Economics 101 teaches us that trade creates wealth out of thin air as long as both parties get something that they want more than the goods, services, or money that they are exchanging. I want a beer more than I want $5 dollars, and the bar down the street would happily exchange one of their brews for that same amount.
In logistics, shippers value the safe and timely movement of their inventory, and carriers value the fees they collect for providing their services. In 2018, the World Trade Organization expects trade to grow by up to 4 percent. Carriers across transit modes are increasing fleet sizes in response, and it’s shaping up to be another great year in our business.
It turns out, a significant share of the rates that shippers will pay this year will be too low or too high. That’s money taken away from other investments. Here’s why. Negotiating freight contracts is a tricky business under the best of circumstances, and for shippers, the market remains murky. Premiums, surcharges, delays, routes, market conditions, and many other factors are obscured and used to justify charges that shouldn’t really exist, at least in their current form.
And if you think that simply obscuring pricing factors is a one-way street, you’re wrong. Shippers aren’t dumb, and they know that they are being taken for a ride. They’re making assumptions — rightly or wrongly — about their logistics partners when they reach the negotiation table and either passing those costs along to their customers or dragging out negotiations in hopes of getting a better rate. And while everybody is doing OK in this scenario, that inefficiency is imposing costs and delays that we need to address, or someone else will!
Logistics shouldn’t be a zero-sum game. That’s why we need transparency, but that’s going to require the industry to embrace all tools at our disposal, starting with a new generation of smart sensors and tracking equipment, and putting them to work safely and securely on a blockchain.
A public blockchain
Blockchain’s public ledger model could essentially automate these negotiations and assign predetermined values based on real-world factors. Take warehousing surcharges for example. With every pallet tracked and verified upon entry and exit of each facility, privileged parties know exactly how long a pallet sat in a warehouse, if there were delays, and who was responsible. With these facts established and logged in an irrefutable ledger in real time, smart contacts that are built into blockchain-based trading platforms can bill with precision.
The best part is, this sort of precision lets logistics managers avoid bottlenecks so that not only are surcharges accurate, they are often avoidable. Now that’s win-win.
Let’s expand on this idea by looking at other blockchain components and how they create fair and accountable markets.
-Reputation and Identity: Blockchain enables a transparent ranking system that identifies good actors, bad actors, and everyone in between. But it’s not just about rooting out that forwarder who consistently misses targets. Blockchain helps parties know who they are dealing with, and that’s crucial.
- Contracts: Smart Contracts are computer protocols that digitally facilitate, verify, and enforce the negotiation or performance of a contract. This lets parties enter into credible transactions without third parties. These transactions are trackable and irreversible. These sorts of transactions are ideal for logistics where at the level of “direct debit” or “standing order,” smart contract technology is perfect for automation. For example, every hour that a pallet is stored in a facility is logged and debited, instead of weeks spent sending bills, waiting for payment, adjusting and contesting charges, etc.
- Bookkeeping: Let’s start with the fact that blockchain is immutable. That means it is easy to run automated audits of every transaction that has taken place with complete certainty. When you add analytics that can run on the ledger, it is possible to further optimize the system, which translates into even more cost savings.
- Empowerment: Blockchain establishes ownership of the shipment every step of the way. With the custody established, it’s easy to tell who has the authority to make decisions regarding the cargo.
Transactions that reflect the pure cost of doing business
Taken together, these factors create a remarkably transparent and low-cost transactional ecosystem, all supported on a blockchain platform. As more logistics companies migrate onto public blockchain platforms, what used to be complex negotiations are reduced to automated contracts that reflect the pure cost of doing business and whatever premiums — also transparent — folks agree upon.
We can think of this as an automated marketplace. We’ve created a truly rational marketplace that eliminates the sorts of emotions and negative experiences that actors normally bring to the negotiating table. This, in turn, eliminates yet another non-core function from logistics. We’re drivers, planners, technicians, managers, and the like, not hagglers at the bazaar trying to drive hard bargains with unctuous merchants peddling overpriced jewelry.
Blockchain lets us hand this function over to machines that have a much greater command of the facts. The companies that win the competition for the burgeoning e-commerce logistics marketplace will be the ones where logistics processes are determined algorithmically. Automated bidding on a blockchain will improve production lifecycle for shippers, with each stage of the shipping process being automated in this manner. The entire supply chain can be improved, and everyone can win.
John Monarch is the CEO of ShipChain.