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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONALRESEARCHUNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

MASTER THESIS

Logistics cost optimization strategy within the context of risk management in international construction projects by the of Power of Siberia Gas pipeline case

Student

Olga Korneeva

Research Advisor

Victor Sergeev

Professor, Head of Department of Supply Chain Management

Moscow 2018



Introduction

Oneofthesignificantconditionsfordevelopmentoftheoilandgasindustryisastablesaleofproductsincludingitscheapandreliabletransportationto any consumer, (its price sometimes can befrom25to50% of the contract price). The reliability of delivery has any priority considering that oil and gas are primarily usedin the energy sector. Moreover,thisprocessincludestheexplorationofnewterritoriescharacterizingbyuniquenatural, climatic, geographical, demographic, ecologicaland other factors introducing some uncertainties to building logistics.

The object of the research: international construction projects logistics.

The subject 1 of the research: logistic costs optimization on international construction projects.

The subject 2 of the research: logistic risk management of international construction projects.

The purpose of the research: to analyze the strategy of logistics costs reducing by optimizing the supply chain, taking into account the growth and the emergence of new logistics risks, entailing additional costs for eliminating negative consequences. management international construction

Hypothesis:

Optimization of the supply chain inevitably leads to an increase in logistics risks and as a result to a reduction in savings

Assessment of relevant logistics risks gives an opportunity to define limits of rational Supply Cain cost optimization

The scientific novelty and main resultsoftheresearch: The significance of this study lies in the theoretical formulation and solution of a tasks set to optimize the supply model of international construction projects and reduce costs, taking into account the management of emerging and growing logistics risks

The international character of such construction projects imposes on them serious demands and responsibility. First of all, it should be noted that such projects are considered as strategically important at the state level. The requirements for the performance of contractual obligations with due quality and in due time are not only economic and reputation for the company, but also have highimportance from the point of view of the state economy as a whole. They (projects) can be even used as a political tool at the international level.

In addition, the launch and maintenance of such construction requires mobilization and involvement of a huge amount of resources, including from foreign partners. This is a strategic decision that can not be easily reviewed, and in terms of financial and reputation losses in case of change or cancellation is irreversible for all participants in the process.

That is why, pursuing its economic interests, it is critically important for companies that conduct international construction projects to seek and maintain a “healthy balance” between economy (profit) and risks. Especially it is important with the growing and emerging risk of non-fulfillment of the project due tooptimization at any level, including logistics, which we will consider in this study.



1. Theoretical aspects of logistics cost optimization of international construction projectsin the oil and gas industry within the context of risk management

ThemostpopulardefinitionoflogisticsgivenbyUSAin1985: “TheLogisticsisaprocessofplanning, executingandcontrolling(inthecontextofcostsaving)ofeffectiveflow of raw materials inventory, materials, unfinished goods, executed products, service andsimilar informationfrombirth to delivery points (including import, export,internal and externalmovements) for full consumer requirementssatisfaction.

V.I. Sergeevemphasizesthe following three moments within this definition:

- First, thelogisticcapacityisintegratedandcoverstheprocessfromthe place of birth to the place of consumption of the flow of raw materialsand finished products.

- Secondly, thesignificanceofcontrolofrelevantinformationis emphasized.

- And, asaresult,thirdly, forthefirsttimetheservice i.e. non-material activity was covered by logistics. Thishasaprincipal meaningfor the development of logistic approachesin service industry. (Sergeev V.I.,2013)

Within his work, Christopher defined the conception underlying the logistics as follows: Logistics represents a process of strategic control of procurements, transportation andstorage of materials, accessories and finished items (andrelative informational flows) of organization and its marketing channels, permitting to maximizecurrent and futureprofitabilityby means of performance oforders andinstructionswith minimum possibleexpenses (Christopher M., 2004).Within his definition, the author also focuses on informational flows and aims to reduce costs.

In numerous literatures,the definition of logisticscan be specifiedboth in a broad and in anarrow sense.

Inthebroadsense: Logisticsisascienceoncontrolofmaterialflowsandrelative information, finances and serviceina particularmicro-, mezo- ormacroeconomic systemfor achieving goalswithoptimal resource expense. AccordingtoD. Bowersocksand D. Klossinfamouswork, Logisticsisnot only related tobusiness orstate sector. TheLogisticsrepresentsabusinessconception,permittingtooptimizecompanysources, related tothe control of material andrelative flows andit's applied both for private and state company.

Inthenarrowsense (i.e. frombusinessposition): Logisticsrepresentsatoolofintegratedmanagementofmaterialandrelatedinformational, financial flowsand alsosimilar service, helping to achieve goals of business organization with optimal source expenses.

Optimallogisticsolutionscanbeobtainednotonlybythecriterionoftotalexpensesbutconsideringsuchkey factors as time of order execution and quality of logistic service. Theprinciplesandmethodsofintegratedlogisticsaredirectedforobtaining of such optimal solutionsparticularly forminimization of total logistic expenses. Reductionofalltypesofexpensesrelatedtothecontrolofmaterialflow, expenses for transportation, warehousing, order management, procurements andinventory,package, decrease of logistic risksallows freeing financial assets for additionalinvestments.

Theessenceoflogisticintegrationisthattheachievements make maximum contribution to the overall “money-box” of company logistic competence ineachseparatefunctional sphere.

Theintegratedlogisticapproachrequirestheintegrationofdifferentfunctionalspheresand participants withinunited Logistic System (LS) in order to optimize it.

