Ten Rules of Effective ATM Cash Management

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1 Ten Rules of Effective ATM Cash Management Brendan Doyle, CEO Cash Management Solutions

2 OVERVIEW ATM demand forecasting in most situations is relatively easy Too much focus is given to demand forecasting at the expense of other factors ATM cash management is complicated An ever changing operational and supply chain environment is difficult to deal with ATM cash management requires dynamic modeling & analysis High quality analytical work is the real key to success The cost of cash among deployers should be very similar But of course they aren t. In practice, there is only a material difference in costs at the extreme Cash management is not a labor intensive business It s surprising to see just how much time gets diverted to administration and poor supply chain performance Develop an accurate micro-prioritization model There will be many factors influencing a prioritization model and every customer will be different 6 7 8

3 Residuals. Does size matter? There is often an obsession with residuals. However, residuals are a consequence of cash management efficiency, not a driver Ignore everything else and concentrate on the cost of cash ratio The cost of cash ratio is calculated by adding up all the annual costs of putting cash into your machines and dividing this by annual cash withdrawals 4 5 Ensure that macro factors are also optimized To get to the optimum amored transport pricing available for your business you need to benchmark your specific requirements 9 When outsourcing, avoid conflicts of interest Cash management needs to be conducted in your best interests by a provider that is not conflicted 10 The CMS Difference 22 years of specialist experience in cash management has given CMS a unique perspective, producing exceptional results worldwide. Here, we discuss the key rules governing how we control ATM cash. By following these rules, the cost of keeping ATMs adequately stocked can be dramatically reduced while improving the end user experience. These rules impact on all strategic aspects relevant to an ATM deployer and will also direct day-to-day operational processes. In other words, they form the core philosophy of ATM cash management.

4 ATM demand forecasting in most situations is relatively easy Unlike many other areas of cash management, ATM demand forecasting is relatively simple. Forecasting demand for a standard ATM (using one currency, perhaps only two denominations, a limited capacity and regular customer withdrawals) should be relatively straight forward. By contrast, a financial institution using up to 140 currencies, multiplied by numerous denominations, in a highly volatile environment is much more complex. Forecasting is only one element of ATM supply chain management. 1

5 2 3 ATM cash management is complicated ATM cash management requires dynamic modeling & analysis ATM cash management is far from easy, an array of logistical factors affect ATMs. For example, the most effective way to operate an extensive fleet of ATMs is often to outsource functions to third parties. Hence, Armored Transport companies can have a huge influence on the performance of an ATM fleet. There is often little competition in most Armored Transport markets and the replenishment process can be very manual this combination means that lots of things can go wrong and when they do, costs can be high. Furthermore, ATM fleets can operate over extensive geographical areas resulting in a wide variety of issues and different operating processes. Other complicating factors can include the quality of ATM performance, the banking relationship and a plethora of other practical issues. This is often related to the physical operations of the supply chain or ATM, rather than related to cash demand. Hence, modeling and then operating each ATM efficiently - from ordering, to withdrawal from the bank, packing, transporting, loading, unloading residuals, transporting back to the bank, depositing - leaves plenty of room for error. Often, these inefficiencies are regarded as being out of scope by suppliers for cash management purposes. However, the effects on deployers are very much in scope and it is the planning, modeling and managing of such factors that brings significant efficiency to cash management and can produce huge benefits if successful. Given the array of logistical factors impacting ATM cash management, we are often suprised when we hear talk about the use of sophisticated mathematics in expensive off the shelf forecasting technology. As discussed in Rule 1, ATM demand profiles are relatively stable and easy to model. The real complication is logistical. Hence, some old-fashioned arithmetical tools are essential, but we have proven that it is the painstaking task of modeling and simulating variables - ATM by ATM - that matters. This requires skilled human insight and comprehensive computing power. When too much reliance is placed on forecasting software to solve all cash management issues, attention is diverted from the real problems and cash management is downgraded into a commoditized clerical role. High quality analytical work is the real key to success

6 Residuals. Does size matter? There is often an obsession with residuals. However, residuals are a consequence of cash management efficiency, not a driver. Just because one ATM fleet is running at lower residuals than another, doesn t mean that it is being run more efficiently. For example, a high volume ATM network with limited cash capacity in each ATM, high demand volatility and a need for regular replenishment may have higher residuals than a network with a low volume & low volatility fleet of ATMs that requires less replenishments. In this case, all things equal, the network with the higher residuals will be more profitable. 4 There are also problems with the way we see the statistics for residuals presented. The biggest example is removing all residuals that can be blamed on something else - machine fault, Armored Transport failure etc. This is done so often and in so many different ways that it is difficult to verify the validity of statistics presented. Rather than residuals, the two figures that are important to monitor are: Cash availability Overall cost of cash

