Risk Management in the Oil Supply Chain: A CVaR Approach

This study analyzes the strategic planning of an oil supply chain. To optimize this chain, a two-stage stochastic model with fixed recourse and incorporation of risk management was developed. The model took a scenario-based approach and addressed three sources of uncertainty. To deal with these uncertainties, the conditional value-at-risk (CVaR) was adopted as a risk measure, and then the model was applied to the supply chain of six oil refineries. The goal of the study was to maximize the expected net present value, E(NPV), of the supply chain under analysis. The results indicate that the optimization of the several scenarios yielded an E(NPV) variation that reached US$ 36 million. Such a significant difference demonstrates that taking uncertainties into consideration is a fundamental step in decision-making processes.