Material, financiallabor, energyresources, timeresources, informational, intellectual and other types of resources can be distinguished. IntheprocessofLSbuildingandanalysisthespecialistsgenerallyoperatewithmaterial, financialand labor resources but it does not mean that the other types of resourcesrelating to solution of separate problem are ignored.

TosimplifyLSdesigning, planning,analysisandcontrolit's periodicallyworth tracing all resource measures to one measure for example, money. However,thisisnotalwayspossiblebecauseofabsence ofevaluation methods of separate resource types in money terms. So, whenevaluatingtheefficiencyofresourceuseinLSsomeindicators are used. Theseindicatorsgenerallyreflecttheresourcesconsumptionlevel.

Asfollowsfromthedefinitionoflogistics,itsmaintaskisanoptimizationof resources when managingthe main andassociated flows in LS.

Optimizationmeansaprocessoffindingextremepoints (globalmaximumorminimum), which can be evaluated as the bestpoints (indicators) of a certaintarget function orchoice of the best optimalvariant from the set of possible ones.Atanyprojecttheresources are limitedforobtainingstrategic, tactic or operational aims. So, theresources optimizationtaskin LS can beformulatedin two ways:

1. Havinglimitedresources, achieveglobalmaximumofvector target function (system of key performance indicators) LS.

2. With the plannedLS indicator points achieve thecombined minimum ofresources. (Dybskaya V.V., Sergeev V.I.,2016)

Speaking about Supply Chain Management we can not fail to mention the significant contribution of Michael Porter, Harvard Business School professor,who with the help of his books and investigations can attract attention by managers and developers of strategies tothe importance of providingrelative competitive advantagesforobtaining success at the market. OneoftheconceptsthatM. Porterusedwas called Value Chain by him:

Thecompetitiveadvantagecan'tbeunderstood withoutconsideration of the whole company. It isderivedfrommanyindependenttypesofcapacity, whichthecompanyexecuted when projecting, manufacturing, marketing, delivery andsupport of its goods. Eachoftheseactivitiesmaycontributetotherelativevalue of company expensesandlaying the groundwork forgoods individualization. TheValueChaindisaggregatesthefunctioningofthecompanyonstrategicallyrelevanttypes of capacity in order toprovidean understanding of expense behavior and alsocurrent and potentialresources ofindividualization. Thecompanygetsacompetitiveadvantageduetothefactthatit carries out these strategically important types of capacitycheaper and better of its competitors (Christopher M., 2004). The concept of value chain is closely interrelated with Supply Chain Management (SCM)

Supply Chain Management was offered by American specialists in the beginning of 1980andlaterwent viral. In essence, Supply Chain representsaconsequenceofinterrelatedsuppliers and consumerswhere eachconsumer is a supplierfor the nextchain link being downstream. And so on until the finished product reaches the end user.

So, oneofthemostwidespreaddefinitionsofsupplychain, basedonopinionsynthesisofmanyleadingforeignexperts, sound as follows: Supply Chain -- three or more economic items (legal entities or individuals), directly participatingin external and internalflows of products, services, finances and/orinformation fromsource to consumer.

1.1 Specificity of international construction projects Supply Chain Management in the oil and gas industry

OverthepastfewyearstheconceptSupply Chain Managementhas been actively amplified. Manyinvestigatorsoppose SCM tologistics (forexample: CLM atCranfield Institute of Logistics and Transport, UK, such famous scientists and specialists in the sphere of logisticsasМ. Christopher, J. Stock, D. Lambert, М. Cooper and many others). Theircommon position comes down to that Logistics is a part of wider business concept -- SCM. In 1998 CLM reviewed the definition of Logisticsgiven in 1985: Logistics is a part of supply chain management processandrepresentsplanning, implementation and controlof efficiency of product flow and stock, service and related informationfrom the point of its birth to the point of consumption in accordance withcustomer requirements.

V.I. Sergeevin his bookconsiders SCMasnatural continuation and development ofintegrated logistic conceptionin the sphere ofinterfunctional andinter-organization coordination. A.N. Rodnikov treats Supply Chain Management aslogistic coordination. Inparticular, inhisdictionaryoftermshepointsoutthatSCM -- a management of logistic chain -- order of different logistic operationsand rulesof its implementation. (Sergeev V.I.,2014)

Recognized American scientists in Supply Chain Management D. Lambert andJ. Stockdefine this concept: asintegration of key business processes, beginning fromany end user and coverall goods, services and information suppliers, adding value for consumersand otherpersons concerned.

Tobuildsupplychainwhenperformingbiginternationalconstructionprojectsit'snecessarytoconsiderall its structural and functionalpeculiarities.It'snecessarytonotethatthediversityofformsandmethodsofconstruction projectsdepending on the functional property ofconstruction object.

So, whenbuildingextendedpipelines(asgas pipeline), it's necessary to focus on the transport logistics.

Firstofall, thisisduetothefactthatthedirectconstructionsupplywiththematerialsandequipmentis performed with the attraction of significant transport part anddeveloped warehouse infrastructure, which part is created directly during construction phase.Inthisregard, sinceconstructioninvolveclosecooperationandcoordinationof manyeconomic entities andimplies any integration of its material flows, the term of Construction Logistics should be detailedup toSCM.

Insuchaspect, asalreadymentionedabove, theoptimizationtaskconsideringlimitedresourcesforthe performance of projectcanconsistof either achieving global maximum point of LS target function oraggregate minimization of using resources whenfinding planned values of LSindicators.

It'salsoobviouslythattheroleoflogisticsinmanufacturing managementis the greater the widercooperation of manufacturing process subjects. Theconstructionindustryhasdevelopedcooperationboth material suppliers andbuilders.

