Print Grabowski Gene

Applying Diverse Analytics to
Improve Automotive Collections

Gene Grabowski, Jr.
Operations Analytics Supervisor
Ford Motor Credit Company
Copyright © 2007, SAS Institute Inc. All rights reserved.
Introduction
Webster’s Online Dictionary definition of “Diversity”
• Noticeable heterogeneity
• The condition or result of being variable
Diverse Analytics
• The ability to employ distinct disciplines to develop
knowledge or address complex problems
Goal
• Encourage the use and integration of diverse analytics
2
Copyright © 2007, SAS Institute Inc. All rights reserved. 1

Problem Resolution
“When people do not have the ability to

resolve a problem, they not only become
tolerant to the problem, but actually start to
deny its existence”
“Those who have the ability to resolve

problems, start looking for larger problems to
solve”
Of Paradise and Power by Robert Kagan
3
Session Outline
Ford Credit Overview
Role of Collection Operations
Role of Collection Analytics
Detail how diverse analytical methods are

currently being integrated
• SAS facilitates this integration
4

Role of Ford Credit
Ford Motor Credit Company (FMCC) is an indirect,

wholly-owned subsidiary of the Ford Motor Company
Since 1959, FMCC has financed over 50 million
customers
• Primary offerings are car loans and leases
• Also offers auto insurance, interest bearing accounts and fixed rate notes
• Services Retail and Commercial customers
• Represented in North America, Europe, Latin America and Asia Pacific
Serves as parent organization to the following:

Primus Financial Services Mazda Finance
Volvo Car Finance Jaguar Financial Services
Land Rover Finance
5
Role of Ford Credit
Goals of Ford Credit:

• Serve as revenue source for Ford Motor Company
• Help enhance overall vehicle sales
− Provide financing to targeted customer segments
− Work in tandem with Ford Marketing & Customer Services
• Ensure customer fulfills contractual obligations
Analytics integrated with SAS can help by:
• Growing the number of outstanding contracts
• Pricing contracts appropriately
• Limiting delinquencies and defaults
6

Goal of Ford Credit Collections
Limit
Delinquencies &
Defaults
Collection Collection
Operations Analytics
7
Ford Credit Collection Operations
Comprised of 6 U.S. and 1 Canadian business centers

- Serve as call centers to notify delinquent customers
- Help expedite delinquent payments
- Handle contract originations work
- Regionally distributed to meet national needs
Business customer of analytical research
8

Ford Credit Collection Operations
Collections workload is divided into 2 primary

categories
• Net Campaign:
- Lower risk customers
- Customers in initial stages of delinquency
• Base Campaign:
- Higher risk customers
- Customers in continued stage of delinquency
- Worked by more experienced and effective collectors
Campaign distinction was not analytically driven
• Created by Collection Operations
9
Ford Credit Collection Analytics – Key Tasks
Analytical Data Management

Risk Assessment of Default
Optimal Assignment Timing
• Initiation of collections work
Seasonality
Time Series Forecasting
Optimal Staffing
10

Ford Credit Collection Analytics - Goals
Look Familiar??
11
Analytical Data Management
Collection Operations use:

• Teradata RDBMS for storage
• Business Objects for reporting
Collection Analytics requires the versatility and
statistical capabilities of SAS
Foundation of analytics: Sound programming and
data manipulation skills
• Ability to implement very specific business rules
• Ability to gather and combine data from multiple sources
12

Analytical Data Management – Best Practices
Use SAS Macros, SAS/GRAPH, reporting PROCs

and SAS/ODS etc. to manage and report data
Learn basics of different operating systems
• e.g. UNIX, LINUX, Mainframe
Investigate Structured Query Language (SQL)
• Relational Databases & SAS/ACCESS
Understand Data Warehousing concepts
• Single source of truth
Goal: Increase analytical independence and
decrease reliance on IT Department
13
Probability of Default (POD) Model

• Assesses risk of default over multiple timeframes
• Logistic Regression Model (PROC LOGISTIC)
ln(p/(1-p)) =b0 + b1x1 + b2x2 + … + bnxn
• Account level binary dependent variable
1= Default - “Bad”
0= No default - “Good”
• Uses variables from three broad categories:
- Application Type, Payment History, Credit Bureau
14

