Fiserv

Cash is the number one form of payment in the United States, used in 62 percent of retail transactions. The amount of cash in circulation―USD878.8 billion at the end of 2010—is growing at the rate of 10 percent per year because of the increasing number of consumers who have abandoned their credit cards during the recession and now pay for purchases in cash or with debit cards.

As the amount of cash in circulation rises, banks are increasingly challenged to have enough cash on hand to meet demand without stockpiling too much of this non-earning asset. For instance, the widespread use of Automated Teller Machines (ATMs) has created a replenishment problem for banks. Globally, banks want to replenish ATMs on a just-in-time basis, to minimize the number of armored courier deliveries and the number of out-of-cash situations. However, it has been difficult for banks to arrive at a calculation that can be performed quickly and automatically to satisfy the numerous variables and constraints involved.

Similarly, a problem for the largest banks involves calculating how much cash should be vaulted for storage and how much should be sent back to the U.S. Federal Reserve Bank to avoid the cost of handling and minimizing armored courier deliveries. A three-year old Federal Reserve rule aimed at reducing “cross-shipping,” or buying and selling the same denomination bills within the same calendar week. This rule imposes a $5 recirculation fee per bundle cross-shipped in excess of 875 bundles in each zone or sub-zone. This makes it particularly difficult to determine the least expensive way to warehouse excess cash.

Reducing expenses for the cash supply chain

Fiserv, Inc., based in Brookfield, Wisconsin, with 20,000 employees around the world, helps its customers solve complex financial challenges with information management and electronic commerce systems. The company has more than 16,000 clients worldwide including banks, credit unions and savings banks of all sizes.

“Reducing expenses at all points for the cash supply chain has been an elusive goal for banks, until now,” says Brian Jorgenson, vice president, product management for Fiserv. “Most traditional methods for managing cash at the branch level, vaults and ATMs involve spreadsheets, cash limits set years ago or, in some cases, guesswork. What most institutions are realizing is that traditional methods aren’t working. They are looking for methods to streamline and automate the process, and bring in more computational power.”

Fiserv discovered that IBM® ILOG® CPLEX® Optimization Studio provides the best solution for solving the banks’ ATM replenishment and vault inventory optimization problems. “IBM ILOG CPLEX Optimization Studio provides access to powerful mathematical programming and constraint programming solvers,” says Jorgenson. “It enabled us to solve problems involving multiple variables and constraints using robust, high-performance algorithms and come up with answers quickly.”

Choosing the right ATMs to service, every day

There are approximately 400,000 ATMs in the United States, and some of the largest banks have up to 20,000. How do they decide which cash points to replenish on a particular day?

With IBM ILOG CPLEX software, the banks construct a problem consisting of multiple decision variables representing cash deliveries to the ATMs. While the ideal would be just-in-time delivery, in reality, there aren’t enough armored couriers to deliver to each ATM.

Truck and ATM capacity are real constraints. And not all ATMs are equal—the cash usage, customer impact, location, and costs are all factors of cash replenishment. ILOG helps to determine which ATMs to service given the following business rules:

• Cash balances of each cash point
• Predicted amounts that consumers are going to be depositing and withdrawing on the particular day (this information is provided by business intelligence software integrated with the ILOG application)
• Currencies and denominations in the ATM and if it matters that all of those currencies be stocked
• Cost of transportation
• Cost of holding funds
• How many cash points can be serviced per day
• The cost of running out of cash (i.e., the damage in terms of lowered customer satisfaction)
• Available replenishment dates and maximum days between replenishments

The ILOG solver selects which of the subset of ATMs should be serviced on a particular day, going out 35 days into the future.

20% - 40% reduction in amount of cash in ATM network

“Before ILOG, we used another tool,” says Jorgenson. “We let it run for three or four days and it was still cooking. It couldn’t solve the problem. With ILOG we can complete the calculation in two-to-six hours in a nightly window for the optimization process. ILOG is the only software we found that could do the job.”

When an ATM runs out of cash, not only does customer satisfaction suffer, costs go up as well. An emergency delivery costs approximately $200. The ILOG solution reduces the number of out-of-cash situations, increasing the availability of cash throughout the network. The solution also reduces by 20 to 40 percent the amount of cash in the network, which reduces the cost of storing excess cash, the number of deliveries, the number of people needed to service ATMs and the number of armored carriers needed.

“The banks want to lower their cost of cash in replenishing their ATMs, reduce their transportation costs and improve customer service,” says Jorgenson. “Now they can do that, thanks to IBM ILOG CPLEX, without having any industrial engineering expertise to run the application.”

Optimizing large bank inventories

Based on IBM ILOG CPLEX Optimization Studio, Fiserv’s Network Optimization Tool balances the costs of holding cash within the bank’s network of vaults and shipping costs back to the Federal Reserve, possibly including cross-shipping penalties. This sets up a lowest total cost solution for the bank across all its network of vaults and the Federal Reserve, factoring in the cost of armored couriers in either case, plus the cost of insurance.

The banks also need to replenish their own cash needs, which incur extra transportation costs and possible cross-shipping fees at the Federal Reserve. An armored courier delivery to the Federal Reserve costs $100 to $300, so reducing the number of these can be a significant savings.

Cross-shipping fees are attached to the highest denomination bill that the bank buys or sells—any other denominations are exempt. This opens the possibility of “piggybacking,” or including more cash for the same fee. It may be less costly to incur a cross-shipping fee if the bank can “piggyback” additional cash. The flexibility of IBM ILOG CPLEX Optimization Studio’s modeling capabilities makes it straightforward to capture these additional factors in the optimization.

Proven cost savings

In a six-month pilot for one of the nation’s top 10 banks with 58 vaults, the bank reduced cash inventories 35 percent, replenishment costs by 55 percent and cross-shipping fees by 63 percent. “The total cost savings for this top 10 bank was incredibly significant to this organization,” says Jorgenson. “Balancing the cost of transportation and the cost of vaulting and cross-shipping fees was really not possible manually or on a spreadsheet in the required timeframe, which was overnight. This is why IBM ILOG CPLEX is so essential to this process.”

For more information

To learn more about the IBM ILOG CPLEX Optimization Studio, please contact your IBM marketing representative or IBM Business Partner, or visit the following website: ibm.com/optimization

For more information on Fiserv, visit: http://www.fiserv.com

Additionally, financing solutions from IBM Global Financing can enable effective cash management, protection from technology obsolescence, improved total cost of ownership and return on investment. Also, our Global Asset Recovery Services help address environmental concerns with new, more energy-efficient solutions. For more information on IBM Global Financing, visit: ibm.com/financing