[Operational Management]

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Executive Summery

Operational management is a subject which applies for every organization as well as for individuals, from accomplishment of organizational goals to run the day-to-day operational activities.In this report author will discuss an operational issue which face by a leading Sri Lankan financial institute. And currently they are experiencing some bottleneck effects along their lending process and it started to cause long delays which lead to unsatisfied customers, time waste as well as frustration among staff members.

Through this report author will describe what the causes for process constraints are and propose a set of recommendations and processes with the use of operational management theories to overcome these issues.

Contents

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1 Introduction............................................................................................................................................4

1.1 Company Introduction...................................................................................................................4

2 Overview of the Problem.......................................................................................................................4

2.1 Current Loan Application Workflow.............................................................................................6

2.2 SWOT Analysis on DFCC Vardhana Bank and its Lending Process............................................7

2.3 The Organisation Structure Relating to Lending Operations........................................................9

3 Literature Review.................................................................................................................................10

3.1 Control Systems...........................................................................................................................10

3.2 GAP Analysis...............................................................................................................................11

3.3 GEMINI’s 4 R’s...........................................................................................................................12

3.4 Key Result Areas (KRA’s) and Key Performance Indicators (KPI’s)........................................13

3.5 Theory of Constraints..................................................................................................................14

4 Structured Solution to Enhance the Performance and Efficiency of the Lending Process with the use of Operational and Strategic Management Theories...................................................................................15

4.1 Identification of the performance gap..........................................................................................15

4.2 Change Management...................................................................................................................17

4.3 Use of control system...................................................................................................................19

5 How these changes would improve quality and/or customer focus.....................................................20

6 Recommendations................................................................................................................................21

7 References............................................................................................................................................23

1 Introduction

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1.1 Company Introduction

DFCC Vardhana Bank (DVB) is one of the Sri Lanka’s fastest immerging commercial banks with 56 main branches and 76 service centres, island wide. DVB is one of the subsidiary companies of DFCC Bank which is the Sri Lanka’s oldest and leading investment bank.

The services which provided by DVB can be divided in to four areas as corporate and SME Finance, Business Banking, Personal Banking and Investment Banking.

In year 2011 DVB reported a growth of profit (PAT) by 92.5 percent and growth of loans and advances by 73.9 percent. And now they are more focused on having streamlined operational activities with the aim of achieving greater efficiencies.

With the mission of being the most trusted and caring bank in Sri Lanka they are more concern on enhancing the customer satisfaction through efficient process management. The loan approval and disbursement process can be considered as one of the processes which need to be improved in order to achieve that goal.

2 Overview of the ProblemIn the banking business lending can be considered as the most important and critical function that bring profits to the organization. The lending process should be an efficient and smoothly running one, but the current process of the DVB one can observe some bottleneck effects which cause long delays which lead to unsatisfied customers, time waste as well as frustration among staff members.

Following work flow shows the current process of lending and its constraints. The red colour arrows show the flows which cause delays and following points can be highlighted as other constraints in the lending process.

No standard response times are established within the process.

In a process which runs efficiently one can observe standard response times and staff members are strictly following such guidelines. In the current lending process there are no such timelines or employee commitment. This can be considered as the main problem area which causes bottlenecks along the entire lending process.

Not having up to date technology

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In the current system one can observe duplication of work as well as some system constraints which cause by lack of system functionalities.

o Duplication of work

DVB Lending process use two IT systems, one for the approval workflow and another system for application processing. After obtaining the approval for a loan application, one need to manually enter the entire application details to the core banking system, but there are systems which allow transferring information from the one system to another without unnecessary manual work.

o System constraints

In the current system one can observe some system constraints which cause long delays. When a loan application forwarded by a branch along the approval process, system does not allow tracking the status of the application as well as it doesn’t allow reassigning of an application to another party without the help of the IT department.

