STORES LEAD TO LOSSES

There is an opinion that while manufacture earns money for the factory it all can be lost by logistics. Here is the reason why I offer to draw a special attention to this question and view all sides of it.

In Soviet times and its planned economic system it was profitable to have large stock reserves.   In fact the factory did not bear any expenses. Moreover, in case of deliver fails the factory always had enough reserves to continue the manufacturing process. Accordingly Ulyanovsky Avtomobilny Zavod as all built in that period factories had a large storage facility. It contained about 25 buildings and constructions including vegetable stores, huge fuels-lubes storages, and others. The all mentioned objects occupied more than 50 000 squared meters of the industrial area.

In the modern world with a smoothly running communicative system material deliveries are made without delay. So the factory is supplied for continuous production process. Considering this the factory has no necessity in such a large storage facility. Moreover supporting of this big territory leads to huge inappropriate expenses for its cervices, heating, water supply, tax payments and so on. The average sum comes to about 200 million rubles annually. It is without mentioning the building renovation costs.



Also with the storage facility disunity and its long distance from conveyors the factory has to bear expenses connected with items repacking. Repacking in its turn quite frequently leads to the items damage. It makes additional financial loses for the factory.

To avoid such loses and above-named inappropriate expenses in the framework of industrial area development strategy the leaders of Ulyanovsky Avtomobilny Zavod took decision and devised a project of creating the unified centralized storage facility for all goods and materials, metal storage, finished-products storage area.

According to preliminary calculations such decision will allow to cut the storage facility support expenses in half. Which means production costs reduction and competitive recovery in the world market. If evaluate the project from the point of recoupment the average profit from inefficient territories sale will amount to a half of a billion rubles. These financial recourses are to be spent for purchase of modern equipment to increase the production quality and quantity.

WHY FACTORIES NEED A TOWER OFFICE BLOCK

A tower office block is the symbol of a factory, it’s face. Lots of people are of the same opinion about this statement. That’s why factories annually spend a huge amount of financial recourses for the tower office block service and support. But is such money spending wise and do factories themselves need such an expensive symbol? In spite of the risk to bring down the public anger I offer to view all sides of the question.

It is known that technologies are constantly developed. And the development is getting more intensive every year. If recently computers were an unimaginable luxury and the internet was a king of something extraordinary, now not a single factory can operate without it. Some people remember that in the recent past all the document flow had to be done by hand. Contracts, orders and instructions were typewritten. Specialists went from department to department for singing them and etc. To avoid the information lost documents had to be copied several times, registered in multivolume journals and kept in huge archives. For the purpose of making specialist work easier and documents keeping systematization there was a tower office block built under each factory to locate there all the administrative stuff of departments.

With the internet and digital technologies the document flow operation got much easier. There such programs appeared as corporate e-mail, electronic systems of document processing and keeping. With the innovations adoption the number of personnel was slowly decreased as one specialist became abele to do the work that had been done by several ones before. It was referred to manufacture itself either. As a result factories got a wide space of empty lost their efficiency offices. Here a question appeared: how to use the inefficient territory.  But the territory non-functionality factories still had to bear expenses for their support, tax payment and etc. Obviously it would be wise to remove all administrative stuff of departments into the empty offices closer to manufacture and lend or sale the tower office building which is located outside the manufacture. But often such version of solution arouses negative reaction.

Here I would like to bring a real example of the Ural Turbine Factory in Yekaterinburg. The factory has to bear huge expenses for support of the tower office block built in 40s. So in 2013 about 250 million rubles were spent for its restoration.  A big part of financial recourses is annually spent for the tower office block support and tax payment either. At the same time there is a recently built absolutely new empty engineering building the factory leaders cannot find appliance.  Considering the fact that the building is located inside the manufacture territory its sale or lending is impossible. That means the factory has to bear inefficient expenses for support of the engineering building as well.

Then the factory leaders got an offer of solution. It was offered to remove all the administrative stuff into the empty engineering building and sale the tower office block.  Such solution aroused negative reaction. The argument was that the tower office block is the factory symbol. But can the factory afford such an expensive symbol under sever condition of the modern world market?  

Talking about the tower office block as of a symbol it should be considered that so called white collars who occupied it generally operate with the information received from their colleagues in the building.   So the most administrative specialist don`t view the real factory situation. More over some of them working at the factory for years have never seen the manufacture process itself. That`s why all decisions are generated by habit and old well-known system which is not always appropriate. As a result it brings about ineffectiveness of work. The world experience shows that to understand the manufacture process and take right decisions for increasing work efficiency  the factory administrative stuff should be located not in the “symbol” but close to the manufacture.

