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Banking optimization for industrial and consumer products

March 22, 2023

Authored by RSM Canada LLP

Cleo L. Melanson, CPA, CA, CMA shared this article

ARTICLE | March 22, 2023

A bank or credit union can be considered a manufacturing company that is selling industrial business-to-business (B2B) and business-to-consumer (B2C) products. And applying an industrial products/consumer products lens can help you to rethink your bank or credit union strategy and transformation opportunities.

In 1984, Eliyahu Goldratt and Jeff Cox wrote "The Goal." It is a novel that presented a new approach to manufacturing and operations management using the theory of constraints (TOC). The story is set in a manufacturing plant and follows the journey of the plant manager as he attempts to turn around his struggling business by applying TOC principles.

The key idea behind TOC is that every manufacturing system has a constraint or a bottleneck, that limits the system's overall performance. The goal of the business, then, is to identify and manage this constraint to improve overall performance. The novel explains how to use TOC to optimize production and manage the flow of materials and information throughout the entire supply chain. The novel's impact on business was substantial—it changed how companies are operated. TOC has been widely adopted in the field of production and operations management, and it continues to be taught in business schools and used in industry today.

Over time, this approach has evolved and it is more integrated with modern business management concepts such as Lean and Six Sigma. Today, TOC is more of a holistic approach in manufacturing and operations management. Many companies have adopted this integrated system to optimize their operations to gain significant improvements in their productivity and efficiency, and to achieve sustainable business performance.

How do TOC and “The Goal” relate to banking? What does a bank sell? What is the product? Money and money-related services, of course.

To this production of money, we can apply the concepts of TOC using motion analysis to identify and overcome bottlenecks, or constraints, in the organization's processes in order to improve efficiency and effectiveness.

Identifying the constraint 

The first step in applying TOC to a financial services organization is to identify the bottlenecks in the organization's processes.

This identification can be carried out for a specific department, product, or service. Once the constraint is identified, the organization can focus its resources and efforts on improving that specific area in order to improve overall performance.

The following significant business, department, and operational processes should be considered:

  1. Customer/member acquisition (acquiring new customers through various channels such as online, branches, and partnerships) may be hampered by the lack of effective marketing strategies, difficulties in identifying and targeting the right customer segments, and a lack of efficient onboarding processes.
  2. Deposits and withdrawals (handling transactions, managing ATMs, and other self-service options) are often constrained by a lack of branch accessibility, insufficient staffing, or systems that are slow or unreliable.
  3. Lending (assessing and approving loan applications and managing the loan portfolio) is adversely affected by a lack of credit scoring models, long loan processing times, or an insufficient pipeline of loan applications.
  4. Risk management (assessing, managing, and mitigating risks) can suffer from a lack of risk management systems, inadequate policies, and procedures, or insufficient data and analytics to accurately assess risk.
  5. Compliance (ensuring the bank or credit union is compliant with all relevant regulations, laws, and guidelines) may be limited by insufficient regulatory knowledge, a lack of resources for compliance and regulations, or difficulties with understanding and meeting complex regulations.
  6. Operations (managing accounts, customer service, and facilities) are often saddled with limited automation, lack of staff or inadequate training, or inefficient processes and systems.

To identify constraints in these process areas, group similar processes or functions into smaller groups, such as grouping customer acquisition and account management, or grouping lending and risk management.

It is also important to identify metrics that will be used to measure performance, and then use data and analytics to analyze performance data and identify areas where performance is lagging. This motion analysis will help to identify the constraint, which is the area that is limiting the overall performance of the process.

Maximizing throughput

The second step is to maximize throughput or the rate at which the organization can produce goods or services. This can be done by increasing the efficiency of the constraint and by managing inventory levels to minimize waste and delays. While cash on hand/cash in reserve might be a more obvious thought, a better efficiency example may be the number of loans moving from origination through to servicing. Maximizing throughput involves finding ways to increase the flow of money, loans, and other financial products and services through the various process areas in order to increase revenue and profits.

By identifying and targeting the right customer segments, streamlining the onboarding process, and implementing effective marketing strategies, the bank can increase the number of new customers it acquires, thereby increasing throughput.

By increasing the accessibility of branches, implementing self-service options, and ensuring that systems are fast and reliable, the bank can increase the number of transactions it processes.