The Development Sample:
Performance Window
All active accounts at time T Default indicator at time T+N as

stored by Ford Credit
POD Model “Splits”

• Lease / Retail Contract (Auto Loan)
− Non-Delinquent
− 1 Payment Delinquent
− 2 + Payments Delinquent
15
POD Initial Steps

• Extract / Cleanse / Merge Data
• Explore Data (PROC UNIVARIATE, SAS/GRAPH)
• Variable Reduction & Transformation
− Bin Continuous & Categorical Variables
− Create dummy variables
PROC TRANSREG DATA = INPUT DESIGN;
MODEL CLASS ( VAR1 VAR2 …. VARN / ZERO = NONE);
OUTPUT OUT = DUMMY_OUTPUT ;
RUN;
− Automatically creates a Dummy Variable for each level
of the input variable (VAR1, VAR2, … VARN)
16

Type of code eliminated with PROC TRANSREG

• Example Variable: STATE=(‘TEXAS’,’OHIO’)
• IF STATE=‘TEXAS’ THEN DUMMY_TEXAS=1; ELSE

DUMMY_TEXAS=0;
• IF STATE=‘OHIO’ THEN DUMMY_OHIO=1; ELSE
DUMMY_OHIO=0;
• DUMMY_TEXAS=(STATE=‘TEXAS’);
• DUMMY_OHIO=(STATE=‘OHIO’);
17
POD Model Specification

• SELECTION = BACKWARD selection process
• Rank order significant variables by chi-square level
Compute Concordance
• All combinations of Good and Bad accounts
• Count pairs where POD of Goods < POD of Bads
− “Concordant” Good/Bad pair
• Divide Concordant Good/Bad pairs by all Good/Bad pairs
Test Kolmogorov Smirnov (KS) Statistic
18

Behavior scores help differentiate delinquent

customers who are likely to pay versus those who
will not
"Non-payers" MEDIUM
"Payers"
G
B G G G LOW
B G G G
B Apply behavior scores HIGH G
B G G B G G G
G G B G G G
B B
B B B G G
G G B B B B B G G G G
G
B BB B B G G B G G G G
high risk Beh Scr low risk
G represents a customer who will pay

B represents a customer who won’t pay
19
Entire active portfolio is scored every month

Scores transformed to POD
POD validated against actual default rates
All results compared to Validation sample
• 25% random selection from Development Sample
⎛ POD ⎞
ln⎜ ⎟ = β 0 + β1 ( Score)
⎝ 100 − POD ⎠
⎡ 1 ⎤
POD = 100 × ⎢ − ( β 0 + β 1 ( Score )) ⎥
⎣1 + e ⎦ 20

A subsequent analysis is performed to

determine when a delinquent account should
be worked by a collector
• When = Number of Days Past Due (DPD)
An “Optimal Assignment Timing” is the

number of DPD at which:
Operational Costs = Losses Saved
21

Operational Cost inputs:
• Annual salary of collector
• Optimal number of Full Time Employees (FTEs) to work 10,000
accounts
Saved Loss inputs:

• Observed default rates by risk level
• Losses per repossession (Severity)
• Number of opportunities to work an account within a year
Both set of inputs are in terms of annual dollars

22

Inputs are combined to determine a “break-even

probability of default”
• A level of risk an account must attain before it is worth
assigning to a collector
Break-even levels are calculated for Net and Base
Campaign
Analysis stills lacks time as risk dimension
23
Group accounts by POD for a given month

• 20 equally sized “bins” – initially!
PROC RANK DATA=INPUT DATA OUT=RANK_DATA GROUPS=20;

VAR POD;
RANKS POD_BINS;
RUN;
Break-Even
Estimate 12 month Probability of Level
Default conditioned on the

number of “days to clear”
for each risk bin
24

Optimal Assignment Timing - Overlay Curves
Break-Even
Level
Since bin 1’s default rate is always less than the

Break-Even default rate, these accounts should not be
issued for work.
25
Seasonality – Prelude to Forecasting
Behavior that occurs on the basis of time