ConsideringanyconstructionsiteasspecificLogisticSystemLink(LSL)whereresourcesaretransformedinfinished construction object, we mayidentify a number of peculiarities capable ofsignificantly influencing on logistic processes in construction sphere:

- Individuality and uniqueness of each construction siteconditioned bythe necessity of consideringa large number of local peculiarities such as: territorial location andremoteness from manufacturers and suppliers, site length, transport accessibility for the whole work area, external economic and social infrastructure, climate and ecological requirementsand limitsetc. All this influences on specific characteristics ofeach linkand requiresa unique approach and construction of individual model for its supply;

- Temporality of infrastructure objects and work places. Depending on work phases, changing its parameters andset of operations performeda change is required both in volumes andavailable resources nomenclatureat each of its phasesincludinghuman ones. Moreover,the performance of temporal infrastructure is required forwarehousing and resourcekeeping;

- Absence at the construction site of specialized warehouse ready for acceptance, storage and movement oflarge volume of construction materialsand equipmentnecessary for work performance should also be attributed to peculiarities of construction industry. As a rule, site warehouse - temporal object of infrastructurerepresentingaspecial place, which location and sizecan change depending onwork phase, butthe capacity is limited;

- The essential factor of uncertainty within periods of specific work performance and resources necessary for themrequire creation of such supply mechanism assisting to minimize negative effects ofuncertaintyand related logistic expenseswhen supplying(LSL).

Takingintoconsiderationthatsuchlinkoflogisticsystemasconstructionsitehastime-dependent characteristics, industrial functional of such node represents any dependence oflarge number of parameters from time. So, constructionsupplyprocessisnotonlycomplicatedbutconsideringitssignificantnumberofvariable parameters its uncertainty level is significantly increasedthat leads toany increase of risksof exceeding deadlinesandgoing beyond the budget.

Speakingofuncertaintywemeanamulti-valued concept, characterizing by a large number ofvariables. Wecanidentifyfourmaingroupsofresourceuncertainty:

- The first one includes factors relating directly to the construction object (LSL so-called), i.e. medium, customer, General Contractor and other experienced participants of the process are cooperated with it;

- The second one includes factors relating to medium. For example,natural phenomena, weakness (uncertainty) of current transport infrastructureetc. becausethey characterize uncertainty ofmedium influence onobjects «covering» by it;

- The third one includes factors, caused by necessity ofscale cooperation and cooperation as well as uneven qualification and knowledge level particularly considering temporalattraction ofsignificant personnel number;

- The fourth group isa selective nature of environmental information collection. Particularly, it's related to logistic objectsbecauseprojectinvestigations are carried out by residual principle for temporal infrastructure. So, the uncertainty levelis extremely high within periods of its creation andquality.

Asitwasmentionedearlier, it'sworthspeciallyseparatingahighlevelofcooperationwhichimpliesjoint work at construction site of several independent contractors and subcontractors, having its own management centers, resources and economic interests and also different qualification level. (KhasmannТ.Т., 2013).Besides,the composition of subcontractors working at construction sitecan be changed depending onphase, contract signingwiththesecompanies; it may be urgentandmay be renewed several times during the execution of works. ThecoordinationofthisindustrialcooperationiscarriedoutbytheGeneralContractor or customer depending on the degree of involvement to the project.

Inviewofthispeculiarityit'snecessarytonotethatoneofpotentialproblemsin the process of such project implementation isinevitabledivergence of commercial interests of contractors and customers.So, insupplychainmanagementthemainemphasisisrelatedtomutual relation management withthe aim ofmore positive result achievementfor all participants of this chain. Although,thisposessomeseriousproblems where it's necessary to sacrifice interests of one chain participant in favor all others. (Christopher M., 2004).

But in contrast to this fact it's necessary to accent that,following the task of contractual obligations executionhaving minimum of own expenses and losses, each project participant may lead to significantdeviations of project parameters as a whole andincrease total resource expenses.

Consequently,whenplanningconstruction ofnewtemporalinfrastructureforcurrentconstructionoflinearobject,risks related tooperational deadlinescreatemultiplicative effect for total risk of construct completion due dateand not exceeding the object budget. Andbecauseit'spracticallyimpossiblefromtechnicalpointofviewtoconsiderallpeculiaritiesanduncertaintiesatthestageoflinearextendedobjectsconstructionwithinplan, then, as international experience proves, the customer task consists not onlyin reduction of planned budgetand deadlines, butits compliance andgrowth control.

Thecooperationofcontractorsproviding workperformance generatesthe wholehost ofinterrelated and interdependent logistic tasks.

Consideringthestructureofsuchproblemset,wemaydefineglobaltasks,EPCcontractor facing with, going beyond one construction site, ifGeneral Contractor simultaneously performs construction ofseveral objects. Andprivatetasksofsubcontractors,whichwillhave private, conditional decisions within global tasks.

Takingintoaccountthattheaimofconstructionindustryisanobjecterectionwithinintimewithinpricepreliminaryagreedwith required quality, then all tasksrelating to inventory and logistics inventory ofconstruction operationswe maydivide into two key groups: general logistic andspecificvariable ones.

The general logistic tasks do not have anyspecificmanufacturing belonging as technologies and its solutions. Its goal is to develop explained and weighed strategy for logistic system link supply with all necessary resources within setprice, quality and time parameters, optimization of tactical moves on supply chain management model selectionand its reliabilitycontrol, supply activities andintermediate storage up to itsassembling beginning, control of key indicatorsof efficiency and modification management.