By optimizing credit-scoring models, streamlining the loan application process, and increasing the pipeline of loan applications, the bank can increase the number of loans it approves, thereby increasing throughput.

By implementing effective risk management systems, monitoring and managing risk on an ongoing basis, and ensuring that policies and procedures are in place, the institution increases the number of loans it approves and decreases the number of defaults, thereby increasing throughput.

And automating processes, providing staff with adequate training, and implementing efficient processes and systems will help the bank increase the number of transactions it processes, improve customer service and increase customer satisfaction, thereby maximizing throughput.

Compliance is also paramount—by staying up-to-date with regulations and laws, implementing effective compliance systems, and ensuring that all processes are compliant, the bank can avoid penalties and fines, and increase customer trust, leading to longer-term and more profitable relationships.

Managing the buffer 

The third step is to manage the buffer or the inventory that is used to protect against variations in demand and supply

By properly managing the buffer, the institution can minimize the impact of fluctuations and maintain a steady flow of goods or services.

In a bank, for example, managing the buffer means moving loans from origination through to servicing and ensuring that there is a sufficient number of loans in the pipeline to meet the bank's current and future needs. Generally, there is a mix of short-term and long-term loans, and managing this mix is critical to maintaining overall financial health.

During the origination stage, the creditworthiness of potential borrowers is assessed to approve or reject loan applications. This is an important step as it helps to mitigate risk and ensure that only high-quality loans are approved. Once a loan is approved, it will be added to the pipeline of loans in the origination stage. During the servicing stage, the loan portfolio is managed by monitoring payments, collecting overdue amounts, and ensuring that the terms of the loan are being met. Credit histories are checked to calculate the risk of default. And this step is critical as it helps to mitigate risk and minimize the exposure to financial loss.

To manage the buffer, a variety of tools such as credit scoring and financial modelling are used to forecast future loan demand. The loan origination process is then adjusted to ensure that there is a sufficient pipeline of loans to meet this demand. Sophisticated data analysis can track and analyze the performance of the loan portfolio and make adjustments as necessary.

Managing the buffer of loans in a bank involves maintaining a sufficient pipeline of loans in the origination stage, monitoring and managing the loan portfolio in the servicing stage, and adjusting the origination process as necessary to meet future demand, all while minimizing the risk of financial loss.

Elevating the constraint 

The fourth step is to elevate the constraint or to improve the capacity of the constraint in order to increase overall performance.

Investments in targeted marketing campaigns attract new customers. Opening new branches, implementing self-service options, and ensuring that systems are fast and reliable contribute to increasing the number of transactions processed. Loan processing times can be reduced by streamlining the loan application process, implementing automated decision-making systems, and increasing the pipeline of loan applications.

Implementing effective risk management systems, monitoring and managing risk on an ongoing basis, and ensuring that policies and procedures are in place, increases the number of loans approved and decreases the number of defaults. Training and educating staff to ensure compliance with regulations and laws, and implementing effective compliance systems avoids penalties and fines and increase customer trust. And finally, automating processes, providing staff with adequate training, and implementing efficient processes and systems increases the number of transactions processed, improves customer service, and increases customer satisfaction.

Repeating the process

The work is never done as the business and regulatory environment is constantly changing. This means the motion analysis should be repeated frequently.

To apply these TOC concepts successfully, a bank or credit union can take the following steps:

  1. Establish a team or a dedicated group to be in charge of identifying, analyzing, and managing constraints across the institution
  2. Develop a thorough understanding of current processes and operations, and use data and motion analytics to identify bottlenecks and inefficiencies
  3. Prioritize improvement and transformation initiatives based on the potential impact they will have on overall performance
  4. Monitor progress and measure the impact of changes to ensure that the improvements are achieving their intended results
  5. Continuously review and adjust processes and operations in order to improve efficiency and effectiveness; this can be achieved by performing the motion analysis (using the same data for a new period) in a repeatable and scalable model on a regular basis

By following the TOC concepts outlined in "The Goal," a financial institution can identify and overcome bottlenecks in processes and improve efficiency and effectiveness. And most importantly, as the business changes and grows, new constraints can be continuously identified, addressed, and resolved.

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