The Pentagon Has the World’s Largest Logistics Problem. Blockchain Can Help

It’s no surprise that the Defense Department faces challenges in managing its inventory, whose value is ballparked at nearly $100 billion. It is difficult, not to mention costly, to manage and track the purchasing of hundreds of thousands of parts from a global web of sub-suppliers, many of them small, unsophisticated, and several steps removed from whatever complicated product the Pentagon is buying.

A 2015 report by the Government Accountability Office, for example, reported “weaknesses in the management of its supply chain,” including problems tracking and delivering supplies. And it’s one thing to misplace materiel, but troops and even missions can be put at risk when shoddy subcomponents enter the system. Over the past seven years, Congress and DOD have ratcheted up their attention to the problem of counterfeit parts, particularly after some sensitive and costly fixes to semiconductors, missile defense systems, and fighter jets. Industry sat up and took note, and Congress required more reporting of counterfeit parts, but problems continue.

But a new technology being tested by other logistics-heavy organizations may offer some help.

Most people, if they’ve heard “blockchain” at all, probably associate it with Bitcoin, Ethereum, or other cryptocurrencies. But it is more precisely the technology that underlies those products. A combination of cryptography, distributed messaging, and other technologies, it is at heart an accounting system with a transparent, ultrareliable mechanism for validating transactions.

This makes blockchain very attractive to companies that depend on the purchase and distribution of vast amounts of material from many sources to many places. Already, major industry players in agriculture, shipping, and retail are putting it to use. For instance, IBM is working with Walmart and China’s Tsinghua University to use blockchain technology to digitally track movement of food products. According to IBM, “farm origination details, batch numbers, factory and processing data, expiration dates, storage temperatures and shipping detail are digitally connected to food items and the information is entered into the blockchain along every step of the process.” Every participant can verify each of the data points through a digital consensus system, leading to an unalterable record of the transaction.

Similarly, shipping giant Maersk is working with Microsoft and consultants EY on a blockchain pilot to track shipments in real time, lower the costs of insuring international maritime shipments and increase the assurance of all parties to the transaction. Even the United Nations is using blockchain to process assistance, support digital identity, and manage contracts when traditional methods are unavailable or fall prey to vulnerabilities.

Blockchain solves a number of challenges. Control or verification is executed by consensus, rather than a central body, limiting the security problems of a single point of failure or vulnerability. Each step in a transaction is tracked, so if a problem occurs with a shipment, the recall of similarly manufactured products can be tracked to a more specific vulnerability point and not require an overly broad and expensive recall. The incremental costs of verification are modest, and the ledger is visible to all participants, allowing even small suppliers to participate and carry out best practices. And the transparent nature of the ledger cuts down on—if not eliminates altogether—corrupt practices that can undermine licensing and customs regimes.

Blockchain can even help with problems specific to government and the Defense Department. Small companies are often not in a position to finance and manage the tracking, auditing, and oversight mechanisms necessary to comply with government, particularly defense, protocols. Yet DOD’s supply chain depends on an enormous number of globally distributed companies, making it hard to oversee them all. This has traditionally been part of the challenge of developing anti-counterfeit systems. Blockchain may offer a simpler way to comply, broadening the set of companies that can compete for military contracts without watering down oversight.

Granted, there are special considerations that other industries simply don’t have to address, such as DoD’s need to maintain extra security and its reluctance to allow non-U.S. access to even hosting its cloud storage. But there are ways to soothe these concerns. For example, the military might create a private blockchain, accessible by invitation only. Or a hybrid ledger, with some transactions highly permissioned among parties with an offline relationship or exhibiting certain security-based characteristics in order to protect the confidentiality, or indeed secret nature, of the transactions; but with additional public key distribution for some aspects of the supply chain to broaden and strengthen reliability of transaction credibility. The broader public participation could help ensure that there is an adequate number of distributed keys to validate transactions that don’t require the same level of confidentiality, while a parallel, smaller private ledger could be reserved for the most sensitive transactions.

To preserve DoD’s sensitivity to offshore data, it might be possible to distribute the blockchain network over domestic military bases with sufficient computing capacity to host the blockchain servers. That way there is a local copy of the ledger in case of network issues, and it is distributed in a way that there are no central points of attack.

This idea is not without its challenges. The use of blockchain for traditional industry logistics and accounting is still at the pilot stage. Its use demands significant technology expertise and server power and energy. Nor does this technology prevent human error, intentional corruption, or all security breaches.

All that said, other industries and countries are pioneering the use of blockchain to solve security, logistics management, and transactional cost challenges. The defense industry has begun to experiment with blockchain as a cybersecurity measure. It would be wise for the military to explore its uses elsewhere.