A Credit Risk Modelling Approach to Assess Supplier Default Risk

Abstract

The purpose of this paper is to quantify the supplier default risk in a buying firm’s supplier portfolio. Based on credit risk models, we develop a methodology that buying firms can use to pro-actively determine their exposure to supplier default risk. To illustrate the proposed methodology, we use empirical data pertaining to supplier portfolios of executive-size car models from three German automotive OEMs. We show that some supplier portfolios are exposed to higher default risk which places them at a disadvantage, because they face a higher probability that the supply of components can be disrupted and cars cannot be built and sold.