• Annual, semiannual, quarterly, monthly or any other
unit of calendar time
Conceals important characteristics
• Requires an adjustment process to enable period-
over-period comparisons
2 Types of Seasonality
• Deterministic: Patterns repeats year over year
• Stochastic: No systematic pattern year over year
26

Seasonality- Prelude to Forecasting
A “Time Series” Yt consists of 4 factors:
Yt = Ct * St * It * TDt (Multiplicative – factors are related)
Yt = Ct + St + It + TDt (Additive – factors are independent)
• Trend Cycle (Ct): Captures long-term trends and business cycle variations
• Seasonal (St): Monthly pattern of variation that repeats year over year
• Irregular (It): Unpredictable shocks that are transitory in nature
• Trading Day (TDt): Measures the frequency and intensity of business days
within the calendar month
Isolate the Trend Cycle (Ct) to make forecasting easier

Factors have a base of 100 (or 1). 100=No Seasonality
Ford Credit factors are Multiplicative
27
Seasonality - PROC X11
Based on the U.S. Bureau of the Census X-11

seasonal adjustment methodology
Decomposes monthly or quarterly series into
seasonal, trend, trading day and irregular
factors
Provides multiplicative and additive form of
the decomposition
Enhanced version of this methodology,
PROC X12, is also available
28

Seasonality- PROC X11
Percentage of
%MACRO X11(CENTER); Work by Day
of Week
PROC X11 DATA=COMBINE NOPRINT YRAHEADOUT;
VAR &CENTER._CAMPAIGN ;
ID SASDATE; /* DATE VARIABLE */
MONTHLY DATE=SASDATE CHARTS=NONE TDREGR = ADJUST;
PDWEIGHTS MON=&MON TUE=&TUE WED=&WED THU=&THU FRI=&FRI SAT=&SAT;
OUTPUT OUT=X11_&CENTER /* OUTPUT DATASET */

A1=&CENTER._ORIGINAL /* ORIGINAL TIME SERIES */
C17=&CENTER._IRR /* IRREGULAR FACTOR */
C18=&CENTER._TD /* TRADING DAY FACTOR */
D10=&CENTER._SA; /* SEASONAL FACTOR */
RUN;
%MEND X11;
%X11
29
Time Series Forecasting
Requirements
• 6-15 month workload outlook for 7 business centers
− 3 forecasting cycles within year
• Performed for both Net and Base Campaign
Candidate SAS Procedures
• PROC FORECAST – Simple but effective
• PROC AUTOREG – Regression with autoregressive errors
• PROC ARIMA – Utilizes Box-Jenkins methodology
− Others: PROC SPECTRA, PROC VARMAX, PROC STATESPACE
Autoregressive Integrated Moving Average (ARIMA) provides
most robust approach in the short run
30

Time Series Forecasting – ARIMA
PROC ARIMA
• Allows for independent variables
• Allows for intervention (dummy) variables
• Integrates well with PROC X11
Autoregressive Process (AR)
• Yt = A1 Yt-1 + A2Yt-2 + ... ApYt-p + et
• Relates the current value to its own previous “p” values
Moving Average Process (MA)
• Yt = W1 et-1 + W2et-2 + …. Wqet-q
• Relates the current value to the previous “q” errors
31
Time Series Forecasting – Stages of ARIMA
Identification Stage
Estimation Stage
Diagnostic Stage
Forecasting Stage
32

Identification Stage
• Time Series Yt must be “Stationary”
− Mean, Variance and Lag Covariance constant over time
− No “Unit Root”
• Corrected through differencing and log transformation
− Tested with SAS Macros: %DFTEST, %LOGLIK
− PROC ARIMA STATIONARITY option
Example of Non-
Stationary Time Series
33
Estimation Stage
• Approximate the coefficient of Autoregressive and
Moving Average terms (if any!)
− Utilize autocorrelation & partial autocorrelation methods
• Determine the significance of date dummy variables
− Dates derived from X11 Irregular Factors (It)
• Determine the significance of independent variables
− Examine cross correlation of independent and dependent
variables to fit Transfer Function
34