- Specificproductiontasksreflectallmanufacturingpeculiaritiesandmanufacturing process specificity. Suchtasksinclude:

- Optimization of construction operations schedulein general andin stages, including search of possibilitiesof simultaneous and parallelexecutionofdifferent tasks within one stage;

- Optimization ofequipment set used (per quantity, productivity, resource intensity, depreciation expenses);

- Optimization ofquantity of using ownemployees and optimization ofsubcontractors attracting to work implementation;

- Calculation of the duration of work manufacturing cycle, its quantity optimization, its length decrease due to increase of operations intensity, specific operations simultaneous execution, decrease ofinteroperable intervals;

- Optimization ofresource volume using in cycle, stage;

- Optimization of resource volumeof all types;

- Optimization ofqualitative indicators of work performed;

- Forecasting the end of work cycle, stage.

Thesolutiontechnologiesandspecificmanufacturingandgenerallogistictasks should be examinedtogether, becausefound solutionsshould be mutuallynon-contradictory. Wemaydistinguishthreemainblocksofsimilartasks, guidingbythefollowing principlewhere the first stageis a planning of time andrequirements, the second stage isformation and management of material base, the third stage is an optimization of resources and processes.

Thefirstblock(formationoftemporalframesand indication of requirements in resources) includes:

- General tasks of evaluation of manufacturing capabilitiesof contractors and their choice considering the reliability.

- Specific tasks during formation of schedule, identification ofequipment set, volume of own resources andlist ofsubcontractors.

Theresultsofworkwithinthisblockarescheduleofactivitiesonprojectconstruction, materials and equipment supplier list, construction machinery nomenclature, list of potential subcontractors.

Theseresultsareformedbytwoimportantnormativedocuments: Construction Management Plan (CMP) andWork Method Statement (WMS).

Schedule, formedduringsolutionofthefirstblockoftasks, indicatesthepossibility of execution ofconstruction worksinspecified time frames and alsoresource requirement. It'sformedascalendar-networkmodel. Theimportantresultofthefirstblocksolutionsisanidentificationofseparate operations uncritical time frameswhich are reserves for the following optimization.

Thesecondblock(formationofmaterial and technical resource reserves)consists of:

- Generaltasks, includingCMPsupply, stockformation, management and control of material flows.

- Specifictasks, suchasadditionaloptimizationofconstructionandassembly work lengthconsidering resource volume used during any stageandall types resources stock volume.

Thethirdblock(optimization of CMP stock)consists of:

- Generaltasksofmanagementoptimizationandstock control

- Specifictasksofresourcevolumeoptimization, usingduringanystage; modification of quality indicators of executing works; scenario analysis of anticipated deviations fromactivity schedule.

Theinitialinformationforworksonblocksofspecificmanufacturingtasksisproject documentation: agreed project, detailed design, includingPlan of Construction Organization (PCO), Work Performance Project (WPP), preliminarypayment scheduleetc.

Asforconstructionsupply, itsschemeisusuallydeveloped by specialized research establishmentwithintheworkingprojectandGeneral Contractor has no rightto modify it at the stage ofconstruction implementation. So,wenotethattheroleofcustomer's competence multiply increases.

1.2 Logistics costsoptimization approaches in oil and gas construction projects

Many economists are focused on problems of accountantsystemdevelopment, management and optimization of logistic expenses. Traditionalaccountingdoesnotpayattentiontotheseproblemsmainly becauseit has been developing for other aims.Methodsofaccountingdonotpermittoidentifylogisticexpensesofcompany -- thiscanbecarried out by analytical way onlydetailing itstypical structure with the following calculationof valuesand comparing itsspecific components.

Besides,theimplementationoflogisticactivityrequirescertaincosts,whichineconomic practice are not always related to expenses instrict understanding of this term. However, theyinfluence ontotal results ofcompany activitybecause they affected on its financial indicators (Borodulina S.A., Sokolov B.K., 2015).

So,logistic expenses can be defined as money term of usedman power, funds and labor objects, financial expenses and losses from differentnegative consequencesofforce-majeure events, which are conditioned by promotion of material assets at the companyandbetween companies in the supply chain and as well asstock support.

Logisticexpensescanbeclassifiedaccordingtodifferent features.Basedoneconomiccontentallexpensesaretraditionallygroupedbyelements and calculation articles. Todeterminevolumesofmaterial, labor, financialresourcesusedbythecompanyforthewholeproductionandcommercialoperationsregardless of its purpose and use they are used classification on economicelements.The element nomenclature is equal for allcompanies. Manufacturingexpensesformingproduct cost include the following elements:

- Material expenses;

- Labor expenses;

- Social security contributions;

- Depreciation of fixed assets;

- Other expenses.

Todetermineprimecost (i.e. expensesinthe sphere ofmanufacture and distribution) of separate types of productsthe expenses are grouped according to calculation articles.Forneedsofinternalmanagementaccountingthearticlelistissetfor each companyin accordance with the conditionsof functioning based onpeculiarities of technology and organization of manufactureof goods and services(DybskayaV.V., SergeevV.I.,2160)

Along with traditional expense division on economic elements and calculation articlesandalsomethodsofproduct item classification (direct andway-bill) andratio oftotal activity change (variables, conditional-constant) logistical expensescan becombined with the following groups:

- Operationallogisticsexpenses, i.e. expensesforexecution of logistic operations/functions(transportation, storage, warehouse cargo handling, orders acceptance and handling etc.);

- ExpensesrelatedtoLSadministration (management and transaction expenses);

- Compensationexpenses (elimination)oflogisticrisks(cargo insurance, responsibility ofcarrier/transport agent, stock insurance)

- Capitalcostsconnectedwithfloating capitalfreezing in stock.

