Ride the wave

Talk of blockchain is omnipresent. Invented by Satoshi Nakamoto, it remained relatively underground until a number of large companies joined forces to build a blockchain-based platform for financial services.

It has taken longer for other industries to embrace the technology, not least the pharmaceutical industry due to its highly regulated environment. Nevertheless, there is a rising awareness of the value that blockchain and other related tools add to the supply chain and logistics.

Niels Hackius, research associate at the Hamburg University of Technology, became increasingly interested in the topic after asking a question on the subject as part of a larger research project on supply chain and logistics. The finding that “nobody knows what blockchain is” led Hackius to convince other professors to look more closely at blockchain and its capabilities.

Although describing exactly what blockchain is remains a challenge, its role is simple to grasp.

“It is a tool that forces you to do one thing and that is to get your processes straight,” says Hackius. “Once you have that you can do so many nice things.”

One of these is the collection of large amounts of data, such as through the use of sensors. “When you attach sensors to things, the information becomes easier to handle and cheaper,” says Hackius. “Also, you’re able to process more data and that is a big topic.”

It is, of course, imperative to have tools to adequately analyse this data, an area often referred to as artificial intelligence; however, Hackius is reluctant to use this term. “We call this machine learning or data analytics because there is nothing intelligent about it,” says Hackius. “There is no brain that we are growing here that you can use.”

Nevertheless, this process is invaluable in providing new insights for the supply chain and logistics. “Companies are coming to realise that you can make predictions from your data and this can be really useful,” says Hackius. “It’s not that they haven’t done this before, but I think the realisation that you can do it and you should do it is now much bigger.”

Despite the benefits, there can be a reluctance to implement these technologies because of the risks involved. “This makes sense because you don’t want to damage some kind of raw material or product,” says Hackius. “You don’t want to be the guy that says ‘I tried a new technology and it didn’t work out.’”

The barrier to blockchain

The pharmaceutical industry is often criticised for being behind other industries when it comes to implementing blockchain and related tools. This is not uniformly the case, however. “Pharma want to have items that are very trackable,” says Hackius. “They are willing to spend more money on ensuring that their goods are handled correctly, which can be an advantage compared with industries that don’t have that money to spend. That’s why blockchain is so fascinating because it has such a large sink for data that can be tracked.”

The huge potential of these tools is clear but there are also a number of challenges with incorporating them into supply chain and logistics processes. “In terms of digital technologies more generally, it is difficult to do,” says Hackius. “It’s hard to get a system that has been working for years, even decades maybe, to move to a new standard. People working in the field are faced with the physical product that is affected and might be incredibly difficult to get back on track if something fails.”

Ensuring that there is adequate data that can be analysed is also key. “You need to make sure that every step is recorded,” says Hackius. “In general, I think it is just hard to do and comes with a huge perceived risk versus the benefits that you can get from the analytics.”

The culture of supply chain and logistics can also present a barrier to innovation. “My impression is that the logistics sector and the supply chain is not particularly attractive for young people, so it is hard to get people that have these radical ideas,” says Hackius. “If you have people that think that everything is fine then you are stuck.”

100
The Pistoia Alliance, a not-for-profit member’s organisation, has grown to 100 members worldwide since 2007.
Pistoia Alliance

The need for speed is another pressing issue. “In Germany at least, the mentality is ‘we will work out the perfect solution first in our lab and then maybe we will try it’,” explains Hackius. “Then, before you have this solution, the world has moved on.”

That is why looking at companies moving quickly in this space can be so valuable. “Amazon is a good example of a company that isn’t afraid to make mistakes,” says Hackius. “It has recently set up a logistics service in Hamburg and it is terrible. But everyone knows that in three years it will be better than any other service. They can just throw loads of money at it and build everything from scratch.”

In addition to these observations, working more strategically with other companies can be hugely beneficial. “With blockchain, you need to work together with multiple companies,” explains Hackius. “There is no real big working example where you can see that companies have done this and seen a benefit from it. Everyone is sitting there thinking ‘I’ll wait and see.’”

One of the obstacles with this collaborative approach is the issue of privacy. “When you make processes transparent, they become visible to new players,” says Hackius. “When companies work together on a common blockchain platform, they fear that they are not as competitive and they may be concerned that other companies might see their customers and approach them.”

There are a few examples of companies working together successfully; for example, the Pistoia Alliance, a not-for-profit members’ organisation working to lower barriers for innovation in healthcare R&D through pre-competitive collaboration. The Alliance was conceived in 2007 and has since grown to over 100 members worldwide. It emerged from the realisation that real progress in implementing digital technologies cannot be achieved on its own and instead fosters collaboration between organisations of all sizes to drive change forward.

Make the jump

In light of the rapid pace of technological development, making predictions is no easy feat. As a result of speaking to a range of industry professionals currently implementing tools like blockchain, Hackius is excited about the future of supply chain and logistics. “Over the long term, robots, wearables and self-driving trucks are coming,” says Hackius. “The robots, in logistics at least, are going to be a big deal but the issue is that they are not cheap enough and they cannot do certain things, which is currently being researched.”

One particular deficit of robots is the inability to grip items similarly to a human hand. “When you lift something, you immediately know how hard you can squeeze,” says Hackius. “As far as I know, there is no machine that can differentiate without extensive learning processes. If you figure out the hand, you are going to be very successful.”

In order to fully realise the potential of these technologies for the supply chain and logistics, it is essential for companies to take a leap of faith. “At some point they will have to make the jump and say ‘we’ll implement a completely new IT system’ and we’ll also open up to make things accessible for outside partners or other people will do it,” says Hackius. “You need to invest a lot to make that happen, so it is kind of a chicken and egg problem.”

The pharmaceutical industry will certainly not change overnight; however, change will happen in a tangible way. “The main thing that we will see is more data being generated because it is easier,” says Hackius. “They can then do data analytics and the little wins will drive progress forward making things better. Small data points that you previously didn’t have access to can be hugely helpful for the supply chain.”

Key characteristics of blockchain

• Decentralisation: in conventional centralised transaction systems, each transaction needs to be validated through the central trusted agency (for example, the central bank), inevitably resulting in the cost and the performance bottlenecks at the central servers. However, a transaction in the blockchain network can be conducted between any two peers (P2P) without authentication by the central agency. In this manner, blockchain can significantly reduce the server costs (including the development cost and the operation cost) and mitigate the performance bottlenecks at the central server.
• Persistency: since each of the transactions spreading across the network needs to be confirmed and recorded in blocks distributed across the whole network, it is nearly impossible to tamper with. Additionally, each broadcasted block would be validated by other nodes and transactions would be checked. Therefore, any falsification could be detected easily.
• Anonymity: each user can interact with the blockchain network with a generated address. Furthermore, a user could generate many addresses to avoid identity exposure. There is no longer any central party keeping users’ private information. This mechanism preserves a certain amount of privacy on the transactions included in the blockchain.
• Auditability: since each of the transactions on the blockchain is validated and recorded with a timestamp, users can easily verify and trace the previous records through accessing any node in the distributed network. In itcoin blockchain, each transaction could be traced to previous transactions iteratively. It improves the traceability and the transparency of the data stored in the blockchain.

Source: Strategy and PricewaterhouseCooper