet the basic mechanics of how people and organisations execute transactions with one another have not been updated for the 21st century.

"Blockchain could bring to those processes the openness and efficiency we have come to expect in the Internet era."

The NTC report states that some experts believe "it is only a matter of time before blockchain technology is used in peer-to-peer and machine-to-machine transactions where high levels of trust and verifiability is required".

Although currently banking and insurance are the two major sectors exploring the possibility of blockchain, IBM is confident that the supply chain sector may not be far behind in seeing this technology become a standard.

Check out the full feature in this month's ATN.

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