Example – When Branch has forwarded the loan application to the Vice Precedent- Lending Operations and if he/she is on leave, branch cannot re-forward the application to a person who has same authority without the help of the IT Department. Branch need to contact the IT department and they will manually reassign the application as per the request which they receive from the branch.

Not having a mechanism to measure customer satisfaction

A mechanism which design to measure customer satisfaction is a must and this should be able to measure the external customer satisfaction as well as the internal customer satisfaction.

External customer satisfaction to measure the overall efficiency and the effectiveness of the current process and internal customer satisfaction to monitor the level of coordination and team work among departments.

2.1 Current Loan Application Workflow

Branch Credit Officer

Detail Credit Appraisal Certificate of Compliance List of Documents to be annexed Rating of the Internal Risk Rating System Balance Sheet

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Fo

When a loan application is being presented to the branch, the credit officer will start processing it. He/she will gather required customer information and run a background check on the customer. After completing the initial part of the lending process credit officer will forward the application to the branch manager.

Branch Manager

Review

Risk Department

Feed back – Rate Changers, Rating Changer

Approval Flow According to the DA Credit Admin

Application Processing and Loan Disbursement

Customer

Branch

Disbursement Memo

Forwarding of DocsRequest Amendments

Resubmission

Forwarding of Docs

Request Amendments

Forwarding of Docs for Approval

Disbursement Memo

Disbursement

Forwarding the approval for disbursement

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Branch manager will review the application and if he satisfied, he will forward the application to the risk department for further risk analysis, if not he will return the application for further modifications.

Risk department will analyze the customer and the purpose of the loan and they will resend the application with their comments. If they have given the green light, branch manager will forward the loan application along the approval line according to required delegated authority.

In this process management of the bank will decide whether to provide the loan or not. If they decide against giving the loan they will notify the branch with their remarks and branch will notify the customer. If the loan has been approved, application will be forwarded to the Credit Administration Department with a notification to the branch. Branch will inform the customer.

Application will be re-entered to the core banking system at the Credit Administration Department and they will release funds upon a request from the branch.

2.2 SWOT Analysis on DFCC Vardhana Bank and its Lending Process.A SWOT analysis is tool that helps one to evaluate the Strengths, Weaknesses, Opportunities and Threats involves in any business organization (U.S. Department of Agriculture & Risk Management Agency 2008, p. 2) and author has use SWOT analysis to understand the internal and external business environment of the DFCC Vardhana Bank and its lending process.

Strengths

A Branch network which covers the all parts of the island.

Backing of a well established business organization in Sri Lanka.

Specialization in lending products and related services.

Weaknesses

Not having proper up to date IT systems and processes.

Lack of customer satisfaction methods, bank should have external as well s internal customer satisfaction measures and methods.

Opportunities

Modify the existing loan processing system as well as the process into a modern system which can cause a threat to other competitors.

Market opportunity which created through political stability with the end of the 30 year old civil war of the country.

Threats

Unsatisfied customers which created through unnecessary time waste which caused by process constraints and it will lead to loosing existing customers of the bank.

Frustration among staff members which lead to internal conflicts.

Strengths

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The Branch network of the bank can be considered as strength of DVB and it has 56 main branches and 76 service centres which cover all parts of the country and they are in the process of increasing that numbers.

With these expansions there reach and delivery points will increase and create a competitive advantage above its competitors.

And the Backing of DFCC bank is a strength which creates trust and assurance about the bank among its existing and potential customers. DFCC bank has over 50 years of experience in lending and related services and DVB also can use that expertise in their operational activities as well as in the product development.

Weaknesses

Not having proper up to date IT systems and processes as well as lack of customer satisfaction method can be identified as the main weaknesses.

In order to convert these weaknesses in to opportunities bank has to upgrade their current IT system as well as they should introduce external as well s internal customer satisfaction measures and methods.

Opportunities

These can be seen as the market opportunities which created through the end of 30 year old civil war and the political stability. Lending products and opportunities started to widen with this.

The system modifications also can be turn in to an opportunity by introducing a system which can perform above all the other competitors.