Forplanningandcontrollingpurposestheleveloflogisticexpensesisindicatedinrelationtobaseeconomicindicatorscharacterizing company capacity: sale volume of goods and services; total company expenses; stock expenses (to the average stock volume at the company); logistic expensesin purchase (supply) (to materials purchase volumes); logistic expenses in distribution(to goods and services volume sales) etc.

Amongtheindicatorsoflogisticexpensestheindicatorofleveloftotallogisticexpenses(ratio of logistic expense value to the turnover of company multiplied by 100%); indicator of expense level tostock (ratio of expensesfor stocktostock volumemultiplied by 100%) can be identified.(Sergeev V.I., 2013)

The optimization of logistic expensesshould be consideredwithinthe value chain, reflecting interrelations of focus companysupply chainwith suppliers and consumers optimizing it supply chain can get advantage incompetitive activity. Theconceptofvaluechainincludesactivitystructuringonstrategicallyimportant types of economic activityin a cycle from obtaining of raw material to finished product salefor end users.

Thelogisticexpensedecreasecanbe achieved by:

- Decrease of stock volume;

- Rationalization of transportation (by means ofoptimization of transport means and routes selection);

- Mechanizationandautomationofwarehouse processes;

- Modernizationoflogisticprocess management (administration);

- Applicationofmoderninformationalsystems, increasing the efficiency of logistic business process management.

Forconstructionprojectsfirstofallthereisagoodreason to consideroptimization of transportschemes and alsorationalization of stock accumulation and storage. Besides, there are some specific methods for solution of abovementioned taskswhenbuildingextensivelinearobjects. So,wemayusethegraphicalmethodtodeterminerational boundaries of segmentsof the main pipeline, material resources (MR) providing by acceptance points (Nagorny V.P, Globa V.M., 2012). Such calculation of optimal transport scheme consists ofindication ofroute sites, servicing by individual points of material resource entry (Temporary Storage Bases), distance of its transportationandrequirement of vehicles.

Asshownin (fig.1), theshortestdistancefromMRdeliverypointsА, В, Сand D correspond toanypipelineroutesdistances a, b, c and d. Pipelineroutedistances correspond values L1, L2, L3 betweenroadsoutputpointsfrom pointsА, В, Сand D.

Figure 1. Model of optimal service areas defining

Therationalboundariesofservicepointsshouldbeseparately indicatedforeach twoadjacentpoints of pipes and materials entry. ForpipelinesectionА'В' therationalboundaryof serviceА" can be determinedaccording to the following formula: l1` =(L1+b-a)/2.

So,foundsolutioncorrespondstothe optimal configurationofMR supply transport scheme.

1.3 Identification, analysis and management of logistic risks in oil and gas construction projectsapproaches

Incurrentliteraturemanyopinionsaredescribedconcerningthe definition and classification oflogistic risks. Riskisamultiple-aspectevent,havingahugequantity of mismatched basesof occurrence. Ambiguityofconditionsoforiginandinterpretationsmakespossiblethe appearance ofdifferent definitions, explaining risk definition from many points of view.

Ineconomicliterature alargequantityofrisk definitions is given.We consider some of them.

- The possibility of event occurrence with negative consequencesin the result ofdirected decisions or actions.

- Probability to bear expenses orloss benefit.

- Uncertainty in obtainingrelated profit or loss.

- Event or groupofrandom, relatedevents, damaging any objecthaving this type of risk.

Ineconomicandmathematical sense the most concisely risk was defined as probability of event occurrenceleading toappearance of economic damage (loss).

The most general definition for logistic risksis given within works of (BudrinaЕ.V., 2001) and (Pletneva N.G., 2006):these are risks of logistic operation execution, transport, storage, cargo handlingand stock managementand alsorisks of logistic administration for all types including management risks, appearing when performinglogistic functionsand operationsin supply chains.

The level of construction project risk is always connected with complexity of project (Darnall R., Preston J.M., 2010). Moreover,the fact that there are so many risks can be identifiedin construction industrycan be explained first by projects` sizes and its complexity. The larger project is the greater the potential risks that may arise. Some factors may stimulaterisk occurrence. Then most popular in modern literature risks arefinancial, concerning the environment, time,quality and planning of project handling. Other factorsinfluencing onrisk appearance includelevel of using technology andcompany risks (Gould F.E., Joyce N.E., 2002).

Cleden (Cleden D., 2009) confirms that the complexity implying a high level of cooperationand coordinationas mentioned above in the context of logistic specificity description at construction sitesarefactor which can limit the project. The larger and more complex the project the more resources are required for its completion. Moreover, it'snecessarytorememberthatnewchallengescanappear after formation of potential risk list.

Therefore, theprojectgroupmustnotonlypayattentiononmanagementof such found risks but alsobe attentive to any new potential risks, which may appear.

Duetothenatureofconstructionsectorwhich impliesa high uncertainty level risk management is very important process here andwidelyused. Thesetypesofinvestmentsinrisksarecharacterizedby more formal processes of planning, monitoringand control. Thesimplestmethodofriskidentificationistheanalysisandmaking conclusions from previousfailed projects.However, it'snecessarytonotethatlargeconstructionprojectsare often characterizedbyunique condition of implementation.

In order to assure that project tasks are executed it's necessary toconsider the portfolio of risks connected withall participants oflife cycle of project (Cleland D.I., Gareis R., 2006).

At early stages of the project where is implied planning and signing the contracts with preliminary capital budget risk management procedures is required to be foreseen.

