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Cost at Risk (CaR) as a Management Tool and Its Application to a Colombian Company
Victor Hugo Aguirre Rendón, Vivian Cruz Castañeda, Samuel Mongrut Montalván and Pilar Álvarez Franco
Cost volatility threatens margins and budgeting in production and service operations. This paper provides a practical tool to quantify downside cost risk using Cost at Risk (CaR), an adaptation of Value at Risk for unit-cost drivers. Using historical monthly observations, we estimate the 95% CaR for each cost component (labor, raw materials, packaging, energy) and for total unit cost across products. We implement three approaches: parametric simulation under Normality, parametric simulation with an alternative right-tailed distribution to capture skewness, and nonparametric bootstrap. Results are reported as component-level and total CaR percentages and are mapped into an income-statement scenario to stress-test gross margin. The framework supports pricing, budgeting buffers, supplier negotiation priorities, and targeted cost-control actions under adverse but plausible conditions.
Keywords: Cost at Risk (CaR), risk management, profitability, production costs, manufacturing, bootstrap