School of Commerce and Economics

Course Name: Retail Banking

Submitted by: Submitted to:

Ayushi Nair Dr. Iftekhar Khan

2021BCHO008
JLU06233
 Introduction

Banking and Inventory Management

In the world of business, two very important things are banking and managing
inventory (keeping track of the stuff a company has to sell). Even though they might
seem different, they are closely connected and play a huge role in how well a
company does. This report looks at both banking and inventory management,
explaining why they matter and how they work together to make a business
successful.

Banking in Today's World

Banks have changed a lot over the years because of technology and rules. Today, you
don't have to go to a physical bank - you can do everything online or with your phone.
Banks do a lot of things, like keeping your money safe, giving out loans, helping you
invest, and managing risks. This report talks about all these things and how they affect
the stability and strength of a bank.

The Connection Between Banking and Inventory Management

Even though they seem different, good banking and smart inventory management go
hand in hand. Inventory management means making sure a company has enough of its
products but not too much. Banks help with this by making sure there's enough money
to buy inventory and run the business. This report shows how good banking can help
a company manage its inventory well, save money, and react quickly to changes in the
market.

In the world of business, two very important things are banking and managing
inventory (keeping track of the stuff a company has to sell). Even though they might
seem different, they are closely connected and play a huge role in how well a
company does. This report looks at both banking and inventory management,
explaining why they matter and how they work together to make a business
successful.
Banking in Today's World

Banks have changed a lot over the years because of technology and rules. Today, you
don't have to go to a physical bank - you can do everything online or with your phone.
Banks do a lot of things, like keeping your money safe, giving out loans, helping you
invest, and managing risks. This report talks about all these things and how they affect
the stability and strength of a bank.

The Connection Between Banking and Inventory Management

Even though they seem different, good banking and smart inventory management go
hand in hand. Inventory management means making sure a company has enough of its
products but not too much. Banks help with this by making sure there's enough money
to buy inventory and run the business. And in the same way all your money with the
bank acts as an inventory which they invest efficiently for everyone’s benefit.This
report shows how good banking and inventory management can help a company
manage to save money,succeed and react quickly to changes in the market.

The Retail Banking SC Model

In retail banking, cash can be considered as inventory in the SC. Therefore, CB

strategies for inventory control, handling/processing cost reduction, and enhancing
efficiency are required. The CB methods used in SC management involve four stages:
plan, source, make and deliver.

Plan

Planning entails demand forecasts to control excess inventory and enhance efficiency.

Excess inventory (cash) increases operational costs while shortages affect the reputation

and may lead to losses. Therefore, inventory planning can result in significant cost

savings.
A bank’s ATM or branch should always have cash, as shortages can affect the

institution’s public image. On the other hand, excess cash in an ATM should be used to

generate revenue. According to Silvestro and Lustrato (2014), the amount held in ATMs

is 40% in excess. Through proper planning of transfers, banks can maintain optimal cash

inventory and reduce costs while ensuring sufficient funds for customer transactions. The

table below shows the impact of planning on cash inventory.

Table 1: Impact of Planning on Cash Inventory

Demand planning Banking services industry

Demand forecasts Statistical models help replenish cash in ATMs and branches in a time series

Inventory planning An inventory plan based on the targeted customer transactions to maintain optimal cash

various ATMs and branch

Inventory Order quantities depend on the replenishment cycle to reduce operational costs

replenishment

Supply planning A cash distribution plan from the bank to ATMs depending on demand forecast

Source

The second stage of the model, i.e., sourcing, involves reducing the supplier spending to

save costs. Business organizations use collaborative approached to create value for their

products or services. Furthermore, firms consolidate their suppliers, increase their buying

power, and achieve uniform standards to reduce costs and generate value (Silvestro &

Lustrato 2014).

In banking, strategic sourcing relates to cash SCs, including cash processing and

transportation. A significant amount of the expenditure goes into the deployment of cash

distribution equipment and technologies and transportation of cash in the SC. Banks
employ diverse supply- and demand-side approaches to achieve strategic sourcing and

reduce costs. Examples of such strategies are summarised in the table below.