Threats

According to the SWOT analysis one can observe main threats as the threat of losing existing customers due to unacceptable delays and conflicts and frustration among staff members which caused by system constraints and bottlenecks.

And through this assignment author has propose an action plan to overcome these threats and convert them in to market opportunities.

2.3 The Organisation Structure Relating to Lending Operations

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Following diagram gives a brief idea on the approval workflow at DVB.

Board of Directors

Head of Corporate Credit =SVP (CB)

Head of Personal Banking

Head of Branch Credit =SVP(BC)

Regional Manager

Regional Manager

Branch Managers

Branch Manager

s

Branch Managers

Senior -Manager=VP(CB)

Senior Manager=VP(BB)

Credit Manager

Credit Manger

Head of Business Banking= SVP

(SME & BB)

Senior Manager

Branch Managers

Credit Cards

Head of Credit Risk Appraisal

HOIHOCR

Director / CEO (or EVP Lending)

CC

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3 Literature Review

3.1 Control SystemsA control system is a mechanism designed to convey information to assist the initiation and

regulation of behaviour. To be successful, a control system should have the following

characteristics.

Flexibility: A control system should be flexible so that the entrepreneurial spirit and

innovations within the organization are not hindered.

Accuracy: A control system must provide accurate information for management

decision making.

Timely: A control system must provide information in a timely manner.

The types of control systems in an organization can be categorized into three main areas.

a) Output control: This type of controls involves managing the problems after they have

occurred. Such control systems are only able to identify problems through the measurement of

outputs against the standards. The main disadvantage is that such control systems are unable to

prevent the problems from occurring and would only succeed in implementing corrective

actions, after the problem has occurred. (E.g. Financial measures, budgets, Goals)

b) Behaviour control: This type of control systems involves ensuring the preferred behaviour

patterns among the employees. Supervision, Employment rules and standard operating

procedures are examples of this type of control systems. These are formal controls that have been

documented, and are part of the bureaucracy.

c) Social control: This type of control systems also involves ensuring the preferred behaviour

patterns. However, these differ from behaviour controls in that social control systems can be

informal as well as formal. Social controls can be defined as the ability of individuals to structure

behaviour of others in accordance with own preferences. Reward power, coercive power, and

personal charisma are some of the ways in which individuals exercise control over others in an

organizational setting.

But in this assignment author is focusing only on output controls and behavioural controls.

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3.2 GAP AnalysisThe difference between a future desired out come and the probability of achieving it create a gap between those two results (Franklin 2006). The future planning and process developments should be aimed to minimize or close these gaps.

This gap may be a growth gap, a share holder value gap, a performance gap and so on. Through the gap analysis it helps to identify the difference between the expected outcome and the outcome according to the current performance.

Following diagram shows the concept of GAP analysis,

Number one shows the current performance of the process or the organization, number two shows the expected future outcome and number three explains the desired future stretched position which include the strategies, tactics and incentives for achieving this position.

In the current business environment most of the organizations shows a negative gap, which means that future desired outcome is not been reached.

Through this assignment our main focus is given to closing the gap between the current performance and the desired future performance which notify by number one and two.

The stretched future position

The stretched strategic gap

The desired future position

The strategic gap

The current position

3

2

1

Perf

orm

ance

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In order to close this gap author will analyse,

Why the gap exists The probability of closing the gap and the time table for closing such gap Strategies to be implemented

Therefore this concept is used to evaluate the current performance as well as to recommend strategies to overcome current operational performance lapses.

3.3 GEMINI’s 4 R’s

This approach is used to manage the changes which required by organizations or their processes, in this assignment this process is used to introduce a new loan processing method as well as to restructure the current procedure.

This approach discuss the requirements need to be fulfilled for a successful strategic transformation. It can be described as follows,

Reframing – this step include the reframing of organizational mind and a development of a monitoring system to monitor the change which conduct in order to achieve the desired outcome.

