For more than 60 years now the shipping supply chain has been ledgered in an outdated method of paper based process which in fact lacks of performance and transparency and has a concurrent result in inefficiencies throughout the whole chain. This is mainly because the communication process and status information exists in paper form or where applicable in digital form but both in turn locked in each organization's silos or servers, thus not shared during the shipping process to all participants.
Blockchain technology creates a robust system of trust based upon a distributed network as opposed to the traditional hub and spoke model of trust. In a hub and spoke model, the hub is a central authority, which controls a centralized ledger. In the distributed network model, there is no centralized authority to control the ledger. Rather, by using consensus algorithms, trust is created by the network as a whole and does not rely upon any single authoritative body.
Blockchain technology can solve many problems companies have with their supply chains. One primary application is in preventing counterfeiting. Blockchain based supply chains, by preventing counterfeiting, can play a vital role in a company's management and profits. Companies rely upon their supply chains not only to guarantee delivery, but also to verify authenticity and combat counterfeiting. With a hub and spoke supply chain model, items can be reliably delivered (e.g. this is the model UPS currently uses), however, authenticity of the delivered items is much harder to verify. Businesses want and need a supply chain model that will ensure delivery of an authentic item. A blockchain system in which merchants, suppliers and shipping companies participate, they would all be able to have nodes that store information in order to validate authenticity of the process. This would help increase profits of the merchants and suppliers as well as shipping agencies due to transparency and satisfaction.
The ideal choice of blockchain technology to use is a combination of the private block-chain Hyperledger Sawtooth for information transactions, transfer and tracking of real world assets, and Bitcoin for the payments.
As it is described below, our system is used for facilitating and tracking transactions among a consortium of parties (companies). Those companies can be partners, branches, competitors. They must deal with each other but not necessarily trust each other, hence the choice of a distributed ledger technology. As the confidentiality of information is important and a flexible access privileges system forms a key part of the system, the choice was made to adopt a permissioned (or private) blockchain. This choice is reinforced by the fact that transaction fees would be excessive if we were to use a permissionless (or public) blockchain like for instance Ethereum, considering the high number of transactions required for tracking real world assets (see below process).
There are multiple options for implementing permissioned blockchains. The choice of Hyperledger Sawtooth was made because supply chain management is one of the main use cases for which Sawtooth was developed and because one member of our team has experience with the technology. Every party in the consortium runs a validating node.
Obviously, systems like Hyperledger Sawtooth are very young and have not yet demonstrated their full advantages over a large number of business uses over a long period of time. The technology will be continuously monitored and ready to be adopted once it demonstrates its superiority.
Another advantage of using blockchain technology is the integration of programmable payments. Hyperledger Sawtooth, like any other private blockchain, does not offer a safe and efficient way to transfer value. For digitally transferring value, the most established option is Bitcoin (or any fork of Bitcoin that may prove to be most suitable (i.e. Bitcoin Cash) when launching our services). It has the biggest volume of all crypto currencies and will therefore be the main currency of choice for payments in our system.
As we will use a combination of a private and public blockchain, we must link them together in order for the system to become one and be straightforward to use for our customers. The detailed process is described below and takes into account the complexities and the many parties in the supply chain:
Both parties agree to the purchase and the supplier uploads, through a pc or mobile device, the cargo papers (packing list, proforma invoice, certificate of origin, RFID tag list, etc) as well as pickup date availability and location of the cargo straight onto the blockchain. They both have a client application (software) that enables them to update and confirm each data transaction to the blockchain. Local export authorities can access and review the papers submitted by the factory and pre-approve the export.
The merchant issues a mini tender and places a deadline (e.g. 12 hours) for tenders to be uploaded online by pre-verified shipping agencies who participate in the blockchain via their client application. The tender parameters will include:
Shipping agencies (air freight and sea freight companies) will be notified based on their preselected offering services, then review the information of the cargo and tender parameters and submit their offer on the blockchain through their client application.
The merchant can view the offers via their client application (the tenderers will be visible on the blockchain but the tenders will be privately seen and addressed by the merchant). The merchant reviews and confirms on the blockchain, the tender that is closest to the desirable parameters, timeframe placed and pricing. The information on the blockchain will show the acceptance of the offer as well as the parameters without disclosing the price related information.