Table 2: Supply and demand sourcing strategies

Expense Supply-side strategy Demand-side strategy

Cash processing – Outsourcing cash processing to a third – Assess the utility of ATM deposit functio

services party

– Use offshore sup

Cash – Use a competitive supplier recruitment – Adopt equipment standards/specifications

equipment/ATMs process

ATM deployment – Utilise a competitive sourcing process – Deploy ATMs based on customer/location

– Implement periodic profile

replacements/upgrades

Courier services – Sourcing through a competitive process – Utilise courier services based on replenish

– use of local/regional supplier services requirements

Commercial banks tend to outsource their services to onshore and offshore suppliers.
However, industry-wide sourcing strategies can yield greater cost savings than regional
sourcing. Enterprise-wide sourcing of hardware and services has been shown to reduce
costs by up to 20% (Silvestro & Lustrato 2014). Outsourcing the cash management
function is common in the retail banking industry. For example, TD Canada Trust
contracted out the replenishment of cash in ATMs to G4S (Silvestro & Lustrato 2014).
The bank also outsourced the maintenance of its ATMs to HP to enhance efficiency and
reduce costs. Outsourcing of certain functions brings multiple advantages to banks.
Examples of advantages (cost savings) derived from outsourcing are summarised in Table
3 below.

Cash supply chain ATMs costs Third-party outsourcing costs Monthly savings Savi

ATM maintenance $165 $90 $75 45.5%

Courier services $208 $172 $36 17.3%

Cash processing $85.5 $64.1 $21.4 25%

Total $458.5 $326.1 $132.4 28.95

Table 3: Outsourcing costs and savings

Make

The common strategies utilised by most firms to cut costs include Six Sigma and lean

production. In the banking SC, lower costs are achieved through streamlining the

currency processing service (Silvestro & Lustrato 2014). Since banks handle a large sum

of cash, it is important to minimise the cost of processing it to achieve efficiency. Lean

operations in the context of banking mean reducing waste, expanding capacity, and

minimising maintenance costs.

It entails expanding the internal processes to minimise the duration between cash

collection and replenishment. Deploying ATMs that support cash replenishment based on

deposits can help improve capacity. Additionally, the use of predictive tools can help

banks anticipate cash flows to reduce maintenance costs.

Deliver

Firms use efficient logistics strategies to provide goods/services to the customer on time.

They use optimised routes to reduce costs and avoid inventory obsolescence. In the

banking industry, the key concern is delivering cash to the customer at the right time in

convenient locations. Another concern relates to the security and reliability of the

transportation system or third-party agency. The central aim of this industry is to

minimise the costs of delivering the product (cash) to the customer. Therefore, the

strategic placement of branches and ATMs can help optimise the delivery routes and

reduce costs.
Silvestro and Lustrato (2014) suggest two ways banks can optimise their logistics to

achieve efficiency in cash delivery, namely, network optimisation and logistics planning.

Banks can achieve lower delivery costs by optimising their branch and ATM placements.

The delivery of cash should involve optimised routes to save time and costs during

replenishment.

Another strategy involves outsourcing the function to third-party firms. This approach

can help reduce maintenance costs and achieve high productivity by focusing on the core

business objectives. Examples of core business objectives include risk, procurement,

treasury, and retail business. Adopting optimised logistics approaches can strengthen the

cash supply chain to support the core business functions as shown in the figure below.

Figure 3: The Cash

Supply Chain and Business Functions

Conclusion

Inventory (cash) management in banking requires optimised supply chains to achieve cost

reductions and enhance efficiency. Supply chain planning in banking entails the use of a

demand-driven logistics strategy to deliver products at the right time and reduce costs. It

also entails cost-effective sourcing of third-party agents and the use of lean and Six Sigma

principles to enhance cash flows.

Research Paper Insights

Reviewing the Landscape

Delving into the depths of academic realms, we have analyzed 4-5 research papers
that shed light on the nuances of banking and inventory management. By synthesizing
these valuable findings, we can extract a comprehensive understanding of the subject
matter.

Paper 1 - INFLUENCE OF INVENTORY MANAGEMENT ON

PERFORMANCE OF THE PRIVATE COMMERCIAL BANKS IN KENYA

The research delves into the relationship between inventory management practices
and the performance of private commercial banks in Kenya. Employing a descriptive
research design, the study involves surveying 142 procurement officers working
within the private commercial banking sector. The findings unveiled several
noteworthy insights.

Firstly, the influence of information technology on bank performance is substantial.

