The objective of the research was to establish a scientifically-based decision makingprocedure for determining the amount of cash to be held at a cash pointat any time without compromising the customer service level or incurring unduecost. To reach the objective, the problem was divided into the followingsubproblems:
To determine the cost parameters describing the nature of the problem ofcash provision in South Africa.
To investigate the characteristics unique to South African retail banking.
To determine the nature of the demand distribution for a cash point.
To develop a forecasting method appropriate for retail banking, althoughit was clearly stated that the methods used were specific to the branchstudied.
To investigate the existing order policies used by retail banks, as well asalternative order policies, with the aim of improving the cash replenishment process.
As a result of the investigation a generic decision model was developed which may be used to improve the process at branch level for retail banks in South Africa. Some suggestions were also made regarding the implementation and maintenance of the model.
To investigate the cash replenishment problem, the cooperation of one of theleading retail banks in South Africa was obtained. A typical branch was selected.The total withdrawal, deposit patterns and the withdrawal patterns at theautomated teller machines (ATM's) for a three month period during 1998 wereinvestigated. The cost parameters relevant to the cash replenishment processwere quantified. The approach followed was based on the classical inventorytheory where the total cost of carrying inventory comprised three cost categories,i.e. storage cost, supply cost and shortage cost. Since the banks do not quantifythe shortage cost, assumptions regarding the scope of the shortage cost had tobe made.
The next step was to determine the cost of the existing order policy followed bythe branch. This figure was used as a benchmark once alternate policies wereinvestigated. The investigation resulted in alternate policies which significantlyreduced the daily cost involved in carrying inventory as well as reduced theaverage amount of cash carried at the branch.
It was also shown, that the branch should consider using an appropriateforecasting method, since once forecasting was combined with an appropriateorder policy, it was possible to reduce the cost of carrying cash inventories evenfurther.
In conclusion, the research report suggested an implementation plan to befollowed at branch level pointing out that certain changes to information systemswere required. In addition, training needs were identified to enable the branchoperations manager to successfully use the decision support model.
A comparison was drawn between the existing approach followed at the branch(which is mainly experience-based and largely of a random nature) to theproposed method. It was shown that the daily cost of carrying cash inventory could be reduced by 13 per cent per day. This represented a daily bottom linecost reduction ofR358. At the time that the research was carried out, this retailbank had 75 similar branches. Should the saving at this representative branchbe extrapolated, it shows a potential saving of R8 000 000 per year at thiscategory of branch. It was further shown that the average cash inventory at thisbranch could be reduced by 52 per cent using the proposed method.
The study was limited to an investigation at one particular branch of a leadingSouth African retail bank. The figures used to describe cash movements at thebranch were of an extremely sensitive nature and were fairly difficult to obtaindue to the way in which transactions are reported. The accuracy of the dataprovided by the branch could not be verified, but had to be accepted at facevalue. Although a particular case was investigated, a concerted effort was madeto point out how the methodology may be used in the generic situation.
During the period under review, the branch relocated to a complex across thestreet from its previous location in a busy shopping mall. This had a directimpact on the ATM withdrawal patterns at the two ATM's located at the branch.In addition, soon after the research was carried out, a number of other branchesof the same retail bank were consolidated into this one particular branch. Thiswould impact on the validity of the branch specific factors determined as partof the research.
The study proved the applicability of industrial engineering principles in aservice environment, where the added value of having the optimum cash amountavailable when required would impact directly on the bottom line of the bankand thereby enhance share-holder value. In the changing environmentconfronting retail banks, enhanced share-holder value is of the utmostimportance to increase competitiveness and long-term survival.
© University of Pretoria 1999
Please cite as follows:
Adendorff, SA 1999, A decision support model for the cash replenishment process in South African retail banking , PhD thesis, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd- 11092006-150852/ >
H160/th