The shipping agency that won the tender validates the information on the block-chain and accepts the contract via their client application and notification is sent to the supplier with the acceptance and pick up information (based on the supplier's pickup availability provided in the initial step)
A draft Bitcoin transaction is created by our server for the merchant to send the required amount of bitcoins to a multisig address based on the invoices provided by the supplier (purchase of goods) and the shipping company (delivery of goods). The transaction appears in the merchant's application for him to sign it. The multisig address shall be in the form of M-of-N and by default on 2-of-3, namely the merchant, the supplier or the shipping company and our company (as an arbitrator in case there is disagreement between the merchant and the supplier or shipping company). Once the merchant signs the Bitcoin transactions and the transactions are broadcasted to the Bitcoin network, the information related to the transaction are included in the sawtooth blockchain and the supplier and shipping company receive a notification.
The shipping agency picks up the cargo from the factory and the driver through a mobile device will input on the blockchain that he has inspected and picked up the cargo while submitting at the same time his digital signature and the warehouse personnel's digital signature that they are releasing the cargo at the proper state. The merchant is notified and can immediately release full or part payment to the supplier as per agreement.
The delivery process can be traced on the blockchain via our application as GPS signals, temperature and delivery points will be sent to the sawtooth blockchain, enabling a live tracking route of the delivery method up until its final destination which might be the airport or the port depending on the choice of the selected service.
The customs can inspect the cargo as well as the information on the blockchain and input their digital signature as approval of receiving the cargo from the shipping company.
Once goods are delivered, the merchant confirms it through the application (approval is sent straight to the sawtooth blockchain) and the funds are released to the shipping company. The merchant and the supplier are presented through their application with the possibility to confirm the payment and sign the Bitcoin transaction to release the funds from the multisig address to the supplier's address. Settlement is gross and in real time. Confirmations of the Bitcoin transaction are monitored and automatically included in the Sawtooth chain.
The payment happened on the Bitcoin network but all informations were included in the Sawtooth blockchain and are distributed constantly to all the nodes and are immutable.
Using our blockchain-based system provides clear advantages compared to existing processes in the legacy system. Many of those advantages come simply from using integrated digital services. Indeed, current supply chain processes imply using a lot of papers and e-mails as well as traditional banking services. Moving those processes away from paper was a task proven to be practically impossible in a world where digital trustless interaction was unthinkable. With the emergence of distributed ledger technologies, it is now possible to interact digitally with untrusted parties. That allows us to replace slow and inefficient interactions with an integrated paperless system.
In term of processes, the different actors will immediately enjoy the following advantages, and the efficiency, improvement and cost reduction that come with them:
Consistency of information: The raw information is included in the blockchain, disseminated within the whole network and accessible by all permissioned parties (every party has at least a node).
Parties can transact with other parties they do not trust, without the need for excessive due diligence.
Internal or external audits are easy to perform. Financial report are easy to compile as all financial informations are available in one location.
Access privilege management is clear. Only parties with the appropriate access can see or edit data.
Nearly all tasks can be automated, including making and sending purchase orders, tenders, payments, notifications etc
Tracking of goods is available through the blockchain.
Shipping agencies that are connected to the network receive real time notifications based on the services they provide
Merchants on the network receive direct quotations from shipping agencies (no middlemen / forwarders needed).
Open rating of suppliers and shipping companies by merchants. Fraudulent activity by any company along the way leaves immutable traces on the blockchain.
The use of digital currency for payments also brings its share of advantages. Beside all their qualities as a medium of exchange, the two additional qualities that we can benefit from are:
Transferability: International payments are cheaper, faster and simpler than with the traditional banking system (see cross-border wire transfers and letters of cre-dit).
Programmability: Digital currencies are programmable so they allow us to improve the supply chain system by allowing:
Automatic payments: During the order phase, payments are made to an intermediary escrow address. After physical transfer of ownership has been confirmed, the funds are automatically transferred. The reduction from a standard 30-day payment to an almost instantaneous one has huge benefits for the supplier.
Multisig: Our escrow addresses are multisig in a 2-of-3 scheme. Like on the OpenBazaar platform, if the 2 parties cannot agree, an arbitrator steps in to settle the transaction.
Competition between shipping agencies to provide the best service at the lowest price possible will be enhanced, whereas at the same time transparency, frauds, illegal cargos, inefficiency, delays, dysfunctional and time-consuming communications via email/phone/logistic papers etc. will be tackled all in once through a transparent and trustworthy blockchain implementation. Merchants will not be seeking the right shipping agencies to handle their cargo but the shipping agencies will be seeking for the right cargos to handle in accordance to their capabilities!
