Survival analysis of supply chain financial risk

Scott Dellana and David West

Journal of Risk Finance, 2016, vol. 17, issue 2, 130-151

Abstract: Purpose - The purpose of this paper is to apply survival analysis, using Cox proportional hazards regression (CPHR), to the problem of predicting if and when supply chain (SC) customers or suppliers might file a petition for bankruptcy so that proactive steps may be taken to avoid a SC disruption. Design/methodology/approach - CPHR is first compared to multiple discriminant analysis (MDA) and logistic regression (LR) to assess its suitability and accuracy to SC applications using three years of financial quarterly data for 69 non-bankrupt and 74 bankrupt organizations. A k-means clustering approach is then applied to the survival curves of all 143 organizations to explore heuristics for predicting the timing of bankruptcy petitions. Findings - CPHR makes bankruptcy predictions at least as accurately as MDA and LR. The survival function also provides valuable information on when bankruptcy might occur. This information allows SC members to be prioritized into three groups: financially healthy companies of no immediate risk, companies with imminent risk of bankruptcy and companies with intermediate levels of risk that need monitoring. Originality/value - The current paper proposes a new analytical approach to scanning and assessing the financial risk of SC members (suppliers or customers). Traditional models are able to predict if but not when a financial failure will occur. Lacking this information, it is impossible for SC managers to prioritize risk mitigation activities. A simple decision rule is developed to guide SC managers in setting these priorities.

Keywords: Resilience; Disruption; Supply chain; Financial risk; Bankruptcy detection; Survival analysis (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-11-2015-0112

DOI: 10.1108/JRF-11-2015-0112

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