At later stages the risk management is systematically applied for monitoring of critical elements which can negatively influence on the project efficiency.

In other words, this allows monitoring any threats at early stage and to informthe project management at early stages, ifany aims, time, cost or quality do not fulfill, giving the possibility to takecountermeasures, (Tummala V.M., Burchett J.F., 1999).

Some risks exist, which can be identified in construction industryandappeared in each construction projectregardless its size or volume.

Changesindesignandscalesaswellastemporalframesfortheprojectcompletion are the mostextended risks for construction sector. Thelaterthedecisiononmodificationsismadeandwithinprojectimplementationisrelatedtovolumeorimplementationmethod, themore additional resources and time is required that finally increases its price.

Earlycompletionoftheprojectcancausethesamequantityofproblemsasdelay in its implementation. Schedule violation createslarge expensesboth for investors andcontractors because ofcontractual work non-compliance (Gould E.F., Joyce N.E., 2002). So, it's important to keep balancein compromise concept on time and quality, which becomes more and more important for construction market (Zhang H., Xing F, 2010). Depending on the scope of the project risk types can be varied by investment volume.

RiskClassificationduringConstructionincluding Logistic Ones

Consideringriskprobleminthetheoryoflogisticscurrentriskmanagementdevelopmentsareoftenused. Insomebody'sopinionlogisticrisksincludedifferenttypesofrisksofalllinksandelementsbothintheprocessofmodificationofmaterial, financialandinformationflowsand in the process ofrisk management, appearing in any logistic system (Pletneva N.G. 2014).

Also,Risks in logistics are defined as external factors, influencing onsystem reliability. This includesmanagement reliability risks, operational scheduling reliability of income and outgoing flows, risks on evaluation ofinsurance (ornormative) stocks (Mirotin L.V., 2004).

Thegeneralclassificationoflogisticrisksisbasedondetachment of the following groups:

1. Commercialrisk - supplyfailure, unavailabilityofcargoontime, non-compliance with deadlines, non-fulfillment of financial obligations of supply chain contractors (logistic system - LS);

2. Riskofpropertylossbecauseofact of God, unfavorable transportation conditions;

3. Riskofpropertylossduetostrikes, mass riots, military actions;

4. Risksconditionedbyviolationsofoccupational and fire safety;

5. Risksoftheft (inparticular, duringwarehouse and transport operations);

6. Ecologicalrisks (goodsaccidentorits feature mismatch withpackage information, that may damageenvironment);

7. TechnicalRisk - failureorvehiclebreakageand, asaconsequence, possible cargo delivery delaysandother risks occurrence increase;

8. Riskscausedbylowqualificationofcounterparties in LS - negligence, document loss, or delayetc.;

9. Riskofcivilliabilityfrom damage to third parties. Asriskeventsinlogisticsarevariedanditsconsequencescausesignificant economic damage, the problem of risk management becomes extremely important. (Sergeev V.I., 2013).

The main causesofriskappearancearethreeexternalfactors,indicatingbydifferentsituationsorsetofcircumstances: uncertainty, accident, reaction,whichmust be considered, foreseen, planned and, if applicable,decreased, prevented.

- Uncertainty is considered as sum ofcircumstances, which preliminary may be foreseenbut it's impossible to determineany level of its influence on total indicators oflogistic capacity.

- Accident involves circumstances, appearing regardlessgeneral situation and in many casesthey appear under the influence ofenvironmental factors.

- Reaction -- willful opposition of logistic participants to its execution.

Theappearanceofrisksituationswithlogisticprocesscomplexityis inevitably attracts careful attention tomanagement problems of logistic risks. In this regard, it's necessary to separate three main tasks:

- Developmentofimageonfactorsofappearanceandidentificationofparticular logistical risks;

- Identification of risk limits;

- Developmentof risk analysis, evaluation and management methods.

Themainaimofriskmanagementisastruggleagainstitsnegativeconsequences, i.е. decreaseoftotalexpenses (losses) fromill-conceived logistic activity, expressed in a complex ofmeasures directed forrisk reduction and/ordirect lossesand expenses, directed forleveling out the consequences of risk events.

SupplyChainRiskscanbedividedinto 2 large categories

1. Unplanned modification or violation of informational, material, production, monetary flows among the participants of supply chain;

2. Unplanned deterioration of functioning (efficiency) parametersofsupply chain.

Thisclassification (andfurtheridentification)oflogistical risksshould be carried out in threeperspectives:

1. Risk sources,

2. Risk factors

3. Strategic importance of the product.

Risksourcesaredividedintointernal (materialandinformational sources) and external (supplier, consumer andinternal environment).

Factorsareasfollows:human, technical, organizational, force-majeure.

Thestrategicimportanceoftheproductfollowingsuchindicatorsasvolume, value, uniqueness, requirement forspecial modesdetermine risk classification according to consequence scaleandprobability of occurrence.

Speakingabouttheclassificationoflogisticrisksbasingonsupply chainexternal and internal environment influence onanyflow typein supply chainsthe following risks should be marked:

Risksassociatedwiththematerialflow-aphysicalflow (rawmaterialsandmaterials, semi-finishedproducts, finishedproducts, goodsandservices) insideandbetweencompanies, - risksofdelay (orprolongation) of any supply, includingdeviations from supply time and as well as receiving products of improper quality orincomplete that can be caused for example by failure of transport operations, custom procedures, inelasticity/failure of manufacturing processes, inventory shortage, force-majeure events: acts of God, acts of terrorism, strikes etc.