Restructure – this include the restructuring of the organizational and work flow which subjected to the change. This can be the whole organization or a single process of it.

Revitalise – through this step it gives the focus in to the current market environment and look into latest developments in the market and suggest new ways and methods to introduce the required change.

Renew – through this step Gemini proposing a learning organization with consists of a reward structure as well as individual learning programmes.

This can be considered as a simple approach to achieving change.

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3.4 Key Result Areas (KRA’s) and Key Performance Indicators (KPI’s)

KRA’s can be seen in existing system as well as they can be developed for an implementation of a new process in order to monitor the performance or for the successful implementation of the process.

Examples for Key Result Areas – Loan application processing, Loan approval, Customer risk analysis and Loan disbarment

KPI’s can be identified as a method which used to measure performance. And these are used to measure performance of an organization, process or a change management process.

Performance can be measured for each process through a tracking system which developed by using KPI’s. Followings are some examples for KPI’s in a lending process.

KRA KPI

Loan application processing Within one working day application should inserted in to the system and forwarded for the approval

Loan approval Within three working days application should forwarded to the next approval level or returned for further modification

Customer risk analysis Within one working day Risk Department should provide a feedback on the application

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3.5 Theory of Constraints

In the theory of constraints it identifies the weak link in the organization or in the process and provides solutions to strengthen that link. In other words this helps to identify the most important bottleneck in processes and systems, so that the organization can deal with it and enhance organizational performance.

This theory can be use to provide solutions to management of processes, inventory, supply chain, product development and project management (Ronen 2005).

Theory of constraints propose a five step method which used to identify bottlenecks and provide solutions and these can be described as follow,

Identification of the system constraints Decide how to exploit the indentified system constraints Subordinate everything else to the prior decisions Elevate the system’s constraints by introducing a change If the constraints are not resolved go back to the step number one

In this assignment author is using this theory to understand the bottlenecks in the lending process of the bank and provide solutions to overcome these lapses.

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4 Structured Solution to Enhance the Performance and Efficiency of the Lending Process with the use of Operational and Strategic Management Theories

To provide a structured solution to this issue author have selected GAP analysis to understand the gap between the expected outcome and the current performance of the loan approval process and the theory of constraints used to determine the causes for the performance gap, in other words what are the bottlenecks in this process. And it also provides the foundation to seek solutions to existing constraints and apply fixes to get the expected outcome from this process.

Gemini’s 4 R’s are used to manage the change which occur within the organization, which arise with the modifications to the existing loan process and technological change. KRA’s and KPI’s will be establishing to monitor and measure the implementation of the new process and its performance.

4.1 Identification of the performance gapFor this gap analysis author has only planning to identify the performance gap and not going to the extent of identification of the stretched future performance gap. Following diagram provides a picture of the gap analysis which done on the whole lending process.

The desired future position

The performance gap

The current performance of the lending process

Perf

orm

ance

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Through the gap analysis author has identified following as areas which contains performance gaps,

Problem Area Nature of the performance gapFeedback from the Risk Department Performance gap can be identified in the form of time

and the nature of the decisions (same type of customers getting different risk ratings).Currently there are no standard maximum time limits to provide the customer risk rating as well as there are no standard procedure to rate the customers.

Approval Process Depending on the nature of the loan and the amount, approval process will be different. But in this process one can identify performance gaps in the time and the system functionalities. Currently there are no standard maximum time limits to review the loan applications and long delays can be observed.Performance gaps in system functionalities also can be observed.

Delays in the Credit Administration Department

All the loans are processed in this department and because of lack of standard response times delays can be observed.Performance gaps in the system functionalities also can be identified.

Loan Disbursements Lack of standard response time and duplication of work.

According to the above table one can easily understand that there is a performance gap between the expected outcome and the current performance. Lack of standard time limits for task completion, lack of up to date system functionalities and lack of standard customer measurements can be seen as the reasons for the current performance gap.

