One of the more common customer or trade questions Blue Book Services frequently answers is, “Why did my company’s Blue Book Score change?”
And, without pause, the inquirer often follows up with, “I pay everyone fast—my score shouldn’t be this low!”
It’s generally a simple question to answer, but one that takes time to navigate and explain.
Blue Book scores over 5,000 produce and transportation companies. Thousands of data points are accumulated and aggregated daily. The reality is that scores change all the time.
Companies of all sizes, well rated or not, undergo score changes: 5, 10, or 25-point changes are not uncommon, and though less common, changes of 50 or even more than 100 points can occur with any given monthly model refresh.
Aside from being a tool to manage the trade risk of customers, a company’s Blue Book Score also plays a role in its ability to access credit and its perception within the industry.
Maurice Cameron, managing member of The Flavor Tree Fruit Company, LLC BB #:260549 in Hanford, CA, says, “We monitor our score to ensure we are consistently presenting ourselves to the industry as an example of prompt pay.”
Scores depend on data. Understanding what they predict and measure will help explain the score and why it changes.
Credit scores are the result of several data points processed by a statistical model designed to predict future credit events. They have been an invaluable risk management tool in domestic and international trade for decades.
Blue Book Scores, the produce industry’s credit score, were first introduced in 2005 and have become a predominate industry risk tool, predicting the likelihood of delinquency and/or default within the foreseeable future (12 months), giving users an inside look at current and future risk.
Blue Book Scores range from 500 (high risk) to 999 (low risk). To help with risk interpretation, scores are grouped into risk bands. Risk bands essentially layer risk from low to high or high to low, and are established from historical credit events.
For example, companies with Blue Book scores of 800 or higher are regarded as lower risk trading partners because these companies have a historically low occurrence of negative credit events.
Companies with lower scores naturally carry greater risk than their higher counterparts as a result of a higher frequency of historical negative credit events (see Table 1 for a basic risk band model).
When management from a scored company says, “Our score shouldn’t be this low,” we ask what’s ‘low’? Low is a relative term. What one company may consider low, another doesn’t.
Hypothetically, when a company’s score changes from 900 to 890, has risk increased? The numeric change would suggest so, but the probability for delinquency or default is essentially the same because 890 continues to be regarded as low risk for such events.
Generally speaking, a 5- or 10-point decline would not create undue concern. Is there risk in doing business with this company? Yes, because all transactions carry some element of risk. There is no iron-clad assurance a company operating today will be in business tomorrow.
The difference between a company scored at 900 and one at 600 is how well each is handling its obligations.
This an excerpt from the Credit and Finance department in the May/June 2022 issue of Produce Blueprints Magazine. Click here to read the whole issue.