Perceiving the logic of such solution the leaders of OJSC “Ulyanovsky Avtomobilny Zavod” in the framework of industrial area development progect decided to remove the factory administrative stuff from the tower office block into empty offices close to the manufacture and sale or lend the tower office block. The financial profit of it is planned to be spent for the factory modernization and modern equipment purchase that will allow increasing the product quality and quantity. Moreover it will reduce production costs by means of inefficient expenses avoidance. The city in its turn gains one of the largest business centers in the region for banks, colleges, commercial organizations and restaurants. 

THE STRATEGY OF URALMASH INDUSTRIAL AND CIVIL DEVELOPMENT

1. Introduction
In the period of 2011 – 2012 our company took part in the realization of investment program of Uralmashzavod. The budget of this program was about 200 million USD. The main part of it was “modernization of metallurgical production”. The main reason of such imbalance was poor condition of industrial buildings, equipment and infrastructure.

Pic. 1. General location of Uralmashzavod’s objects by years.

Finally the realization of investment program was cut down because of its low efficiency. As experience has shown, its main parts required more serious investments:

Capital demands during project’s realization increased:

 industrial safety from 5 to 30 million USD;

 modernization of metallurgical complex from 120 to 240 million USD.

In general, investment demands increased from 200 million USD to 900 million USD.

Pic. 2. Investment’s object, plant № 36.

Absence of modernization leads to low competitiveness, shutting down production and bankruptcy. According to the data of financial statements during the last 5 years total loss amounted to 193 million USD.

Pic. 3. Net +profit/-loss of Uralmashzavod (according to the data of financial statements), million USD

This loss has constant tendency to increase. As expects, it can increased to more than 90 million USD in 2013.

2. General scope.
Having more than 60-years’ experience of industrial and civil construction and understanding the low returns from realization of investment program, our company has worked out “The strategy of Uralmash industrial and civil development in 2013 – 2020”.
The main idea of that program is modernization of Uralmashzavod with emphasis on redistribution of machine building manufacture. Having low competitive abilities, Uralmashzavod is in crisis.
According to the world experience this period is the most suitable for modernization. It allows to create modern compact machinery production, reduce costs, raise the competitiveness and assets cost. We suppose that to organize modern compact production, which meets world standards, we need about 340 million USD.

Pic. 4. One of possible ways of metallurgical production construction.

It is possible to develop residential (total square is 2 million sq.m.) and commercial (total square is 0,8 million sq.m.) real estate on a free 160 hectare area.
The realization process of this strategy was discussed during the meetings with representatives of the Region’s Government, expert and construction organizations, financial structures, where the agreement in principle about active support and participation of that structures in realization of this idea was reached.
There are other owners of real estate with their production on the estimated territory except Uralmashzavod. Nowadays we could conduct negotiations and reach agreement in principle about their production transfer to the 12 hectares area, which one we have found. We have reached agreement with several owners about sale of their real estate.

Pic. 5. Free 160 hectare area

Profit from realization of built housing and commercial real estate will be shared between the participants of the project.

To realize this strategy in a proper way and efficiently we have established Administration Company “Modernization of production complexes and city infrastructure”. We are offering to join this company the representatives of owners of Uralmashzavod JSC – Gazprombank JSC, SMY-3 CJSC and the representatives of leadership of Sverdlovsk Region.

3. Project’s Resume

3.1. To realize the project we need credit line in the amount of 440 million USD which will be sent for repayment of:

 real estate which includes equipment of metallurgical production of Uralmashzavod ~ 138 hectares for 360 million USD.

 buying of real estate with other owners ~ 22 hectares for 70 million USD.

3.2. Loan repayment will be realized in the period of 2017 – 2018 by selling of the real estate.

3.3. Construction of housing and commercial real estate (2,8 million sq.m.) will require the future investment in the period of 2014 – 2016 in amount of 840 million USD. The investment program will be realized by attracting co-investors and share interest. So the total cost of the project will be 7 560 million USD and it will allow to became one of the most significant projects in the sphere of redevelopment of industrial territory.

