An Analysis of Coordination Mechanisms for the U.S. Cash Supply Chain

Abstract

The overuse of its currency processing facilities by depository institutions (DIs) has motivated the Federal Reserve (Fed) to impose its new cash recirculation policy. This overuse is characterized by the practice of cross-shipping, where a DI both deposits and withdraws cash of the same denomination in the same business week in the same geographical area. Under the new policy, which came into effect July 2007, the Fed has imposed a recirculation fee on cross-shipped cash. The Fed intends to use this fee to induce DIs to effectively recirculate cash so that the societal cost of providing cash to the public is lowered. To examine the efficacy of this mechanism, we first characterize the social optimum and then analyze the response of DIs under a recirculation fee levied on cross-shipped cash. We show that neither a linear recirculation fee, which is the Fed's current practice, nor a more sophisticated nonlinear fee is sufficient to guarantee a socially optimal response from DIs. We then derive a fundamentally different mechanism that induces DIs to self-select the social optimum. Our mechanism incorporates a fairness adjustment that avoids penalizing DIs that recirculate their fair share of cash and rewards DIs that recirculate more than this amount. We demonstrate that the mechanism is easy to implement and tolerates a reasonable amount of imprecision in the problem parameters. We also discuss a concept of welfare-preserving redistribution wherein the Fed allows a group of DIs to reallocate (amongst themselves) their deposits and demand if such a possibility does not increase societal cost. Finally, we analyze the impact of incorporating the custodial inventory program, another component of the Fed's new policy.cash supply chain, coordination, fit sorting, cross shipping

Redesigning a closed-loop supply chain exposed to risks

“…these results, we recommend other central banks to evaluate whether or not they should provide interest compensation in order to reduce risks with their associated CSC. Previous literature has focused on process and incentive changes in the CSC (Geismar et al, 2007;Dawande et al, 2010), using examples with a societal perspective from the United States. This study contributes with an approach for analyzing structure (network design) that is applicable to real case data using a more commercial perspective, where all private actors in the CSC are considered.…”

“…This was extended by applying inventory control principles to the CSC context, which shed light on how banks in the United States should cope with recent policy inventory policy changes by the U.S. Federal Reserve (Geismar et al, 2007). When it comes to incentives in a CSC, previous research shows that the introduction of cash recirculation incentives for private banks reduces returns to the U.S. Federal Reserve (Dawande et al, 2010). These contributions have in common that they apply a societal perspective to the CSC, where managerial insights are based on costs associated with a central bank cash operations, so-called societal costs.…”

Pricing and Logistics Decisions for a Private‐Sector Provider in the Cash Supply Chain

“…Based on the characteristics of this domain and discussions with practitioners, Dawande et al. () justify the week‐to‐week periodicity (i.e., over 7 days) of both demand () and deposit () for a DI i ∈ I and use a deterministic setting for these numbers. We adopt this setting and the underlying assumptions as they are both appropriate and sufficient for our purpose.…”

Stochastic Optimization of a Cash Supply Chain

“…In a recent paper, Dawande et al (2010) present a strategic approach to the problem of cash recirculation. The U.S. Federal Reserve has addressed this problem, seeking to minimize the societal cost of providing cash to the public.…”