Isenberg School of Business

Operation Management Case study

Case Study: SCH MGT 670

Submitted by: Subrata MukherjeeTable of Contents2Executive Summary:

2Introduction:

3Existing Process description:

5Existing process flow

5Bottleneck in the process

6Data Analysis

7Envisaged Operation

7Option-1: Low CapEx model

10Option-2: High CapEx model

12Conclusion

Executive Summary:

ABC Bank N.A. (intentionally changed the name) management is paranoid that last 2-years in a row their customer attrition rate higher than industry average. Root cause of analysis performed by eminent market research company revealed that customer dissatisfaction triggered due to ATM running out of cash in the busy area during the rush hour. ATM without cash forces customers to use another banks ATM at a fee. Operating process of the banks ATM cash filling is convoluted. Lead branch manager is responsible for supervising and reporting the cash position of other branches ATMs and stand-alone ATMs under his purview to HQ. Operationally, within a location (determined by bank leadership) range, bank branches follow a hierarchical pattern. A lead branch manager is a person from the top node in the branch hierarchy. Every day, in the morning, HQ cash services dept. triage the cash position reports in a FIFO manner that was sent by all the lead branch managers. Followed by, cash service dept. prepares and sends a cash disbursement request to armored carrier for the ATMs. This process generally takes more than 3 hr. So, ATM suffer from cash shortage never gets replenished within rush hour. By the time armored carrier drops the cash, rush hour is already over.

This article would illustrates the existing process in detail; followed by propose two different solution to remediate the problem. First solution implementation involves less CapEx, than the second solution. Introduction: Since 2009, ABC Bank (intentionally changed the name) is one of the leading retail and corporate banking institution in the New England and Mid Atlantic area. The bank is serving over 0.5 million customers in New England area. Over last two quarter senior leadership of the bank is paranoid, as customer attrition rate is around 30%, which is much higher than the market standard. In a fiercely competitive market, higher customer attrition rate implies apocalypse of business. Management recently engaged a leading marketing research company to identify the reason behind customer attrition. As per the survey, poor customer satisfaction rate is the leading cause of recent customer attrition. Root-cause analysis reveals that the ATM at the prime locations often suffers from shortage of cash during the morning rush hours, which sparks customer dissatisfaction. The Bank has more than 750 Branches and around 1200 ATM within New England and Mid Atlantic area. Each of the branches takes care of multiple remote ATM along with its own branch. Remote ATM refers to ATMs that are located inside CVS pharmacy, supermarket, etc. As per the banks internal operating procedure - bank maintains a hierarchy of branches within a geographic location (generally within 10 miles of radius). Lead branch manager in the hierarchy is often the in-charge of the branch ATMS and the stand alone ATMs in that area (under the hierarchy). This article would systematically identify the existing business processes, followed by bottlenecks in the process; finally, it would suggest the optimal process to increase customer satisfaction.Existing Process description:Lead branch manager arrives around 8.00 AM. 1. Upon arrival his primary task to physically check the ATMs cash level with in the branch, and make a road trip to each of the ATMs within its own purview. Even if he identifies, the first branch ATM he inspected is the one is running out of cash, he cant order it, until he comes back after inspecting all the branches and prepares his cash disbursement report. Upon inspection, branch manager prepare a cash replenishment report. Generally speaking, ATMs refilling is done in two ways

