Trade begins with a buyer’s need and ends with the fulfillment of that need. It comprises many activities, including enquiry, goods or services delivery and payment.
Transactions take place within a preestablished system, on the basis of a functioning legal framework and technical infrastructure. Key steps include the supplier finding a buyer, the signing of a sales contract (electronic or otherwise), goods shipment and payment within the contractual deadline. While all these activities together are called the supply chain, a closer look shows there are three parallel flows :
- The physical supply chain – goods or services flowing between supplier and buyer
- The financial supply chain – financial transactions such as payments and invoice financing, implied by the move of goods or services
- Underlying information flows supporting the financial and physical supply chains and including, for example, purchase orders, confirmations and invoices.
Each of the flows in Figure 1 has one or more supporting information flows : the physical supply chain is supported by the information flow , the financial supply chain by the information flow ]2], and underlying information flows may take place in  to .
Over the past few decades much effort has been put into improving efficiency in the physical supply chain. This has led, for example, to reduced lead times, lower inventories, increased responsiveness and improved customer service.
Using automated and electronic systems, information can be processed faster and more accurately, cutting lead times. Similarly, if purchase orders are managed electronically, procurement is quicker.
Furthermore, if a company can accurately forecast purchases and sales, it will gain a competitive advantage by successfully managing its supply chain.
Improvements in financial flows in supply chains should match improvements to supply chain management. Having both financial and trade process information available electronically can : minimize human errors; reduce reconciliation time in the three-way match of purchase order, shipping receipt and invoice ; and create a more tightly integrated supply chain.
However, if there would be a mismatch in information flows, resulting in, for example, delays in processing and reconciling invoices, then the “day’s sales outstanding” for accounts receivable will be higher than necessary, implying that working capital management needs to be able to deal with uncertainties.
Matching information flows in the supply chain – effective management of information flows – benefits all parties.
This requirement for “effective management of information flows” boils down to “interoperability”. This is defined as “the capability to run business processes seamlessly across organizational boundaries”.
Interoperability is achieved : by understanding how the business processes of different organizations can interconnect ; by developing standards to support these business processes efficiently ; and by specifying the semantics of messages exchanged between organizations to support these business processes in a scalable way. Standards for “(electronic) messages exchanged between the organizations to support these business processes” are developed by standardization organizations.
Seen as a central prerequisite to establishing e-business, interoperability enables information to be presented in a consistent manner between business systems, regardless of technology, application or platform. It thus provides organizations with the ability to transfer and use information across multiple technologies and systems by creating commonality in the way that business systems share information and processes across organizational boundaries.
Figure 2 introduces (bottom to top) the basic layers of interoperability :
Technical interoperability, which comprises the common methods and shared services for the communication, storage, processing and presentation of data. This includes the technical foundations for a secure environment, compatible technical standards and a common framework.
Semantic or business interoperability, which includes discovery and collaboration aspects such as workflow and decision-making transactions. This can require the alignment of business processes as well as operational synchronization of collaboration data.
Generally speaking, these all need to fit in a legal and political context ; in total that adds up to five layers. On each of the five layers, agreements between actors are needed for proper interaction.
In come standards
Industry standards are used at all levels – from technical to quality and from formal to informal. A distinction must be made between “use of a standard” (facilitating primary and secondary business processes) and “support of a standard” (embedded in products and services provided to buyers).
An interoperability initiative should stem from a business decision (organizational interoperability), elaborated outward into the lower and higher layers respectively.
Contemporary development methods for standards for electronic messages focus on business essentials, in which translation into the actual messages used in the electronic data interchange is automated as much as possible. These development methods optimally support information definition, enveloped in electronic data messages, that actually needs to be exchanged between actors. This enables their business processes to function and makes it possible to cope with evolution in the (business) interaction between actors. The format chosen for the electronic messages is usually eXtended Markup Language (XML) (see Box below).
What is XML ?
XML stands for ‘eXtensible Markup Language’. It has been designed to structure, store and transport information (from sender to receiver), and not to display data. The aim of XML is to be self-descriptive.
The following example is a note stored as XML :
<body>Don’t forget to call me !</body>
The note above is quite self-descriptive. It has sender and receiver information, it also has a heading and a message body. But still, this XML document does not do anything. It is just information wrapped in tags ; a tag is like <note> (indicating a start) or </note> (indicating the end of an information field). Someone must write a piece of software to send, receive or display it.
XML tags are not predefined. Users must define their own tags. The design goals of XML emphasize simplicity, generality and usability over the Internet. It is a textual data format with strong support for the languages of the world. Although the design of XML focuses on documents, it is widely used for the representation of arbitrary data structures, for example in Web services.
ISO 20022, Financial services – Universal financial industry message scheme, is such a development method and defines a methodology for developing financial message standards. As www.iso20022.org shows, the primary application area of messages developed in this way is indicated by  in Figure 1. This covers trade-supporting functions such as payments.
Using matching interactions via  and  in Figure 1, and assuming sufficient detailed information present for automated systems to fulfill their roles, financial inflows and outflows can be managed better. This helps, for example, by reducing days’ sales outstanding and improving credit decisions, reducing the need for working capital so that money can be better used elsewhere.
