Cash Logistics

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CASH LOGISTICS: By Dhundiraj Gawade Ketan Deshmukh Saurabh Gadkari Unmesh Rajhans SCM

P R O JE C T

Introduction: 2 

 The world’s oldest payment technology – cash – still thrives with more than US$4 trillion of money in circulation globally, and is growing at 7-10% p.a. ,1 billion new bank notes printed each year.

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The number of ATMs will excess 2.5 million by 2013, driven by the growth of BRIC economies.

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Although it seems largely invisible to the average tax payer, cash payments comes at a social cost – ranging 0.4-1.5% of GDP – to economies worldwide today.

What is cash logistics? 3 

Cash logistics sits at the ‘intersection’ between financial services and physical logistics, and so present unique challenges.

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If you create or destroy, move, distribute, handle, or accept large amounts of notes and coins each day to your cashpoints, then you are in actual fact part of a logistics supply chain.

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You incur direct costs of transportation, processing, packaging, and storage, in addition to the interest and opportunity cost of cash.

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However cash does not get consumed at the end of a linear chain – it simply circulates.

What is cash logistics? 4 

Figuring out where to put the right denomination and amount, at the right place, at the right time – to efficiently utilize your cash inventory while minimizing costs – is a complex enough logistics problem.

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if you control more than one part of the chain, it can be further complicated by needing to solve simultaneously your cash supply to match your cash demand.

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In a fragmented cash supply chain, there is typically no informational coordination platform to do so – causing a mismatch in inventory and resulting in excess unnecessary cash movements and holdings.

Cash circulation: 5

Contd… 6 

the failure of Banks to take an integrated end to end view of the cash supply chain is one of their biggest opportunity costs.

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how can banks further improve utilization of cash as it moves into, through, and out of their organizations ?

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Banks can benefit by having more prime retail space available in branches, freeing up staff to focus on customer facing activities, shorter cash lead times, maximum ATM availability and minimum running costs.

Contd… 7 

By the nature of their business, retail banks have to deal with large volumes of cash.

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So despite the growth in electronic forms of payment, customers still want to withdraw and deposit cash inbranch and via ATMs.

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Banks are not logistics companies -yet cash often forces them to think and behave as though they are.

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The key elements of the cash cycle

Objectives: 9

Reduce:

Increase:

C a sh In ve n to ry

Service Level Agreements (SLAs) Management A T M A va ila b ility

Tra n sp o rta tio n C o st, Tim e A T M D o w n tim e Lo st/ S to le n Ite m s

S e rvice E fficie n cy V isib ility / O ve rsig h t

In vo ice O ve rp a ym e n t Pro a ctive M a n a g e m e n t

Challenges in the Cash Supply Chain 10         

Automated Teller Machines Cash Deposit Machines Recycler Machines Bank Branches Retail Stores Cash Centres Central Banks Cash In Transits

Solution: 11 

Consolidate across the cash cycle for one centralised cash management.

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Ø Ø Ø Ø Ø 

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the integrated cash cycle consists of: One Database One Engine One System One Interface One Platform for complete 360° cash management.

Solution: 12  

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Connect to other players in the cash cycle for new efficiency gains.

Solution: 13 

q Provide web-based solution that automatically reconciles cash orders and shipments for branches, ATMs, transport providers and vaults from within the system. 

q Through rapid matching, reconciliation, research and resolution of exceptions throughout the cash lifecycle, the system streamlines the entire balancing process — eliminating errors and reducing costs.  

Use web-based cash inventory management system that allows for reductions in cash inventories and armored carrier expenses

Benefits: 14        

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Reduce Costs Improve Customer Service Increase Productivity Utilise Less Cash Forecast Cash Demand Patterns Precisely Optimise Your Cash Distribution Schedules Monitor and Proactive Alerts to Anomalous Events Real Picture of Your Business Constraints

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Case study :  UK cash logistics 

Introduction: 16 

in comparison to the integrated supply chains seen in other industries, the banking industry's cash cycle combines high ongoing costs with low efficiency, tying up more financial, real estate and human resources than it needs to.

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The challenges of managing the cash cycle vary between the two key distribution and delivery channels to customers – in-branch and via ATMs.

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We will now look at the issues and trends in each channel, highlighting key areas to address in each case.

ATM transaction 17 

Figure shows, it is not just the number of transactions in UK that is rising, but the amount of cash required to fulfil them.

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When this is combined with cash shipped to and from business customers such as retailers, the result is that an estimated £500 billion in cash is being transported around the UK each year, equating to £1.4bn each day.

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ATM transaction values, 2002-2006

Figure : 1

Key Trends: 19

Banks' major objectives in managing their ATMs are§ to maximise their physical availability and security, § minimise the cost of operation, and § increase the utilisation of cash. 

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Figure 3 shows, the overall number of ATMs in the UK continues to expand, with the majority of this growth now accounted for by pay-to use ATM machines

ATM numbers in the UK 20

Key Trends contd…. 21 

The ongoing growth of the ATM network means consumers feel that they can easily get hold of cash as and when they need it.

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So, rather than carrying large amounts of cash around – which creates personal security risk – they prefer to leave that risk with the bank, and withdraw smaller amounts for specific purposes.

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Clearly such a pattern of usage is highly costly to banks, because it increases the challenges around demand management and logistics while also tending to boost the ‘disloyalty fees' payable when customers go to another bank‘s ATM.

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These factors are intensifying the pressures to reduce the cost of ATM provision and maximise availability.