Risksrelatedtofinancialflow (cashandcashlesspaymentsbetweencontractors-insideandoutsideorganizationsincludingexpenses and investment distribution) - is a violation of payment obligations between contractorsor investment management failure, causedby destabilization ofpayment system, currency gap risks, financial imbalance, actions ofcontractors.

Risksrelatedtoinformationalflow, arementionedintwoprojections: at first, informationalsystemsandtechnologiesrisks(informationalsystemsoperationalfailure, datahandlingerrors, informationalsecurityviolation, insufficient effectiveness of informational systems, inconsistency of their functions with the goals of contractors), secondly, garbling risks, caused by informational barriers in supply chainsand forecast risks - so called Forrester effect (time lag of data entry on demand level, availability of qualitative information, order cycle length), sales promotion effect, goods seasonalityetc.

Somespecialistsattributegarblingproblemsaswellsascontractordecisiontomodifyconditions/terminate the contract (includedprice increase for products/services), violation of supply conditions by parties, involved inthe process of supply or distribution.

Anothercategoryofrisksinsupplychains-coordinationrisks (interactionofcompanydepartments, companyanditssuppliersand othercontractorsin order to provide manufacturingandproduct supply to end userthrough supply chainwith maximum profit for all participants (Cavinato J.L., 2004).

At the same time it's necessary to consider that allrisksappearinginconstructioncanbedividedinto zones depending on influence level and influence:

1. Project risks, which may influence on project aim achievement;

2. Business risks, influencing onoperational activity;

3. Environmental risks - external onestowards the project, which may influence onproject objectives;

4. Internal risks of each participant of logistic chain.

Thus,focusing onterm similarity «Logistics» and «Supply Chain Management» in terms of object image, Fuchs and Wohinz define this logistic risk as - unforeseen, undesirable event, led tothe absence of necessary materialin timein related quality, place on agreed price(Fuchs H., Wohinz J.W., 2009).

However, this risk simultaneously shouldbe consideredasasourceofadditionalpossibilities, logistic system competitive growth method and its subjectsthroughelimination ofnarrow places andconcentration ofkeyfactors of success.

Reviewofmanagementmethods (elimination) of logistic risks

Theprimarytaskofriskmanagementisan identification and evaluation of risks.Thesuccessofthistaskdeterminestheefficiencyofallfollowingactivities: planning for risk response, monitoring (risk measurement), event performance (risk response) and control.

So, this cycle of risk management in supply chain can be representedas follows on figure 2:

Figure 2. Risk management cycle in supply chain(Gattorna J.L., 2008)

Inthisregard, ahighlevelofmethodologicalbaseofriskmanagementandprimarilyagreedterms and then,resource identification methods, risk causes and consequencesare the main factor ofbusiness logistical risks management efficiency augmentation. (Levina T.V., 2014)

Rusk management system is rather often built as Deming cycle (orDeming's Shewhart) - PDCA-cycle (words: plan, do, check study, act) (Neew G.R., 1996).

Risk management system includesa set of key steps:

1. Risk identification;

2. Risk evaluation;

3. Critical Risk Management;

4. Monitoring and Control of Risks.

Theidentificationofriskisusuallyconstruedaslocationprocess, listformationanddescriptionofrisk elements. It'soneofthemostimportantstepsoflogisticrisks management system formation.

Toevaluatelogisticrisksincapacityofindustrialcompaniesthe following structural-logic chart (fig. 3) should be used:

Figure 3. Methods of Logistic risks identification (Kulagovskaya T.A., 2012)

Risk Situation Analysis definesthreeinteractive conditions:

- Uncertainty presence,

- Analysis of possibledevelopment alternatives,

- Selection of possibility to assess probability ofselected risk management variant execution.

Afterassessmentofprojectriskstheymayberepresentedintheformofriskchart(fi. 4)where they aredistributedbased on negative effect degreeandpossibility of occurrence as well asdivided into groups. Eachgroupsuggestsitsownrisk elimination method.

Figure 4. Risk matrix

Thefollowingeventsmayberelatedtomethodsforreducinglevelof risks(fig. 5).

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Figure 5 Risk level reduction methods



We'llanalyzeeachmethodin details.

1. Diversification -- distributionofinvestmentsondifferentfinancial tools, different investment objects. Thediversificationassiststodecreaseriskandlosses of financial resources.

2.RiskTransfer (decreaseofrisk) -- first (transferring) partywilltransfer to the second one (receiving) part a riskbased on the signed contract or agreement. Risktransferparticularlyoftenisusedatrent, signingconstruction contracts, finance lease, signingstorage agreements, shipping contracts, agreements of sale and purchase, supply, mandate, service, factoring. So, risksofinsolvency, propertyloss, responsibility, terminationcan be transferred.

3. Limitation.Thismethodinvolvesdefinitionoflimitsumsforspending, salesandexpenditure, credit etc. It'sprincipallyusedbybanksaswellascompanieswhensailing of merchandise on credit, investors during calculationof capital investments. Inanycasesthelimitationisconsideredasmethod of risk situation limit.

4. Insurance -- distributionortransferofrisks, bearing by one or several subjects. Thismethodisusedinaccordancewiththecurrentlawindifferent countries for example it includesdouble insurance, reinsurance, self-insuranceetc.