This means that the adoption and effective use of modern technology systems
significantly contribute to a bank's overall performance. These systems facilitate
various aspects of inventory management, streamlining operations and enhancing
efficiency.

Secondly, the study sheds light on the importance of warehouse management systems.
The research demonstrates that factors such as dynamic and static configuration,
optimum space utilization, and coordination of inbound and outbound logistics play a
notable role in shaping bank performance. Efficient warehouse management ensures
that inventory is well-organized and accessible, reducing costs and increasing overall
performance.

Thirdly, the research identifies inventory cycle counting as having an impact on bank
performance, albeit to a lesser degree. This practice involves regular and systematic
inventory counts, which contribute to accurate reporting and efficient resource
allocation.

Lastly, warehousing management systems are found to have a limited influence on

bank performance. While these systems offer benefits, such as improved throughput
rates and cost-effectiveness, their impact on overall bank performance is less
pronounced compared to information technology and warehouse management
systems.

In conclusion, the study highlights the positive correlation between effective

inventory management practices, including the adoption of technology and efficient
warehouse management, and the performance of private commercial banks in Kenya.
The research recommends that private institutions, especially banks, embrace these
practices to enhance their performance. Furthermore, it suggests the need for
additional research in other private sectors to validate and expand upon these findings,
emphasizing the broader applicability of these principles in diverse organizational
settings.

Paper 2 - Global Inventory Management - European Bank

Background: In 2014, a European bank faced challenges with managing its inventory
efficiently. It relied on Excel spreadsheets, which resulted in fragmented inventory
pools and a lack of real-time visibility across trading activities and locations.
Additionally, the bank needed to adapt to Basel III Liquidity Coverage requirements
and reduce liquidity costs due to its existing inefficient system infrastructure.

Project Award and Implementation: The bank chose 4sight as its solution provider for
a global inventory management system. 4sight integrated with ten external systems
used by the bank, including the Kondor + trading system, market and reference data
solutions, and liquidity and risk management systems. This integration allowed the
bank to have a real-time, unified view of positions across desks and custodians,
covering both pending and settled positions up to 30 days ahead. The Inventory
Manager provided flexibility in customizing positions within the hierarchy and
incorporated risk-related data.

Key Features: 4sight introduced a delta window, widely used by the bank, to track
daily changes and deltas from previous days. To meet Basel III Liquidity Coverage
Ratios (LCR), 4sight implemented Bloomberg Liquidity Class Feeds, enabling the
bank to categorize securities and display LCR levels in the Inventory Manager.

Benefits and Future Phases: Since implementing the 4sight solution in November
2015, the bank has experienced significant reductions in manual effort and time
savings. Daily reconciliations that once took two hours now require less than 10
minutes. This efficiency allowed the bank to adapt to regulatory changes without
increasing staff. The bank also gained a proactive approach to liquidity management
and reduced liquidity costs. Future phases of the project include enhancing multi-
market trading tools and further improving liquidity management.

Modules Used:

Inventory Ladder

Repo Module

Gateway Interfacing Tool

Note: This case study highlights how 4sight's solution helped the European bank
overcome inventory management challenges, improve liquidity management, and
achieve significant operational efficiencies while complying with regulatory
requirements.

Paper 3 -A Specialized Inventory Problem in Banks: Optimizing Retail Sweeps

Background: Banks in the United States need to manage their deposits at Federal
Reserve Banks. This is a bit like managing inventory for a business. But why is it
complicated? There are two main reasons.

Reserve Requirements: The government says banks must keep a certain amount of
their deposits at the Federal Reserve Banks. It's like a rule they have to follow to keep
the banking system stable. This rule applies to some types of deposits, like checking
accounts.

Day-to-Day Operations: Banks also need some of these deposits for their everyday
work. They use this money to provide services like wire transfers, ACH payments,
and clearing checks. So, these deposits are super important for banks to do their job.

The Problem: Here's the tricky part. The Federal Reserve doesn't pay any interest on
the deposits that banks have to keep to meet these rules. So, banks want to keep as
little money as possible in these deposits. They don't want to miss out on earning
interest elsewhere.

The Solution - Retail Deposit Sweep Programs: In 1994, banks came up with a smart
solution called retail deposit sweep programs. These programs help banks avoid the
rule by reclassifying some deposits as savings instead of checking. This way, they can
keep less money in the low-interest deposits.

