Basic Risk Quantification Models

The risk quantification models discussed in this chapter will take a broader view of supply chain risk and model it as a function of occurrence, impact, detectability, and recovery. Methods to quantify each risk component will be developed. We will begin with the development of a basic risk quantification model as a function of impact and occurrence. Separate mathematical models will then be developed for risk detectability and risk recovery time. All the models will be integrated and illustrated with a case study on risk adjusted multi-criteria supplier selection model at the end of the chapter. 

Following Yang (2006), we classify risks, natural or man-made, that can cause supply chain disruptions into two types for the purpose of quantification  

The basic model will quantify risk as a function of severity of impact and 

It is worthwhile to note a subtle difference between the definitions of impact and occurrence in VaR and MtT type risk functions. In the case of VaR type risk function, impact is a probability distribution of loss due to a risk event and occurrence is the probability distribution of the number of risk events during a period. For the MtT type risk function, impact represents the loss due to deviation from a performance target value and occurrence is the distribution of that performance measure. 

Value-at-risk (VaR) Rare Severe Hurricane, strike, fire, terrorist attack 

---