In business, introduction of the electronic form of data interchange in business practice adds new dimensions. Here are a few examples.
First, it should not limit the flexibility that parties require in their operation.
Furthermore, exchanges of all information types need to be covered, as long as they are predefined, structured and can be processed by applications at both ends. These requirements also include the need to identify regulations and any requirement for legislative compliance which are satisfied by non-electronic message-based solutions, and would need to be met by any electronic business solution.
Second, standards developers are usually not the entities that implement them ; and these, in turn, may be different from the entities that support (or use) them. Each group usually has its own drivers and interest and may be subject to different legal environments. Implementation does not necessarily always follow development automatically, and the different characteristics of the groups need to be recognized.
Finally, replacing existing paper documents on a one-for-one basis by electronic messages and then using them implies that the business processes handling them will almost certainly be the same as before. While promptly provided electronic information can bring benefits to business, making the most efficient and effective use of the electronic messages that replace paper documents requires “business process redesign”. The whole concept of change can be called the “dematerialization of business processes”.
The scenario in Figure 1 is a strong simplification. In international trade there are many actors involved, even in a single sale and delivery. They can all be grouped as schematically indicated in Figure 3. Here, traders and financial service providers clusters can be recognized. Actors in roles such as customs, transporters and insurance have been clustered in “authorities” and “intermediaries”, in accordance with internationally adopted concepts for modelling business processes.
Developments take place in each cluster. Examples are: for financial service providers in Europe, the establishment of the Single Euro Payments Area (SEPA); and for traders, automation – electronic messages replacing paper documents. In addition, developments can be found on the interaction between clusters – an example is traders – authorities interaction, generally known as trade facilitation.
For obvious reasons all developments in the clusters, and those on the interaction between clusters, do not take place under centralized governance. Although more or less adhering to similar concepts, each cluster develops its own solutions for its own reasons, such as improving efficiency and reducing costs.
Implications of individual developments
In Figure 1, again only the most relevant actors in a trade transaction are depicted : buyer, supplier, and for each of these their respective bank. Not shown are the dozens of interactions that usually take place with authorities and intermediairies.
Generally, the development of electronic messages indicated by  in Figure 1 is done mainly by organizations such as GS1, OASIS UBL (Organization for the Advancement of Structured Information Standards Universal Business Language), and UN/ CEFACT (United Nations Centre for Trade Facilitation and Electronic Business). In these cases the actual standard used for the electronic messages to exchange information between buyer and supplier is determined by parameters in the business sector.
The GS1 standard, for example, is heavily used in the retail sector. UBL is one of the preferred standards used to facilitate European Commission projects such as PEP-POL (public procurement online), which is used as a government-business interface in the EU. “Legacy” UN/EDIFACT (United Nations rules for electronic data interchange for administration, commerce and transport) messages are used in  Figure 1 too.
The Box below shows an example of a UN/EDIFACT message ; the difference with an XML message is obvious.
What is UN/EDIFACT
The United Nations/Electronic Data Interchange For Administration, Commerce and Transport is the international standard developed under the United Nations. An example of a message in this format is given below :
UNA:+. ? ‘
IFT+3+NO MORE FLIGHTS’
Compared with XML, two significant differences are noticeable :
- There is no flexibility in the message ; adding or deleting a field makes it incomprehensible by the receiving application
- Translating it into a human understandable presentation requires detailed knowledge of the message structure and meaning of the elements.
Although the physical supply chain is represented by merely a single arrow as seen in  of Figure 1, it must be repeated that there are usually many interactions (in fact the information exchanges) between buyer and supplier. In real trade these interactions occur at various moments in the business process, and are intermingled with interactions with parties from other clusters.
However, these different interactions may use the same information from the business processes. This shows that the development of electronic messages to facilitate interactions within a cluster should preferably be harmonized with (certain aspects of) the development of electronic messages within other clusters. This interoperability avoids the otherwise resulting need for information translation.
Electronic messages supporting the interaction, as indicated by  in Figure 1, facilitate the products and services that are being made available by banks and financial service providers. They are developed using the ISO 20022 method. In Europe, a specific use for the messages developed is SEPA.
As indicated by the interactions in Figure 1, given the different standards facilitating  and  respectively, it will be clear that  and  imply interaction between clusters. They determine how financial and trade process information is made available electronically, where and at what moment.
ISO 20022 has been designed to allow for the adoption of innovative technologies, payment solutions and supply chain support functions that enable larger, faster and more cost-efficient supply chains. Recent implementations, particularly in automated payment solutions, have demonstrated major improvements in supply chain performance.
Better financial flow management in turn influences product supply chain performance. It can directly affect, for example, product availability on the shelf, on-time delivery, inventory value and the cash-to-cash cycle.
The adoption of ISO 20022 by standards developers can be measured by the increasing number of “business justifications”. These ask for the development of a certain (set of) message(s) where it can be observed that – within the cooperation agreements with other standardization organizations – the scope for application is absorbing functions from  and  as seen in Figure 1, providing ever increasing business process support.