OPTIMIZATION OF THE TOLLING PROJECT OF USING THE METHODS OF NETWORK ANALYSIS

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1 OPTIMIZATION OF THE TOLLING PROJECT OF USING THE METHODS OF NETWORK ANALYSIS Kamila JANOVSKÁ 1, Jiří STANĚK 2, Šárka VILAMOVÁ 1, Iveta VOZŇÁKOVÁ 1, Josef KUTAČ 1, Jarmila JAROŠOVÁ 3 1 the Department of Economics and Management in Metallurgy, FMMI, VŠB-TU Ostrava, Ostrava Poruba, Czech Republic, iveta.voznakova@vsb.cz; kamila.janovska@vsb.cz; sarka.vilamova@vsb.cz; josef.kutac@vsb.cz 2 TOLFIN s.r.o., Ovesná 14, Ostrava - Nová Bělá, Czech Republic, jiri.stanek@tolfin.cz 3 JAROŠ CZ s. r. o., Ostravská 1230,Orlová, Czech Republic, jarosova@jaros.cz Abstract The so called liquidity crisis is often talked about in relation to the current global economic crisis, when a great number of companies face troubles repaying their liabilities or financing their own business activities. The banking sector represents a crucial source of financing of Czech industrial firms, and it is currently going through an extremely difficult and unstable period, which is characterized by more cautious loan policy, resulting in price increases of loans and credits, and the volume of loans is significantly reduced. For the above described reasons, companies must also focus on other forms of financing their current and future needs for working capital and they must look for alternative financial sources. The non-traditional financing instruments satisfying the working capital needs may include the tolling method. Because the principles and requirements for implementation of tolling define certain sequence of steps, some of which must be performed before starting the actual implementation of tolling, I believe that the methods of network analysis can be used for processing the time, resource and cost analysis of a tolling project. The article suggests the prerequisites and possibilities of using the methods of network analysis for processing time, resource and cost analysis and for optimizing the tolling project as an efficient way of working capital financing in industrial businesses. Keywords: tolling, methods of network analysis, metallurgical production 1. INTRODUCTION In the context of the current global economic crisis, many Czech industrial companies find themselves in a difficult financial situation which is, among other things, characterized by lack of available funds. Securing working capital financing for companies is in many cases very difficult and it can be said that the problem of raising resources for working capital financing is typical mainly in small and medium size companies. It is virtually impossible to ensure working capital financing for newly created companies [1]. However, at the same time, the capital shortage poses direct threat to the innovative capabilities of companies [2]. The aim of every financial restructuring is to make the organization solvent again as regards cash flow and balance sheet (statement of financial position) [3]. This situation is not a priori caused by these companies being in a critical situation due to high costs or illmanaged investment strategy, but it is mainly because the financial sector in the CR maintains conservative approach to bank credits, which leads to increasing prices of bank credits and loans resulting in dramatically reduced volume of credits given. The amount of short-term loans provided to small and medium size companies serving for operating financing in particular are being reduced, and given that the banking market is largely monopolized, those companies are unable to turn to another bank without sanctions.