Scheduled refilling - 2 times in a week On-demand refilling as need basis; when cash level in ATM goes below $1000. It is worth noting that during rush hour, $1000 inventory takes less than 30 minutes to get exhausted. As per the existing contract, the cash refilling to the ATM is done by the 3rd party armored carrier companies, e.g. BRINK, DUNBAR, etc. 2. Generally, lead branch managers report arrives to HQ by 9.30 AM. In HQ, cash service team arrives between 9 - 9.30AM. A team of 3-people review the morning cash inventory report for entire ATMs from the respective lead branches. Existing ATM request is triaged in FIFO manner. In FIFO queue, ATM report which comes early stays at the bottom in the queue; even though, that ATM has a dire need of cash. 3. The complete triage of all the ATMs cash inventory takes around 1.5-hour. Around 11 AM in the morning, the cash replenishment request goes out to the responsible armored carrier company. It is worth mentioning that not a single armored carrier company serves the entire national footprint for the bank. As an example, BRINKS (armored carrier) serves South Shore, Boston; North Shore area is served by DUNBAR. 4. Operationally, armored carrier company follows a cut-off time. Any request coming 30 min before the next delivery truck schedule, wont be satisfied by the next delivery cycle. That order would be fulfilled in the following delivery cycle. Normal vehicle schedules are top of every 2-hour starting from 6 AM till 11 PM. Thus, from bank perspective, missing any of the time window implies that ATM would have to wait for at least another 2 more hour for replenishment. Also, the armored carrier vehicle serves multiple banks. Considering logistics, armored carrier optimizes their routes for the cash drop-off. The dropping of cash goes by the nearest bank location on armored carrier.5. Once armored carrier vehicle drops the cash, they prepare a logistics worksheet with the cash denominations (number of $20, $50, and $100) delivered to an ATM. End of day, armored carrier transmit this data to the bank HQ for the accounting and asset liquidity.

Existing process flow:

Bottleneck in the process:

Lead branch manager starts his/her road trip to identify the cash position around 8.00 AM in the morning, and send his report around 9.30 AM, which is almost the end of rush hour. Today, there is no proper cash forecasting model, by which HQ can order more cash to those ATM that often suffer from cash shortage. In HQ, Cash services office hour starts at around 9.30 AM. They triage the entire cash request in a FIFO manner. Followed by, log the disbursement order with armored carriers. It is a scheduling and dependency orchestration issue. Major drawback of the FIFO model is - it refrains to quickly identify the ATM with most cash shortage without triaging all the records in the queue. There is a strategy and productivity issue.

In HQ, there is no facility to ramp-up and down of worker (temporary) based the on-demand pattern. When there is a surge in the ATM cash demand, existing workforce cant get additional helping hands without jeopardizing other operational activities.Data Analysis:As part of the analysis, the following data points need to be captured For each Lead branch manager:

Lead branch manager road trip start time. Scheduled start time is 8 AM. Deviation in road trip start time (how many days/week he comes after 8 AM. How many days he starts before 8 AM)

Lead branch manager daily total road trip time (total driving and cash position observation time) # of ATM under individual lead branch manager Lead branch managers morning report (ATM cash position) preparation time If the early morning road trip to be subcontracted, then what is the hourly rate (overtime= 1.5 times regular wage) How much money bank would save by not making lead branch manager coming at 8AM (presently, working hour starts at 9 AM. It is 1-hr overtime for lead branch manager)For each ATM: Record ATM cash inventory level everyday (daily)

Days in the week has above normal consumption (generally Monday Wednesday, and Friday) Months in the year having more consumption (generally during holidays) ATM replenishment frequency

Cash ordering cost (charge from armored carrier)

Cash holding cost (cash pilled in ATM)

Cost of upgrading each ATM (CapEx and OpEx)

Cash demand from ABC bank customer

Cash demand from Non ABC bank customer

For HQ: HQ team member arrival time

HQ team, per member triage capacity ( Total how many ATM cash position reviewed) HQ individual team member efficiency (how many ATM cash position triages/hr.) What is the per hour wage equivalent of HQ stuff

At what time cash disbursement request goes to armored carrier from HQ How many disbursement request missed the armored carrier cutoff cycle

For each Armored Carrier (BRINKS, DUNBAR): Hour of operation ( morning start time to evening last vehicle dispatch time) Frequency of operation, e.g. every hour/every two hour, etc.

Cut-off time for each delivery cycle

Morning at what time first armored carrier vehicle starts

Lead time (between ordering and delivery)

Envisaged Operation:The objective of the solution is to maintain optimal cash level in the ATMs, so that it wont go out of cash during rush hour. Upon reviewing the bottleneck in the existing process, there are two different solutions proposed. One of them is inexpensive (les), and another is expensive but sophisticated. Both the options would meet the existing need of keep ATM cash filled during rush hour.Option-1: Low CapEx modelLead Branch Manager: One of the existing bottlenecks in the process is a single person (lead branch manager) making road trips to identify the cash level in different ATM (remote, and with the branch) every morning. Followed by, the branch manager compiles the cash disbursement list to send it to HQ. From the collect data (mentioned above) - The average time for road trip of lead branch manager calculated

Pattern of delay can be established: weekly, monthly or seasonally. Example during winter delay is less than summer. As during summer the traffic is higher. Of course, some adverse weather in New England winter causes delay in travel time.