Costs of operation: 22 

industry figures show that the two basic support functions of maintenance and cash supply together account for more than half (around 52%) of the operating cost of an ATM – exceeding the combined cost of IT/communications, depreciation, rent and security.

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The high costs of these functions reflect the fragmentation and duplication embedded in the ATM supply chain in its current form.

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ATM ownership by a UK bank - cost composition of operation per year

Areas to address: 24 

little on-balance sheet cash in the supply chain as possible by using effective forecasting and stock management tools.

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supply chain is defined, integrated and managed as a single entity.

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continuous flow through the supply chain by eliminating wastage, storage and duplication of activities -thereby achieving ‘lean processes'.

Key Trends: In-branch cash withdrawals

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“These withdrawals are among the most expensive payment transactions possible, consuming high-cost resources while also incurring significant opportunity costs by diverting resources away from potentially higher-margin business in-branch.“

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Rather than looking to withdraw this service, banks need to focus on reducing the costs involved and maximising service quality.

Key Trends: 26  

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A further issue is office space. The administration and handling of cash in-branch requires large, dedicated, highly-secure areas. Many branches are prime retail space, and devoting a significant area to cash-handling means less space is available for high-value, customer-facing activities. the demarcation of secure cash-handling areas also creates a barrier between branch staff and customers, reducing the overall quality of the customer interaction. Also replenishing the ATMs according to need rather than in line with a fixed timetable – creates fewer opportunities for criminals, it reduces the security risk for bank staff themselves.

core objectives: 27 

Provide a state-of-the-art cash dispensing solution that frees up in-branch staff to concentrate on generating value through the provision of customer advice and high-value services.

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Adhere to “Fourth Party Logistics” principles to ensure that cash in the supply chain is managed and utilised as efficiently as possible.

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eliminate gaps in the supply chain, especially around the flow of data.

A new perspective on the supply chain

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A world class end-to-end cash management can allowmore space in branches to be utilised as prime retail space, minimising the areas devoted to administration and secure cash handling, freeing up staff to focus on customer facing, revenue-generating activities.

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It ensures the supply of cash to branches, ATMs and business clients is fully optimised, with cash delivered “just in time" – exactly when and where needed.

Impact: 29 

It enhances the bank's ability to leverage the Bank of England Note Circulation Scheme so that, through effective track and trace, more cash can be placed on deposit with the Bank of England.

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Second, it enables shortened lead times for cash to be placed on deposit.

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And third, it maximises ATM availability and minimises running costs through full integration with the cash supply chain, helping to ensure ‘disloyalty fees' come into the business rather than flow out.

Creating a world class cash supply chain: 30

What is needed is a more cost effective solution that combines three qualities:§ It needs to be secure, to protect cash and people. § It needs to be traceable, so the bank and other participants can always tell what point the cash has reached in the supply chain. § And it needs to be accurate, to avoid uncertainty and leakage. 

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a major retail bank in the UK is likely to have an average of £450 million tied up in its cash supply chain at any given time.

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the implementation of a best practice cash management solution could reduce that amount by

Creating a world class cash supply chain 31

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Next Figure sets out the building blocks of such a solution, by highlighting the key areas of waste in the cash supply chain along with specific actions to address each of them.

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A world-class cash supply chain would derive benefits from an overall increase in cash optimisation and utilisation, and drive a sharp reduction in the total cost of cash.

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Areas of waste in the traditional cash supply chain

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CIT integration with the branch 

The new model has a major impact at branch level, feeding directly into complete and fully-integrated cash management and security, alongside improved planning/forecasting and simplified cash functions.

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The monitoring and forecasting required to support such a model requires investment in new technology solutions, all of which are now available.

levels of CIT integration with the branch

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Driving greater value from ATMs: 

Research and experience found that integrating the value chain into a single source model produces a potential 20% reduction in ATM annual operating costs.

Hard financial benefits: 36 

Alongside the operational benefits, optimising cash inventory provides a clear financial payback.

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By minimising the cash tied up in the supply chain it automatically maximises the amount that can be put on deposit with the Bank of England at any time, enabling a cash-rich bank to gain a LIBOR return on every pound that is no longer tied up unnecessarily in the cash supply chain.

Hard financial benefits: 37 

when one bank‘s ATM goes down it can trigger a run on a second bank's ATM nearby - with the results that the second ATM empties faster than expected and causes that bank‘s customers to go elsewhere.

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Such problems by responding rapidly and dynamically to the sudden depletion of cash in an ATM, turning disloyalty fees into a revenue-enhancer.

Conclusion: 38 

One useful starting-point is to look again at the end-toend cash supply chain and use this to assess the bank‘s performance in each area, together with its ability to influence or directly control the costs in that particular stage of the chain.

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the key is to ensure that access to and usage of the cash centres is closely integrated into the rest of the chain.

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Moving to just-in-time replenishment under a servicelevel agreement will optimise the supply and level out the peaks and troughs.

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A far more efficient approach is one-stop, single-line maintenance integrated with the CIT provision, which

Conclusion: 39

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A bank that optimises its cash supply chain will not just gain bottom-line benefits in terms of costs and usage of resources. It will also be able to turn cash into a positive competitive differentiator for its offering – by focusing less on managing logistics and more on customer satisfaction, thereby delivering a better and more responsive service to its customers.

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And when other banks' ATMs run out, yours will be the ATM consumers come to -building both your brand and your revenues.

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Thank you