2 For the above described reasons, especially small and medium size companies have to look for alternative financial sources in order to finance their current and future working capital needs and these may include the method of tolling (also recommended by a macroeconomic expert of ČMKOS, Jaroslav Ungerman [4]). 2. TOLLING Tolling is an economic and business system of short-term assets financing, in which a submitter has the finished product manufactured by a producer for a charge, using its own raw materials [1]. The tooling method can be characterized as a method of effective financing of working capital, in which the funding subject (a tolling company) uses either their own free resources for financing the manufacturer s needs or, which is more common, their own resources are supplemented by a bank loan. A specific feature of tolling financing is the fact that the short-term assets acquired from the tolling resources are at all times and in all forms (raw materials, work in progress, receivables) owned by the financing tolling company, not by the manufacturer. If one of the sources of financing is a bank loan, the debtor is not represented by the manufacturer but, again, it is the tolling company. The problems of tolling are reflected in several areas of human activity, including economic, financial, legal, and, last but not least, the political area. Tolling can thus be characterized as a non-traditional tool used for working capital financing that can be used in a project dealing with a critical situation in a company, primarily to finance production [1]. In companies where the manufacturer works in the form of contracts or projects, it is not always necessary to provide capital resources for the entire production of the manufacturer, but only for some concrete projects. Such a company usually uses both regular banking products and, for some specific projects, also resources provided by the modified method of tolling - project financing [1]. 2.1 UTILIZATION OF TOLLING IN METALLURGICAL INDUSTRY Metallurgical industry is considered to be the basic industrial branch, as metal production is the first important preceding step in the value added chain of many industrial branches. The main consumers of steel are industrial branches such as engineering, automotive industry, shipbuilding, aircraft and aerospace industry and civil engineering. Because of close links between two technologically different productions (physical-chemical and mechanical technology) and the resulting high investment demands, metallurgical industry in the CR needs external resources, in addition to its own financial resources. In the context of the current global economic crisis, there has been a slowdown in steel production dynamics 1, which is especially related to the reduction of production dynamics of the major customers and, with the impacts of the financial crisis, especially in civil engineering. Lack of working capital caused by insufficient capital power of metallurgical companies, excessive loan coverage which hinders the possibility of obtaining loans from commercial banks do not allow metallurgical companies to respond to the development of the situation in the steel product market with sufficient flexibility. In the Czech Republic, the tooling method was used in larger time and material scope in the VÍTKOVICE OSINEK project, when tolling as a way of working capital financing was implemented in (positive assessment, see the macroeconomics expert of ČMKOS, Jaroslav Ungerman[4]). Tolling was used by Osinek Company entirely owned by the state (however, it was not a case of public support; everything was strictly conducted on commercial basis). The basic scheme of tolling, which is shown in Figure 1, was as follows - Osinek Company was purchasing raw materials, materials and energies 1 In 2011, the world production of steel equalled billion tons, which is a new record. It has grown by 6.8%, in comparison with previous year and despite the fact that the production of steel has never been higher than last year, the dynamics of growth has slowed down significantly. In 2010, the production of steel increased by 15 percent, as recorded by the World Steel Association (WSA). quotation 18 February 2012

3 on its own account and it had metallurgical products manufactured by VÍTKOVICE STEEL, a.s. using the purchased raw materials and materials, along with consumption of the supplied energy media. The company paid for processing commission for the manufactured products. The finished steel products were sold by the company to customers. In connection with the delivery of products, OSINEK Company also provided resources to cover the cost of sales related to product delivery. Fig. 1 The basic scheme of tolling Reviewed by [1], [7] VÍTKOVICE, a.s. engineering production used the so called project financing - financing of pre-defined projects. The application of tolling in mechanical engineering production required specific approach to the individual projects - business cases. Project financing was therefore focused on a business case precisely defined by a contract with the customer, as far as the subject of the contract, the delivery terms, the payment terms, guarantees, etc were concerned. Tolling of metallurgical and engineering production through Osinek Company allowed stabilizing the situation in VÍTKOVICE, restoring cash flows and maintaining the continuity of metallurgical manufacturing in full production capacity, thus partially capturing the boom in rolled material demand in the markets. It is no longer possible to assume that tolling in the range as implemented in the VÍTKOVICE OSINEK project (there was a loan of CZK 1.8 billion for funding of metallurgical part of VÍTKOVICE Company, and for the engineering part, there was an open credit up to CZK 1 billion) will be realized again [1]. Working capital financing using the tolling method has not been realized in greater extends in the CR so far. If tolling is implemented at all, it is based on a private investor approach, especially in case of small or medium-sized companies whose business activities are in the area of civil engineering, light engineering, electrical engineering, especially in the form of tooling combined with project financing. 3. NETWORK ANALYSIS Coping with large and complex projects is impossible without mastering the basic tools, techniques or methods of project management. Planning the sequence of all project activities, tracking important