The pivotal question would be does lead branch manager has enough bandwidth to cover all the ATM. Also, there is a consideration that number of ATMs would be increases over next few years within the bank footprint. Based on the data, capacity utilization (Time spends to inspect ATMs by the manager vs. day of the week) matrix would be established (graph plotting to understand the capacity augmentation need) to determine the new man-power need. Man power needs can be met in two ways recruiting employee and split the workload vs. subcontracting the job. The value proposition to go for one over the other is determined by the TCO. For an employee to come at 8AM would imply everyday 1 hr. overtime. As per the bank policy, overtime rate is 1.5 times regular wage. The following calculation would be utilized to make the business case -Calculation:

Money spend=Subcontracting rate ($/hr) * # of hr needed

Money saved = Lead manager overtime rate (1.5 * regular wage) * # of hr

ATM cash forecasting: For each of the ATM, a daily demand log needs to be maintained to obtain the demand trend. The data collected would later be used for a regression analysis to forecast the cash demand (time series with seasonal index).Calculation:

Forecasted demand = b* Qty of cash + a

It is obvious that demand pattern of individual ATM would be different. Knowing the pattern of cash demand (D), HQ would be able to proactively order (cash reordering) the cash for those ATM that often goes dry. This business process change would eliminate lead managers report from the critical path of cash ordering. The new operational model would ensure majority of the cases ATM would not running out of cash.Calculation:

Projected Cash demand = Cash demand of the ATM in past year * Factor of Safety

Factor of Safety = f {proportion of customer increase, # of commuter increase in the area} From the above illustration, apparently ATM cash forecasting sounds pretty convincing. But, there is still possibility that some ATM can go dry. The reason could be new demand pattern evolution. Thus, ATM cash forecasting still would not completely eliminate the need of the lead managers supervision. This is a continuous monitoring of the inventory model. Moreover, lead manager daily cash inventory report would be use to perform a periodic re-tuning of the forecasting model. It is worth to remember that every order (delivery by armored carrier) cost (Co) the bank money (amortized value of the contracted amount). At the same time, cost of sitting on the unused cash (Ch) in the ATM for a prolonged period would hurt the bank in terms of liquidity, and theft risk. Thus, an optimal order size would need to be determined using EOQ model.Calculation:

EOQ = SQRT(2 * Co * D/Ch) // D Projected Cash demand Reorder point = m * d / EOQ

m = lead time (time between cash order to delivery) d = demand using forecasting model

HQ capacity and efficiency: As described in the existing process bottleneck section ATM cash disbursement request triage is another major bottleneck. If branch manager starts early option is implemented along without ATM cash forecasting model, then to meet the objective of the process ATM to stay loaded with cash in rush hour, HQ needs to start the office hour early. Starting early implies that they would be able to triage and notify the armored carrier to load the cash early. However, one needs to be cognizant about the capacity and the efficiency of cash services staff. Presently, only 3 stuff triage the 1200+ ATM data. Collection of the capacity and efficiency data of the cash services dept. would enable to understand the required staff augmentation level. Calculation:

Employee productivity = # of ATM triaged hr (by an employee)Employee productivity determination would enable workload distribution among employees (less efficient employee to most efficient employee).

Total ATM triage time = ATM to triage / # of employee productivityTime at which cash ordering starts = Employee start time + Total ATM triage time If the need is frequent, a decision needs to be made between hiring new employee vs. outsourcing part of the job. If the need is infrequent, then subcontracting could be an option. The decision criteria would be TCO analysis to determine what would be the cost to hire more employees vs. cost of subcontracting along with lost sale (customer attrition). Calculation Money saved (customer retention) = P * CM * RF * BLC

P = Revenue from a customer per product (checking account maintenance fee)

CM =% contribution to overhead (bank overhead, e.g. cash services salary, office overhead, armored carrier bill, etc.)