7 5 6 Ignore everything else and concentrate on the cost of cash ratio The cost of cash between deployers should be very similar The cost of cash ratio is calculated by adding up all the annual costs of putting cash into your machines (including banking, Armored Transport, interest, insurance, cash management etc.) and then dividing this by the annual volume of cash withdrawn. This will give you a percentage rate. There is a natural trade-off between cash availability, the cost of cash and the marginal increase in cost rises with the level of availability required. Hence, you need to set a standard at which you do not want to see cash availability fall below. We usually work on the benchmark of 99.5% availability.this means that, at any one time, no fewer than 5 ATMs in 1000 can be out of cash. With this constraint, the cost of cash can then be easily measured against best practice by using simulation techniques, taking into account other constraints such as machine capacity. Within a single economy the cost of cash between deployers should theoretically be very similar, but in reality it isn t. Thinking logically, it can be seen that one deployer can operate on far less cost than another if they are prepared to accept lower cash availability. In practice however, there is only a material difference in costs at the extreme. In other words, a 99.9% cash availability should produce far higher costs than 99.0%, but perhaps surprisingly 99.0% will be very similar to 95% and below. This being the case, we still see that nearly all deployers exceed 95% cash availability, yet we also still see huge differences in costs. This suggests significant variations in efficiency levels. Case Study: Cost vs. Availabilty Excess costs can then be calculated for your network and the reasons for this analysed; reasons can include; too much Armored Transport, supplier pricing too high, banking costs too high, too much cash in the supply chain and interest costs too high to name but a few. Pinpointing where these excesses are can form the basis of a cost reduction strategy. Variations in efficiency levels present opportunities to reduce costs Company 1 Company 2

8 Cash management is not a labor intensive business Our first question when we visit clients offices to see how they manage cash internally is usually... what are all these people doing? It s surprising to see just how much staff time gets diverted to adminstration and poor supply chain performance. Little effort is put into prioritizing ATMs and when it is, the prioritization process is too clumsy and often plain wrong. So, huge amounts of time is devoted to the wrong tasks at significant opportunity cost. 7 Cash management requires highly skilled, highly numerically competent individuals overseeing complex computing models. They should focus on adjusting those models to changes in the operating environment, such as demand changes or supply chain changes and the key objective should be to improve productivity and availability.

9 8 9 Develop an accurate micro-prioritization model Ensure that macro factors are also optimized While there will be many factors influencing a prioritization model and every customer will be different, the process should remain the same. By developing a simulated model for each ATM, we can calculate the optimum operational model taking into account the two factors: Availability Cost From there, we can measure the efficiency gap between current operation and optimal in order to establish a ranking of ATMs. This enables us to develop an ATM by ATM cost-benefit analysis to underpin our prioritization and produce the best results from our optimization strategy. Rule 5 touched on some of the macro factors that impact cash management. For example How much do you pay for your Armored Transport? is a familiar refrain between deployers. But this is almost like comparing apples and oranges. Armored Transport prices are dependent on factors such as the amount of cash delivered each time, insurance, number of services, trunking costs, the number of banking vaults, days of the week your ATMs are serviced, capacity and market conditions at the time, etc. To get to the optimum Armored Transport pricing available for your business you need to benchmark your specific requirements to the marketplace and that requires expert analysis. Other macro factors include contracts for banking & cash provision and interest costs. We find that putting real effort into fully understanding the competitive advantage that can be gained from seemingly marginal differences, can deliver fundamental results. The beauty of ATM cash management is that continuous, incremental improvement can be achieved and easily measured

10 10 When outsourcing, avoid conflicts of interest X Cash management needs to be conducted in your best interests by a provider that is not conflicted. For example, outsourcing to a bank could be problematic if the bank generates more revenue the more cash you order and return. Furthermore, if the bank is responsible for funding there may be a beneficial interest for them in maintaining high cash balances across your network. Similarly, Armored Transport is a capital intensive business which benefits from high volume trading. By charging per visit, the Armored Transport company will benefit if you order cash more often than you should. In addition, outsourcing cash management to any business with an interest in your supply chain can often lead to a commoditization of the process as the suppliers lack the expertise or interests in what they might regard as a non-core activity. Therefore, when outsourcing cash management you should choose an independent partner who has no conflicts of interest. Cash management should sit independent from the supply chain

11 And finally... About the Author This white paper was written by Taken together, the rules presented here provide the framework for sophisticated management of ATM cash. This framework provides optimal results across the varied constraints that ATMs are subject to. Through optimization of cash management, considerable competitive advantage can be gleaned. As deployers across the world see their competitors move toward this optimum, the relative risks of poor cash management performance grow. By understanding and implementing these rules, CMS has become recognized as a leading outsourced provider of cash management services. Our expertise has given our clients vast cost savings and greatly improved performance, allowing quicker growth and improved profitability. Brendan Doyle, CEO Cash Management Solutions (CMS) Brendan Doyle founded CMS in 1991 following his MBA at Manchester Business School. Since then, Brendan has gained over 20 years experience operating within the cash industry and has developed solutions for industry leading clients in 25 countries worldwide. Brendan is also a regular guest speaker at numerous conferences related to cash, most recently speaking at industry events in Dubai and London. If you have any questions regarding this white paper or any questions relating to cash management please contact: Brendan Doyle, CMS bdoyle@cms-cashmanagement.com

12 White paper written and produced in house by the team at Cash Management Solutions 111 West Jackson, Chicago, Illinois