Value-at-Risk VaR Models

Generally, VaR type risks are caused by rare events, such as earthquakes, floods, fire, wars, terrorism, etc. They can result in catastrophic disruptions to the company s supply chain. Recall how a lightning bolt hithng a semi-conductor plant in New Mexico in 2000, resulted in over 640 million revenue loss to Ericsson and changed the landscape of the mobile phone industry. 

VaR models were first developed for the financial industry in the early 1990s. They are considered as a standard measure for market risk and used extensively in portfolio risk management. From the financial point of view, VaR measures the maximum possible loss in the market value of a given portfolio. Considering the characteristics of VaR type risks caused by rare events, the concept of VaR can be applied to risk quantification in supply chain management also. 

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