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Use of theory of constraints to propose solutions to overcome these issues

The problem areas which identified through the GAP analysis can be taken as the constraints under the theory of constraints. Then the next step is to decide how to exploit the indentified system constraints.

Some of the identified constraints can be overcome by introducing standard response times, for example urgent loan applications need to be responded within 24hrs and regular ones need to be responded within 72hrs.

Others can be address by introducing modified and new systems which enhance the efficiency of the whole process as well as in the whole organization.

Step number three is to help the above decision by allocating organizational resources. Through this process standard maximum response times will be established and few technological changes also will take place.

Step number four is to introduce changes to the current process which will be addressed through the Gemini’s 4 R’s approach.

Step number five is to evaluate the current performance and if still constraints can be seen go back to step number one or if constraints were resolved document and application of the modified system. For the performance evaluation one can use KRA’s as well as KPI’s.

4.2 Change Management

For the purpose of change management author is planning to use Gemini’s 4 R’s approach and it provides a simple framework to introduce change to a process or to an organization.

First step is Reframing and it includes the reframing of organizational mind and a development of a monitoring system to monitor the change. In this scenario peoples mind set need to be refocused to work on tight deadlines and achieving targets. This can be achieved systematically by including these in to their job descriptions as well as taking them as measurements for performance evaluation in their mid year and year end appraisals (Simms 2005).

Example – urgent loan applications need to be reviewed or rated within one working day and regular ones need to be completed within three working days.

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Adaptation to new systems also needs to be considered, for this purpose organization can introduce and develop new staff training and development programmes to enhance the skills of their employees as well as to explicate them on the importance of the new system development.

Step number two is Restructure; this includes restructuring of the organization or the workflow. Under this author is focusing on achieving performance enhancement through restructuring of the current lending workflow. Restructuring will done in the form of introducing new standard response times, new system application to use in the application approval process and introducing customer surveys to measure the internal and external customer satisfaction.

Step number three is Revitalise and it describes the use of new technology and methods. The current workflow will be modified with the introduction of a new loan processing system which is a business process management system. And it will allow to identify the bottlenecks and avoid duplicate work which done under the current system.

Step number four is Renew which describe creating a learning organizational culture. All the staff members will be trained on the new system application and they will be given proper notification on the process modifications. This will be a continues program with an evaluation and rewarding mechanism.

Use of Key Result Areas (KRA’s) and Key Performance Indicators (KPI’s) for performance evaluation

First whole process will be divided according to key result areas and then they will be assign key performance indicators for performance evaluation.

Following table will provide detail information on the KRA’s and KPI’s which implement under the new monitoring system.

Key Result Areas (KRA’s) Key Performance Indicators (KPI’s)

Initial Loan Processing Credit officer at the branch need to complete the initial stage of the loan process within three working days after the receipt of the loan application. He should forward the application accompanying the other supporting documents to the Branch Manager.

Branch Manager Review Branch Manager needs to review the

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application within two working days after the receipt of the application. He may forward it to the Risk Department or resend it to the Credit Officer for further completion

Credit Risk Rating – Risk Department Urgent applications need to be reviewed within one working day and regular ones need to be reviewed within two working days.

Approval Process Loan application will be forwarded along the delegated authority depending on the nature, amount and the tenure of the loan. Each review should be completed within three working days.

Loan Processing at Credit Administration Department

Every application should be completed within the day which they receive them and disbursements also need to be fulfilled within 3Hrs.

Entire Application Process Entire application process need to be completed within two weeks of the receipt of the application and need to maintain zero level of customer complaints.

These KPI’s can be monitored through the new business process management system and operations department will look for constraints and inform relevant departments to take necessary corrective actions.

4.3 Use of control system

Through the process modifications author is recommending output and behavioural controls. These controls will be flexible and will help to provide timely and accurate information to the relevant parties. And these controls will be discussed under recommendations.

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5 How these changes would improve quality and/or customer focus

With these suggested changes current lending process will be automatically transform in to a customer friendly as well as an efficient and effective one.