4. Conclusion
The realization of this project will allow making the following profits for all the participants:
 to make a profit on 1 551 million USD and share it between the shareholders of The Project ;
 to get payback of Uralmashzavod by selling the territory and its metallurgical production in amount of 367 billion rubles;
 to build the Palace Of Water Sports and Hockey Academy and also other social projects;
 to increase housing construction in the framework of national project “Available comfortable housing” and to create a housing complex where can live about 25 000 families;
 to create extra work positions;
 to realize experience transfer to other industrial sites.
This project works perfectly with supported by President of Russian Federation request for participation of Ekaterinburg City in Expo 2020. It will allow this project to become one of the most significant in the sphere of redevelopment of industrial site.

URALMASH DREAM PASSED AWAY



-          I had a wonderful dream…

-          Why “had”?

-          It wandered away!

Nowadays a recently profitable and perspective factory bears huge losses. The production level is winding down, mass layoffs are in process. There is a question occurred to ex-employees’ minds: - was it possible to avoid all of this? And my answer is: - it was.

Talking about the factory I would like to remind of its history first. Uralmash started his heavy engineering construction in 1933. Generally it specialized in production blast-furnace and steelmaking machinery, excavators and hydraulic presses. Then people had great planes and expectations about the manufactory. To achieve a high level of production quality Uralmash was provided with the most modern equipment from such known companies as Wagner, Krigar, Sheppar. There was a special educational institution arranged under the factory for preparing high-skilled professionals to operate the equipment.

A lot changed from that time. Nowadays Uralmash is a loss-making living out its final days manufactory. Technical equipment and adjacent structures are worn-out in service, production buildings came to critical condition.

Lack of manufactory modernization leads to the marketability loss, capacities reduction and total bankruptcy. According to accounting reports the factory activity losses in 2013 amounted to 3.05 bln. rub. Moreover the sum is constantly increasing.

To improve such critical condition and save Uralmash factory specialists worked out a strategy of industrial area development. The main idea of it was to turn the manufactory into a compact economic and effective production with equipment qualifying the modern standards. The strategy was to be achieved by means of financial recourses got from inefficient industrial area sale. For instance, about 90 hectares of such area are occupied by constructions built in 30s of the latest century, which now are inappropriate for manufacturing activity.

According to the strategy of Uralmash industrial area development it was planned to release the area of 1,5 million square meters for residential and 500 thousands square meters for commercial construction. A part of residential and commercial buildings sales-profit was planned to allocate for building such social objects as the Hockey Academy and Water Sports Palace. The strategy realization could be a solution not only for a number of the factory tasks, but for social ones as well. Among them is job creation and housing construction rate increasing within “Affordable Housing” national project.

Nevertheless, in spite of the obvious advantage, the leaders of Uralmash factory couldn’t arrive at a common view and make a positive decision about industrial area development strategy realization. A beautiful and realizable dream of Uralmash factory died. So, the employees have nothing left but wait for their turn to be fired. And we have nothing to do, but watch how a recently profitable manufactory with its powerful capacities is falling into decay.

INDUSTRIAL AREA DEVELOPMENT

While property market suffers from building land deficit, manufacture bears expenses for supporting ineffective spaces which lost their relevance. Industrial area occupies thousands of hectares. Most of them ended manufacturing long time ago and turned into chaotic dump site.

From the Soviet Union with its planned economy our country inherited one of the most powerful industrial capacities in the world. In the Russian Federation so called industrial area takes about 40 % of city territories, when in European cities it makes up less than 10%. Nevertheless it has to be admitted that the rate of industrial efficiency is much lower than in Europe. Let’s clear up the reasons of such predicament.

A big amount of manufacture financial recourses is allocated for maintaining of oversized and inefficient infrastructure. Large spaces of industrial area are occupied by additional buildings and constructions which require expenses on electricity, water supply and other necessary supporting. In modern world such way of management is totally illogical and irrational. Considering the abovesaid it is obvious that manufacture has an urgent need in modernization and transition to a new quality level from a point of manufacturing.

So, what is the way to transform a lossmaking business into a COMPACT ECONOMIC and EFFECTIVE manufacture? It is reasonable to improve manufacture infrastructure by releasing inefficient spaces of industrial area. Hereafter a part of released territory should be redeveloped and made available for house building, according to municipal town planning scheme, or arranged for sale. The financial resources received from sold non-core assets and saved on inefficient infrastructure support are to be means for development, technical modernization and transition of manufacture into a new quality level.

Thus, by rational use of industrial area manufacture can essentially increase its efficiency and marketability in the world market severe conditions. At the same time city residents will get additional housing spaces, facilities for social needs, roads and parking lots which can be located on former inefficient industrial areas.