How It Works: Imagine you have two bank accounts: one for checking and one for
savings. The sweep program moves money from your checking account, which has to
follow the rule, to your savings account, which doesn't. You don't even see this
happening; it's like magic!

But there's a catch. The government says you can only move money from savings to
checking six times a month. If you do it more often, you have to follow the rule again.
So, banks need clever computer programs to manage this and make sure they don't
break the rule.

Why It Matters: These programs have become really popular and saved banks a lot of
money. They've reduced the amount of money banks have to keep in these low-
interest deposits at the Federal Reserve. This means banks can use that money
elsewhere to make more profit.

What's Next: Some people are worried that these programs might make the financial
system less stable or cause problems for the Federal Reserve's policies. There have
been talks of changing the rules, but so far, these programs are still widely used by
banks.
So, in a nutshell, this case study explores how banks handle their deposits at the
Federal Reserve, aiming to minimize costs and follow the rules using clever programs
called retail deposit sweep programs.

: Components of Reserves and Account Balances at the Fed Source: Board of

Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H3/hist/h3hist2.txt

http://www.federalreserve.gov/releases/h3/hist/h3hist3.txt

Significance of the study

 Efficient Banking Operations: The study highlights the importance of efficient

deposit management for banks. By implementing retail deposit sweep programs,
banks can optimize their use of low-interest deposits, allowing them to allocate
funds more efficiently across their operations.

 Regulatory Compliance: Understanding and effectively managing reserve

requirements is crucial for banks to comply with federal regulations. Retail
deposit sweep programs provide a practical solution to navigate these regulations
while maximizing profitability.
 Monetary Policy Implications: The study raises awareness about the potential
impact of such programs on monetary policy, particularly in terms of federal
funds rate volatility. This underscores the interconnectedness of banking practices
and broader economic policies.

Learnings and Suggestions

Key Learnings

 Innovative Solutions: The case study illustrates how banks can come up with
innovative solutions to address regulatory challenges. Retail deposit sweep
programs represent a creative approach to managing funds within the constraints
of federal regulations.

 Data Challenges: The limited quality of data on sweep program activity

highlights the need for better data reporting in the banking industry. Improved
data collection and analysis can enhance transparency and regulatory oversight.

 Interest Rate Sensitivity: The study underscores the sensitivity of banks' strategies
to interest rate fluctuations. Banks must carefully consider the impact of changing
interest rates on their deposit management practices.

Suggestions: In my view

 Continued Monitoring: Banks should continue to monitor changes in federal

regulations and be prepared to adapt their deposit management strategies
accordingly. Staying informed about potential shifts in monetary policy is crucial.

 Enhanced Data Reporting: Banks and regulatory authorities should work together
to improve data reporting related to sweep program activity. This would enable
better analysis and oversight of these practices.

 Risk Assessment: Banks should conduct regular risk assessments to evaluate the
potential impact of deposit management strategies on their overall financial
stability. This includes assessing the implications of interest rate changes.
 Collaboration with Regulators: Banks can collaborate with regulatory authorities
to ensure that their deposit management practices align with the broader goals of
monetary policy and financial stability. Open communication can help address
concerns and potential issues proactively.

 Diversification of Strategies: Banks should explore diversified strategies for

deposit management, considering various scenarios, including changes in interest
rates and regulatory frameworks. This can help mitigate risks associated with
overreliance on a single strategy.

In summary, the study emphasizes the significance of efficient deposit management

for banks, compliance with regulations, and the potential impact on monetary policy.
Key learnings include the need for innovation, improved data reporting, and
sensitivity to interest rate changes. Suggestions focus on ongoing monitoring, risk
assessment, collaboration with regulators, and diversification of strategies to optimize
deposit management practices.
 References /Bibliography
https://studycorgi.com/banking-and-inventory-management/

https://www.researchgate.net/publication/
367403001_INFLUENCE_OF_INVENTORY_MANAGEMENT_ON_PERFORMA
NCE_OF_THE_PRIVATE_COMMERCIAL_BANKS_IN_KENYA

https://www.broadridge.com/_assets/pdf/broadridge-global-inventory-
management.pdf

https://s3.amazonaws.com/real.stlouisfed.org/wp/2005/2005-023.pdf