Managing Supply Risk Using Value at Risk Method based on Extreme Value Theory

The general trend to focus more on core competencies has forced companies to use outsourcing strategies and led to appearance of supply chain. Supply chain risks can arise from many sources, including political events, demand fluctuation, technological changes, financial instability and natural disasters. To be able to handle these risks, supply chain risk management is needed. Managing supply risk is an essential part of the supply chain risk management and in this research we focus on supply risk management. We use value at risk, extreme value theory and cash flow at risk to present a method for quantification of supply risks such as late delivery, quality risk, natural disasters risk and business risk (financial instability of suppliers). Furthermore, a model for supplier selection and order allocation based on these supply risks, has been proposed. Finally, a numerical example is presented and some computational result is reported.