RF=repurchase frequency

BLC = Buyer life cycle (how often buy new product, e.g. IRA every year, upgrade checking account, open savings account, open money market, etc.)Option-2: High CapEx modelATM upgrade: Replace the existing ATM with more sophisticated ATM machine, where the upgraded ATM would systematically log the cash disbursement request to the HQ cash services dept system (in near real-time) based on a configurable cash level. A copy of the ATM cash disbursement request would also show-up on the lead branch manager dashboard for information (audit) purpose. It would eliminate the need of the branch managers early morning road trip. One of the obvious question may arise, why not ATM directly notify third party armored carrier service for the cash replenishment. The answer to the question is regulatory and compliance enforcement of US does not allow doing it. Upgrading the ATM is a multi-million $$ initiative from CapEx perspective. Only a few top notch US banks have this facility. This project must undergo the financial and operational feasibility studies. As part of the feasibility study, the break-even analysis required to be performed to justify the cost vs. benefit, and to prepare a TCO-TBO report for the leadership approval. It is also worth keeping in mind that upgrade in ATM system may imply higher OpEx. The reason of higher OpEx is originated from the higher depreciation cost of the high-end ATMs, higher network bandwidth, higher cooling cost, to name a few.Calculation:

CapEx = Cost to procure new ATM + initial cost to make new ATM up & running (new networking, new infrastructure, etc.) Salvage value from old ATM = ATMs individual salvage value

Break-even point analysis:

Net revenue = Fixed cost / contributory margin ratio (CMR)

HQ capacity and efficiency: Upgraded ATM does not solve HQ triage time. With the upgraded ATM, systems would send their respective cash demands in real-time to HQ system. If HQ doesnt change their start time, capacity, and efficiency model the problem of ATM running out of cash would persists. The solutions to this problem would be Breaking down the cash services operation hour into two shifts - First shift would start in the early morning at 5 AM. The second shift can start at noon. The workforce in the early morning shift would sort the cash disbursement request before the rush hour starts and notify to the armored carrier for delivery. If order arrives by 6.30AM to armored carrier, then 7 AM cash would be replenished. However, in this case can be surge in workload during morning shift (back orders from the last evening piled-up). Thus, rush hour cash shortage concern will be out of the picture. However, one needs to be cognizant about the capacity and the efficiency of cash services staff. Calculation:

Employee productivity = # of ATM triaged per day / hr (by an employee)

In order to meet the timeline on cash ordering, some of the workload needs to be distributed from the less efficient employee to most efficient employee.

Total ATM triage time = ATM to triage / # of employee productivity

Time at which cash ordering start = Employee start time + Total ATM triage time

Collecting the capacity and efficiency data of the cash services dept would enable to understand the required staff augmentation level. If the need is frequent, a decision needs to be made between hiring new employee vs. outsourcing part of the job. If the need is infrequent, then subcontracting could be an option. The decision criteria would be TCO analysis to determine what would be the cost to hire more employees vs. cost of subcontracting along with lost sale (customer attrition). Calculation Money saved (customer retention) = P * CM * RF * BLC

P = Revenue from a customer per product (checking account maintenance fee)

CM =% contribution to overhead (bank overhead, e.g. cash services salary, office overhead, armored carrier bill, etc.)

RF=repurchase frequency (how often buy new product, e.g. IRA every year, upgrade checking account, open savings account, open money market, etc.)

BLC = Buyer life cycleConclusion:

In the globalization era, every organization is striving to operate at a maximum efficiency to combat the competitive forces. Operations Management (OM) is an omnipotent discipline within the management, which deals with the design and management of products, processes, and services to yield maximum possible efficiency of an organization. It is worth mentioning that maximum efficiency drives maximum profit. Every business and its stakeholders strives to make profit. OM approach to deal with ABC bank customer attrition starts with the process itself. OM based process analysis starts with the data collection of the existing process; followed by analysis of the data to identify the process bottlenecks. Upon knowing the drawbacks in the existing process, better operating model options are proposed. As discussed earlier, both the options have ability of overcome the issue of ATMs are running out of cash. Having more than one option in front of the ABC leadership would enable them to lay the plan accordingly. In a short term, company can opt for option-1, and in longer term they can adopt option-2. As option-2 is more capital intensive than option-1. In reality, most of the cases senior leadership before embarking into a huge capital investment, they want to verify the effectiveness of the new operating model. In this case, option-1 opens up the door for the bank leadership to verify the process, before making major capital investment in more sophisticated model, option-2.