Through the suggested process improvements and new system implementation the bottlenecks of the lending process can be identified much more easily and solutions can be provided without any delays. This will help the bank to maintain high quality and rapid delivery times for their lending products. Sri Lankan banking market can be considered as an oligopolistic market with smaller number of market players which provide similar type of products. With these improvements DVB can become a major player by providing a quality and fast services to its customers.

With the introduction of customer surveys at the end of the loan disbursement, bank can monitor the overall customer satisfaction. This will automatically divert the focus of staff members from product focus to customer focus.

When departments start to rate themselves, they will start to think more on the quality of their work and try to complete their work before deadlines other than just completing their work. This will lead to quality improvements in the entire process.

With all of these modifications in place, current lending process will be transform in to an efficient operational process which delivers quality outputs which aim to provide 100% satisfaction to the customers.

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6 Recommendations Following were identified and discussed as problem areas of the current lending process,

Lack of coordination among departments

Not having a tracking system or proper on time feedbacks

Not having standard turnaround times for process completions (bottlenecks can be observed)

Not having a mechanism to measure the customer satisfaction.

Lack of proper up-to-date technology

And following were proposed as solutions to above issues with the use of operational theories,

Through the GAP analysis author has identified time gaps and technological gap as the main constraints in the current system and following were recommended to improve these areas.

Establishment of standard response times and review times

Introduction of a new loan approval system which capable of monitoring bottlenecks in the lending process, provide accurate and timely information to the top management, allow tracking the status of the application and avoiding duplicate work by transferring loan application details directly from the approval system to the core banking system.

In order to increase the quality of the work and to achieve customer focus author has introduce a survey which will aim to measure the internal and external customer satisfaction.

From the new surveys it will monitor the customer satisfaction of the entire process through the survey which done on the external customers and through the internal customer survey departments will rate themselves and it will lead to improvements in the quality of the work and there coordination.

Introduction of KRA’s and KPI’s will allow monitoring the effectiveness of the process much more easily.

From above recommendations, current lending system can be transferred in to an effective and efficient operations process much more easily. And finally author has identified commitment of the top management as the main factor for successful transformation.

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Following diagram shows the new lending work flows with new KPI’s

Fo

Branch Credit Officer

Detail Credit Appraisal Certificate of Compliance List of Documents to be annexed Rating of the Internal Risk Rating System Balance Sheet

Branch Manager

Review

Risk Department

Feed back – Rate Changers, Rating Changer

Approval Flow According to the DA Credit Admin

Application Processing and Loan Disbursement

Customer

Branch

Disbursement Memo

Forwarding of DocsRequest Amendments

Resubmission

Forwarding of Docs

Request Amendments

Forwarding of Docs for Approval

Disbursement Memo

Disbursement

Forwarding the approval for disbursement

Three working days

One working day for urgent requests, two working days for regular applications

Three working days per Authorization

One working day

Three working days

One working day

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7 References

Boaz Ronen (2005). The Theory of Constraints: Practice and Research, Human System Management. 1. ed. IOS Press: IOS Press.

Charles Montgomer (ed). (2012). Multiunit Leadership: The 7 Stages of Building High-Performing Partnerships and Teams. eBookIt.com: eBookIt.com.

U.S. Department of Agriculture & Risk Management Agency (2008). SWOT Analysis: A Tool for Making Better Business Decisions. eBookIt.com: Google eBook.

DFCC Profile [online]. (2011). Available from: &lthttp://www.dfcc.lk/dfcc-profile&gt. [Accessed 05-January-2013].

Financial Reports [online]. (2011). Available from: &lthttp://www.dfcc.lk/investor-relations/annual-reports&gt. [Accessed 05-January-2013].

Helen Simms (2005). Organisational Behaviour and Change Management. 1. ed. University of Cambridge: Select Knowledge Limited.

Maren Franklin (2006). Performance Gap Analysis: Tips, Tools, and Intelligence for Trainers. 1. ed. United States of America: American Society for Training and Development.