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.