Capital Optimization & Logistical Constraints: Banks and Supply Chain Management

Ferran Frances-Gil

A common mistake when we’re defining capital management is limiting its scope to portfolio management. In fact capital management has a broader scope which includes portfolio management. But as we’ve seen with the examples of Kantox or in-house banking, business processes management is as important for capital management as portfolio management.

A particular opportunity for improvement in business processes applied to capital management is the management of physical currency.

Management of physical currency presents several challenges for Banks:

• Very high storage costs.

• Cost of opportunity for non-invested capital. Currency in branches and ATMs is not producing any profit, in times of high liquidity constraints this is a very expensive resource that banks can’t afford wasting.

• Very high transportation costs.

• Availability of cash is a very sensitive matter and consequently high safety stocks levels are required for guaranteeing customer satisfaction.

• Physical Currency demand can be modelled according to statistical patterns.

In my case, before working in banking I worked for more than 10 years as Supply Chain Management Consultant with SAP for companies like Henkel, J&J or Sara Lee, and it’s clear to me that the challenges above are very similar, if not the same, as those confronted by other companies with complex distribution channels (consumer, electronics, etc.)

A particular disturbing issue in supply chain management is the bullwhip effect – It refers to a trend of larger and larger swings in inventory in response to changes in demand. Inefficient management of the supply chain with limited visibility increases variability of the client’s demand one moves up the supply chain, as small changes in consumer demand can result in large variations in orders placed upstream. As a consequence, the company supports higher costs and offers poorer service.

Unfortunately it’s not easy to find bankers who are aware of the potential improvements of applying supply chain management knowledge for capital optimization. For instance, two weeks ago I was discussing this topic with a friend, a senior executive in a retail bank in Asia. He was aware of the opportunity that supply chain management represents for reducing transportation costs, but it was not obvious to him that this was also a component of capital management.

SAP is the recognized leader in supply chain management and the lessons learned managing supply chains in other industries are very useful for banking. At least it worked for me – in the end my friend admitted that efficient capital management requires also managing the logistics constraints of physical currency distribution.

By the way, if you want to know more about what SAP can offer in this area, you will find more detailed information here.

About Ferran Frances-Gil

Ferran is Principal Consultant of SAP Banking in SAP North America, specializing in Analytical Banking. In 2008 he founded an SAP Banking community on Linkedin (which he welcomes you to join.) Additionally he’s taught SAP strategy, information and knowledge management in several universities since 1998. Connect with Ferran on Linkedin