Application of TOC In Banks

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bannerIn the banking business, the three measures discussed previously are defined as follows:

  • Throughput is the rate at which a banking system generates revenue for services provided in a way consistent with goal. Throughput in banks can be generated by investing in such markets as customer lending, institutional lending, real estate, and investment firms. Moreover, banks generate money by offering a variety of services such as wire transfers, foreign exchange, and cashier’s checks.
  • Operating expenses include all the money the bank spends in the process of generating throughput. These expenses include all direct and indirect expenses except for the cost of obtaining money in the market.
  • Inventory investment is the amount of money spent by a bank to raise capital necessary to generate throughput. Inventory investment consists of the principal amount and the interest, if any, paid on deposits. It should be noted that in the banking business, both the primary input –inventory — and output consist entirely of money. Banks use the money obtained from depositors and invest it ventures varying in the degree of risk.

In contrast with manufacturing, banks do not need to convert physical inventory of products into money through sales. Hence, the length of the process of generating throughput in banks is much shorter than in manufacturing. It is intuitive that banks that want to grow should have no difficulty investing unlimited amounts of money obtained from depositors in the market, whereas manufacturers typically face finite demand for their output. Therefore, because of the nature of their markets, banks have a stronger incentive to increase both their input and output compared with manufacturers.

On the input side, banks typically base the rate they offer their customers on the amount of the deposit and the length of time to maturity. They pay no interest for traditional checking accounts that allow instantaneous withdrawals up to the balance in the accounts. Longer Term deposits pay higher interest compared with shorter-term deposits. Similarly, larger deposits pay higher interest compared with smaller deposits. As compared with the manufacturing sector, the banking industry has to pay a higher price for acquiring large deposits (i.e., a quantity premium as opposed to a quantity discount). On the output side,banks have to manage their investment risk. If they invest large amounts in a single project (as opposed to small amounts in multiple projects), they expect high returns because of increased exposure.

Customers conduct a variety of transactions, including direct payroll deposits, money transfers, and loans. They typically prefer to conduct their business at one bank. The customers who provide the bank with deposits that contribute to inputs often use the same bank to meet their needs for loans, which directly affect the bank’s output. Hence, a strong link exists between banks and their customers, on both the input and the output side. A similar supplier-manufacturer-customer relationship does not exist in the manufacturing sector.

Throughput can be enhanced by increasing the number of borrowers and investment projects. It can also be enhanced by increasing both the number and amount of transactions. Operating expenses can be reduced by making operations more efficient (e.g., through investments in technology). Inventory investment can be reduced by reducing the cost of borrowing. As was established earlier, since banks offer low interest on short-term and small deposits, it is beneficial for banks to attract a large number of small and short-term depositors which, in turn, will increase the number of transactions. A Specific Example is of a service industry that has successfully implemented the principles of TOC is a bank located in the Midwestern region of the US.

The bank identified its weakest link as the mortgage department. It took the bank too long to process individual home mortgage applications. The bank wanted to reduce the average processing time to three weeks. In order to achieve this goal, the management of the bank decided to use the five-step TOC focusing process. First, it formed a cross-functional group of eight people, who were selected to form the mortgage improvement team (MIT). People from different functional levels within the branch and other branches made up the team. This team was the bank’s maiden voyage regarding continuous quality improvement (CQI) methodology.

The team decided that there were basically two groups of customers: one that paid 20% or more down toward their home mortgage insurance and the other that paid less than 20% down. In this illustration, the focus is on the process of those customers who paid less than 20% down toward their home mortgage insurance. The team used flow charting as a tool to analyze processes. An early indication of the complexity of improvement was that it took too long to verify the employment, conduct appraisal, and survey. On further analysis and discussions, it was agreed that since all the foregoing activities were independent of each other, they should be immediately addressed. This was a crucial turning point in the life of the MIT. In addition, the first TOC step of focusing and identifying the weakest links was accomplished.

The next step in the TOC process is to exploit the constraint. In other words, how can the time taken for verification of employment, conduct appraisal, and surveys be reduced? The team learned through data collection that there were several different methods for shortening the processing time for employment verification, appraisal, and surveys. For example, as far as employment verification was concerned, the team established a best current method for personnel to obtain this information. Furthermore, the team learned that in several instances it took a company two weeks to verify employment status. A solution to this problem was for the loan officer to request the applicant to bring in alternative documents. It was agreed that bringing the last two years’ W-2 forms and the last month’s pay stub would amount to a feasible solution.

Similar solutions were also developed for reducing time in conducting surveys and appraisals. The preceding example not only illustrates how the bank exploited the constraint but also how it had personnel subordinate their actions so that the constraint could perform at a higher level of performance. The subordination is the third step of TOC, meaning that everyone supports the first two steps of identifying and exploiting the constraint.

Furthermore, these actions caused OE and I to decrease and T to increase. The fourth step of TOC is taken when the exploitation and subordination steps as related to the constraint have been exhausted and the demand is so great that additional time for verification can be jus-titled. The fifth step is that once the first four steps have been completed, inertia is not permitted to become the system’s constraint. In other words, the bank should look for new constraints and start the process over without becoming complacent regarding its accomplishments. The bank is still discovering new ways to subordinate and exploit its constraints within the mortgage department and has not reached the point at which there is a need for more improvement.

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Mufaddal Dahodwala

The author is ex-employee of Accenture and he is currently pursuing MMS finance from JBIMS,mumbai. He has won several prizes from top MNCs for his contribution towards articles as well as idea generation and business plans having a social impact to the society.

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