4 deadlines, resources, and spending represent the key role of project management. Planning of the above described parameters is carried out using the technical tools of project management based on network analyses (CPM, PERT, etc.). The network analysis uses charts or diagrams to illustrate the project in a clear way; it solves the optimization tasks with regard to the necessary time, resources and the necessary expenditures. Project management must ensure coordination of contradictory demands that are posed on the project, i.e. it must minimize the time required, minimize the necessary resources, minimize the costs and maximize the quality of the process and its outcome [5]. The focus of these tools rests mainly in computer support of the project manager regarding decision-making in the form of a various software products making it possible to perform the time, source, and cost analyses (e.g. GanttProject program, Microsoft Office Project program, and WinQSB program). The time and resource evaluation of the project activities is carried out on the basis of calculations or expert estimates. If the durations of the activities are considered to be deterministic data, the CPM method can be recommended to analyze the network chart. If the durations of activities are considered to be random, which means stochastic variables, the PERT method can be applied. 3.1 UTILIZATION OF NETWORK ANALYSIS METHOD TO PROCESS THE TOOLING PROJECT TIME ANALYSIS At present, the methods of network analysis (PERT and CPM) are normally used in small and large companies to determine the time behaviour (duration of the individual activities, project duration) of the technical part of a concrete project, especially in industry and civil engineering, for example in construction of production facilities, in the area of maintenance and reconstruction of production facilities, in development of new products, when providing complex administrative tasks and compiling work plans, etc. The team of authors is currently devoting themselves to a project using network analysis methods to perform time analysis of a tolling project as part of their scientific research activity, where, in addition to the classical analysis of the technical part, the model is extend to include analysis of the individual steps associated with tolling financing. The network analysis method was used for processing of the time analysis of the "siding of VŠB-TU Ostrava - New Building of FEI" project, where the project financing consisted of tolling combined with project financing. I. The technical part of the project siding of VŠB-TU Ostrava - New Building of FEI II. The financial part of the project tolling financing The principles and conditions for the implementation of tolling define specific sequence of steps, some of which must be performed before the launch and the actual implementation of tolling. These activities can be arranged in the following manner [1]: 1) Inquiry 2) Principles and their observance 3) Implementation prerequisites and their fulfilment 4) Financial analysis as a basis for decision-making 5) Financial plan 6) Initialization of implementation 7) Actual realization of financing A timetable of activities in logical sequence that must be performed within the project of siding of VŠB-TU Ostrava - New Building of FEI has been drawn for this project, and each sub-activity was complemented by its duration. The outcomes of the analysis (performed using computer support) have shown which activities are critical and the shortest term of project completion was determined (equivalent to the duration of the

5 critical activities). It should be noted that the critical way is reflected in the scheduling and management of the project in virtually all stages of the project life cycle and in case some of the defined critical activities are behind schedule, the whole project is delayed as a result of that. Time allowances were calculated for this project as well (total time allowance, free time allowance, dependent time allowance and independent time allowance). The analysis clearly highlighted the critical activities and the total time allowances are equal to zero, which is data that require the greatest attention in project management if we want to ensure the timely project completion. All other activities are non-critical; they have certain time allowance which shows how much the sub-activities can be delayed, without affecting the project completion time. 4. CONCLUSION The text above indicates that the tooling financing method in the CR is primarily realized on the basis of a private investor in small or medium-sized companies whose business activities are focused on civil engineering, light engineering, and they use tolling especially in combination with project financing. In the past, tooling was also successfully used in the field of metallurgy, namely in case of VÍTKOVICE OSINEK project, however at present, we can no longer expect tolling to be used in such an extent as in the VÍTKOVICE OSINEK project. Nevertheless, in relation to metallurgical production, we see some potential for the utilization of tolling in metallurgy engineering companies - for example for small and medium-sized foundry companies (almost 65% of foundries have up to 250 employees [6]), where the method of tolling (especially the form of tooling combined with project financing) can become an effective instrument used for solving critical situations in the area of company cash flow. The methods of network analysis can be used both as a planning tool, but also as a controlling tool for identification and optimization of the project process of the tolling project, as an effective way of working capital financing in industrial companies. The methods of network analysis make it possible to determine the minimum time required for the realization of the entire project and to define the activities (partial operations), on the continuance of which the time set for the realization of the whole project depends. A major benefit of the network analysis is a fact that it forces the project manager to elaborate and plan the project in an explicit and detailed manner. ACKNOWLEDGEMENT The work was supported by the specific university research of Ministry of Education, Youth and Sports of the Czech Republic No. SP2012/12. LITERATURE [1] STANĚK, J.,Předpoklady efektivního financování pracovního kapitálu metodou tollingu, disertační práce, FMMI, VŠB-TU Ostrava, 2011 [2] HVIZDOVÁ, E.;MIKLOŠÍK, A. Znalosti ako determinant inovačného rozvoja podnikov. In Studia commercialia Bratislavensia. Bratislava: Obchodná fakulta Ekonomickej univerzity v Bratislave, 2011, ISSN , 2011, roč. 4, č. 15, s [3] MIKUŠOVÁ, M. Crisis Management.Review of interdisciplinary approaches to crisis and crisis management. Saarbrucken, LAP Publishing, ISBN [4] FASSMANN,M.; UNGERMAN, J. Ekonomická krize pohled odborů II, dostupné z: [cit ]. [5] CHUCHRO, J a kol., Podnikatelské projekty a plánování, Ostrava, VŠB - Technická univerzita Ostrava 2002, s. 95, [6] MPO, Dostupné z: [cit ]. [7] MIST, dostupné z: [cit.6/2006].