5. Riskelimination -- coversterminationofanytypes of capacity, connected with this risk.

Riskminimization, appearinginLS,isbasedonsomebusiness measures, purposefully and preventively decreasingthe probability of risk occurrence:

5. Informationavailability -- proof, up to date and full.

6. ManagementeffectinLS, decreasing the probability of risk occurrenceanddecreasingits negative consequences.

7. Useofnormativematerialsfor correct responseon risk situations appearance.

8. Availabilityofdeveloped logistic infrastructure: transport and informational infrastructure.

9. Insuranceoftransportation, warehousing, handling.

10. Preventionoffurther risk damage.

Developmentofrisk identification descriptionand analysismodel

Foridentificationanddetailedanalysisofrelevantlogisticrisks,appearing on construction projectsduring optimizationwe may use the following structure (fig. 6).

Figure 6. Risk structure

Where we will define and analyze such definitions asobject of logistic risk, definerisk events/situationsand its consequencesas well asidentifyrisk subjects (resources) andfactors.

Within our investigationandconsideringtask material flows arethe object of logistic risks andrisk event isunplanned modification of its parameters. Regardless thatany investigatorsrefer to logistic risks, risks of informational and financial flowsbased onobject definition and logistic object, it's necessary to conclude thatparameter modification of informational and financial flowsarea subject of investigationsoffinancial and informational management andviolation of its parameters may bea source or consequence oflogistic risks.

All forms of material flow including stock are the object of logistic risk. So, logistic risk will bea possibility of loss or expenses conditioned byoccasional modifications of parametersof material flows.

The parameters of material flows include about 20 characteristics which serve basically for its classification, including nomenclature andassortment, quality, weighed, physical and chemical description of cargo, nature of package, carrier and carrier vehicle goods, conditions ofpurchase and sale, transportation and insurance, financial characteristics as well asintensity, density, speed, initial and end points, way geometry and length, movement speed andtimeetc. (Mirotin L.B., 2000).

For the purposes ofthis investigation it's necessary to limit and orderthe parameter part, which violationwill bewitness onoccurrence of risk event.

In many cases two groups of parameters aredistinguished:

- Static (weight, quantity, dimensionsetc.)

- Dynamic (speed, temp, time, length and trajectoryof route).

Subjects of logistic risk may representMR supplier, MR consumerand third parties, who do not participate directly in merchandise flow.

Risk event consequences includedirect or indirectlosses, expenses related tofeature recovery (reliability andиstability) a supply chain link, and also economic consequencesforother links of the chain.

Figure 7. Material Flow (MF) Parameters Violation (Levina T.V., 2015)

InwitnessofthelastconfirmationwewouldliketonotethatoccurrenceofrisksituationmayleadtodirectresourcelossesofMRsupplerand/orconsumerorbecomeasourceofother risk categoryrelated to subject policy of risk in the sphere of management by logistic risks (directed onprevention or decrease ofdamage sizein the result of occurrence of risk event) -response tooccurrence of risk event (i.e. control actions), andaccordinglyexpenses for thisactivity (fig.7).

Table 1. Risky events characteristics

Parameter	Event	Consequence
Supply defect
Time	Supplier's MR dispatch	After scheduled date	Supply delay risk (failure to perform obligations before the supplier) or risks (for example increase of operational movement speed) and expenses related to the performance of delivery execution (due date)
		Before scheduled date	MR delivery risk to the consumer before due date. Resource waiting risk used for MR transportation (technique, personnel), consumer's acceptance - decrease of resource efficiency.
	MR Receipt for consumer	After scheduled date	MR deterioration risk. MR deficit risk. Expenses related to MR stock, necessary for continuous supply of operations
		Before scheduled date	MR surplus risk. Additional expenses in the result of unplanned resource allocation necessary for MR receipt.
Quantity	Supplier's MR dispatch	Less agreed quantity	Failure to perform obligations before the consumer on MR quantity. Expenses relating to MR compensation.
		More agreed quantity	Risk of MR delivery to consumer exceeding agreed quantity. Additional expenses for handling operations of MR additional volume. Expenses related to return of MR additional volume.
	MR receipt for consumer	Less agreed quantity	MR deficit risk. Expenses related to MR stock, necessary for continuous supply of operations.
		More agreed quantity	MR surplus risk. Additional expenses in the result of unplanned resource allocation necessary for handling and storage of MR additional volume. Expenses related to return of MR additional volume.
Quality	Defected MR dispatch from Supplier	Defected MR delivery to consumer. Expenses related to return of defected MR and MR compensation.
	Defected MR delivery to consumer	MR deficit risk. Expenses related to MR stock necessary for continuous supply of operations. Expenses related to return of defected MR. Risk of using defected MR in operations.
Supply failure
Dispatch didn't happen	Delivery didn't happen. Failure to perform obligations before the consumer. Expenses relating to MR compensation.
Delivery didn't happen	MR deficit risk. Expenses related to MR stock necessary for continuous supply of operations.
MR quality does not completely correspond to agreed one	Failure to perform obligations before the consumer. Expenses related to return of defected MR and MR compensation.
MR quality does not completely correspond to agreed one	MR deficit risk. Expenses related to MR stock necessary for continuous supply of operations. Expenses related to return of defected MR. Risk of using defected MR in 1 operations.

Forexample, MRarrivaldelayfromprevious supply chain link maynotcauseMRdeficitsituationinifit'snotcritical,there'sanytimereserveand/orthisrequirementisprovidedbyMRstock «attheinput»ofoperationsorinteroperablereserves,butleadstoadditionalexpensesrelated tocompensation of MR insurance stockand related risks, connected withcreation andstock holding (theft, decrease ofasset turnover, decrease ofMR quality). Adecisiontoincreasethespeedofmaterialflowincaseofriskofsupplydelaymayleadtothe increase ofresource failure, participating in transportation of material objects (for example, breakage risk orvehicle accident, cargo damage duringtransportation).

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