Automating Commercial Processes in Logistics with Smart Contracts
Current industry estimates indicate that 10% of all freight invoices contain inaccurate data which leads to disputes as well as many other process inefficiencies in the logistics industry. This problem is so prevalent that in the oil and energy industry alone, Accenture expects that at least 5% in annual freight spend could be reduced through improved invoice accuracy and reduction of overpayments.
Blockchain has the significant potential to increase efficiency along the entire logistics and settlement process including trade finance and help to resolve disputes in the logistics industry. As digitized documents and real-time shipment data become embedded in Blockchain-based systems, this information can be used to enable smart contracts. These contracts can automate commercial processes the moment that agreed conditions are met.
One of the first startups to pursue such smart contract applications in the logistics industry is ShipChain. ShipChain is an early-stage company which has designed a comprehensive Blockchain-based system to track and trace a product from the moment it leaves the factory to final delivery at the customer’s doorstep. The system is designed to encompass all methods of freight and there are plans to include an open API architecture that can integrate with existing freight management software. All relevant supply chain information is recorded in an immutable Blockchain-based database that can execute smart contracts once the conditions have been met (for example, as soon as the driver transmits confirmation of successful delivery). A key element to automating the settlement process is through ShipChain’s digital currency called “SHIP tokens”. Participants of ShipChain’s platform purchase these tokens in order to pay for freight and settle transactions on the platform.
In this use case, Blockchain in combination with the Internet of Things (IoT) in the logistics industry will enable even smarter logistics contracts in the future. For example, on delivery, a connected pallet will be able to automatically transmit confirmation and the time of delivery as well as the condition of the goods to the Blockchain-based system. The system can then automatically verify the delivery, check whether the goods were delivered as per agreed conditions (e.g., temperature, humidity, tilt) and release correct payments to the appropriate parties, greatly increasing efficiency as well as integrity.
Blockchain can further be used in the context of IoT to automate machine-to-machine payments (e.g., connected machines negotiating and executing price based on the logistics activities performed).
Another example of smart contracts in the logistics industry is the digitization of letters of credit (L/C) in order to accelerate the preparation and execution of a standard paper-based L/C — a process that currently tends to take from a few days to a few weeks. The Bank of America Merrill Lynch (BofAML), HSBC and the Infocomm Development Authority of Singapore (IDA) have developed a prototype to bring the paper-intensive L/C process onto Blockchain. The system essentially enables the sharing of information between exporters, importers and their respective banks on a secure Blockchain-based platform. This allows trade deals to be executed automatically through a series of digital smart contracts. In the trial, each of the four parties involved in an L/C transaction could visualize data in real time on a mobile tablet and see the next actions to be performed.
In a joint statement, the consortium partners state that the proof of concept shows potential to streamline the manual processing of import/export documentation, improve security by reducing errors, increase convenience for all parties through mobile interaction and make companies’ working capital more predictable. The partners now plan to conduct further testing of the concept’s commercial application with selected partners, such as companies and shippers.
Startups are also working in this space with one example being Libelli. This company is developing a solution to essentially act as an escrow agent between any seller and any buyer to create a smart contract, bypassing the need for buyers and sellers to engage banks and eliminating the paperwork traditionally associated with L/C. The company aims to provide transparency to all stakeholders during the process and claims that the automation of this commercial process reduces L/C time-to-execution down to a few minutes, with costs ten times lower than currently charged by banks.
Other functions that could be automated include outsourced transportation management, normative compliance, route planning, delivery scheduling, fleet management, freight forwarding, and connectivity with business partners.
