Literature Review on Risk and Risk Management of Logistics Projects
2.1 Risk Overview
2.1.1 Definitions of Risk
The main task of the American Society of Risk Analysis is to identify risks (Jap and Ganesan, 2000; Min et al., 2005; Sun, 2007). However, after four years of hard work, the committee finally decided to abandon this task because the difficulty of demonstrating a completely unified risk definition cannot be overcome (Zhang and Huo, 2013). In the financial industry, the concept of risk refers to the variability of asset returns (Bernard et al., 2018; Ceryno et al., 2015; Chang et al., 2015; Copeland, 1993). In the insurance industry, risk is defined as the probability of loss (Bowersox and Daugherty, 1987; Chen et al., 2016; Cheng et al., 2018; Michael et al., 2018). On this basis, risk has been defined in many different fields, where it can refer to the uncertainty of loss and the uncertainty of profit. Sun (2007) argues that the following are roughly the typical view about the definition of risk:
a）The first view is that risk is the possibility of loss occurrence. The concept of risk is initially incorporated into theory of economics by Haynes. In his article ‘Risk as an
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Economic Factor’ published in 1895, the term risk is used in economics and other academic fields. No technical content is established, and risk only represents the possibility of loss. Haynes (1895) believed that in the implementation of certain economic behaviours, the economic behaviour will bear the risk if uncertainty exists about the occurrence of unfavourable results, and the result of taking the risk is the reduction of the profit of economic behaviour. French scholar Reimann’s ‘General Business Economics’ published in 1928 also defined ‘risk’ as the possibility of loss.
Since then, other scholars, such as Maier, Kemek and Rosenbull (1986) have clearly defined risk as the possibility of loss. Boehm (1991) also defined risk as ‘the probability of loss or damage’.
b）The second view is that risk is uncertain. Chapman (2003) defined risk as an uncertain event or condition that positively or negatively affects the content of the project. Modern asset portfolio theory also believes that risk is an uncertainty, and risk and uncertainty are not essentially different.12
c）The last view is that risk can be considered the deviation of the results from expectations. Chen et al. (2014) argued that risks are manifested as a fluctuation of variable in the future. Firstly, this volatility comes from the uncertainty of future outcomes, which cannot be accurately predicted in advance. Secondly, the fluctuations of market variables are frequent or even continuously changing with some statistical characteristics. Mathematical statistical methods for measuring volatility mainly include the expected value and variance (or standard deviation) of the variable. The expected value represents the concentrated trend and average level of the fluctuation of the variable, whereas the variance represents the discrete trend of the variable change, that is, the risk level. Using the variance or standard deviation to assess the level of risk has become a basic risk measurement method.
On the basis of the definitions of risk, most scholars believe that risk is related to loss
12Major differences still exist between risk and uncertainty. Commonly, risk can be appraised with probability. People do not know what is going to happen but know what distribution looks like. By contrast, uncertainty cannot be measured entirely. Hence, people neither know what is going to happen nor what possible distribution looks like.
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and uncertainty and that risk is a multidimensional concept. However, when it comes to risk in logistics projects, the definition of risk must be clarified and made precise for the intended propose to be understood by everyone in this industry. Such actions can guide the analysis of this thesis. On the basis of the different interpretations and definitions of risk, the definition of risk in this thesis is as follows13:
Large Scale Logistics Projects Risk is a negative activity or event and a potential consequence that people do not want, including (1) the probability of loss or gain and its measurable size;(2) it is an event that can cause the occurrence of another event that is unrelated to the other, multiple simultaneous events or an ongoing event.
As argued by Sun (2007), as a common phenomenon in social and economic life, risk has the following characteristics (Barry et al., 2001; Ko et al., 2010; Ljungqvist and Ricjardson, 2003):(1) Risk is objective and universal; it does not depend on human will.
Although humans always want to identify and control risks and try to change the conditions in which risk may occur within a limited time and space, people can typically only reduce the frequency of occurrence of the risk and the losses caused by the corresponding risk and they cannot eliminate the risk entirely (Bernard et al., 2018; Chen et al., 2016; Cheng and Xiao, 2009; Cheng et al., 2008; Daugherty et al., 2006).(2) Risk is accidental. Contingency is also the uncertainty in the usual sense, which is the essence of risk characteristics.14 This assumption is due to the randomness of objective conditions and people’s lack of understanding of the future environment, which prevents them from fully determining the outcome of an event (Chen et al., 2010; Day, 2000). (3) The possibility of risk is testable. Uncertainty determines that risk can only be a possibility, and this possibility becomes a reality depending on other relevant conditions.
13Defining risk in logistics projects in this way is reasonable. In terms of logistics projects, what people care about is the profit and loss, which are the main reasons why this thesis includes the probability of loss or gain in the definition of risk. Moreover, logistics projects cannot be implemented alone. The process of logistics projects almost includes each part of the society, which is the direct reason why this thesis considers the second part of risk definition.
14In this thesis, contingency does not differentiate accident and contingency; however, knowing that these contingency and accident are different is important. Briefly speaking, contingency is (uncountable) the quality of being contingent, of happening by chance, whereas accident is an unexpected event with negative consequences occurring without the intention of the one suffering the consequences (Lalonde and Boiral, 2012).
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However, this potential uncertainty can be predicted and measured by analysis, statistics, subjective judgement or evaluation of a series of similar events in the past (Fawcett et al., 2008; Nyaga et al., 2010; Tsanos et al., 2014). (4) Risk is related to behaviour.
Behavioural associations indicate that the risks faced by decision-makers are closely related to their decision-making behaviours. The behavioural relevance of risk indicates that any type of risk is basically formed by the combination of decision behaviour and risk status, that is, the unity of risk status and decision behaviour. Although risk status is objective, results will vary due to different risk attitudes and decision-making behaviours (Hartmann and de Grahl, 2011). (5) Risk can be changed under certain conditions.
Objective conditions change; thus, the nature and the number of risks may also change or be eliminated with the control of certain risk within a specific time period, and new risk may also arise (Grudinschi et al., 2014). (6) Risk is detrimental. The occurrence of risk will have a certain influence on specific targets. Generally, the influence of risk in this thesis refers to the effect that a particular subject does not want to see. This effect can cause damage to the subject and affect effective decision making. In other words, non-destructive risk is also a risk (Fawcett et al. 2012). The discussion of risks and definitions is summarised inFigure 2-1.
Figure 2- 1 Definition and Characteristics of Risk in This Thesis
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