Diagnostic Stage
• Goodness of Fit
− Minimize Akaike’s Information Criterion (AIC) & Swartz’s
Bayesian Criterion (SBC)
• Autocorrelation of Model Residuals
− Non significant “Q Statistic”
Forecasting Stage
• Are forecasts realistic?
• Within expectations?
• Check forecast errors Æ Et = Yt − Ft
35
Times Series Forecasting – Error Tests
Mean Absolute Error
Mean Absolute Percentage Error
Mean Square Error
Root Mean Squared Error
36

Optimal Collections Staffing
Defined as the optimal number of Full Time

Employees (FTEs) required to work 10,000
accounts
• Estimate is used in conjunction with forecast
Calculated in the context of minimizing losses
subject to constraints
• Estimated for each business center
• Estimated for both Net & Base Campaign
• Serves as input to Optimal Assignment Timing
37
Losses
L1
Total FTE Cost
L2
0 FTE1 FTE’
FTEs per 10,000 Accounts to be Worked

38

Optimization performed with PROC AUTOREG

• Augments OLS with autoregressive term of error
− Used when estimates are continuously above (below) trend
• Take first derivative of quadratic function and set to zero
− f(x) = ax2+bx +c
− f’(x) = 2ax +b =0 Æ x= -b /2a where x=Optimal FTEs
et = −eλt − 1 − eλt − 2 − ... − eλt − m + v
39
Conclusions
Diverse analytical methods can be effectively

integrated to meet complex business needs
Integration enables a greater number of needs
to be addressed
Don’t hesitate to expand into different analytical
subject areas
Effective data management and programming is
the foundation for all analysis
SAS enables diverse analytics
40

Thank you!
Gene Grabowski, Jr.

Operations Analytics Supervisor
Ford Motor Credit Company
ggrabow1@ford.com
734-347-2430
Special thanks to:

Alfredo Cateriano
Ishita Gupta
41
42

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Applying Diverse Analytics to

Improve Automotive Collections

Copyright © 2007, SAS Institute Inc. All rights reserved.

Copyright © 2007, SAS Institute Inc. All rights reserved. 1

 “When people do not have the ability to

 “Those who have the ability to resolve

Of Paradise and Power by Robert Kagan

 Ford Credit Overview

 Role of Collection Operations

 Role of Collection Analytics

 Detail how diverse analytical methods are

Copyright © 2007, SAS Institute Inc. All rights reserved. 2

 Ford Motor Credit Company (FMCC) is an indirect,

 Serves as parent organization to the following:

Role of Ford Credit

 Goals of Ford Credit:

Copyright © 2007, SAS Institute Inc. All rights reserved. 3

Ford Credit Collection Operations

 Comprised of 6 U.S. and 1 Canadian business centers

 Business customer of analytical research

Copyright © 2007, SAS Institute Inc. All rights reserved. 4

 Collections workload is divided into 2 primary

Ford Credit Collection Analytics – Key Tasks

 Analytical Data Management

Copyright © 2007, SAS Institute Inc. All rights reserved. 5

Analytical Data Management

 Collection Operations use:

Copyright © 2007, SAS Institute Inc. All rights reserved. 6

 Use SAS Macros, SAS/GRAPH, reporting PROCs

Risk Assessment of Default

 Probability of Default (POD) Model

Copyright © 2007, SAS Institute Inc. All rights reserved. 7

The Development Sample:

All active accounts at time T Default indicator at time T+N as

 POD Model “Splits”

Risk Assessment of Default

 POD Initial Steps

Copyright © 2007, SAS Institute Inc. All rights reserved. 8

 Type of code eliminated with PROC TRANSREG

• IF STATE=‘TEXAS’ THEN DUMMY_TEXAS=1; ELSE

Risk Assessment of Default

 POD Model Specification

Copyright © 2007, SAS Institute Inc. All rights reserved. 9

 Behavior scores help differentiate delinquent

G represents a customer who will pay

Risk Assessment of Default

 Entire active portfolio is scored every month

Copyright © 2007, SAS Institute Inc. All rights reserved. 10

 A subsequent analysis is performed to

 An “Optimal Assignment Timing” is the

Optimal Assignment Timing

 Saved Loss inputs:

 Both set of inputs are in terms of annual dollars

Copyright © 2007, SAS Institute Inc. All rights reserved. 11

 Inputs are combined to determine a “break-even

Optimal Assignment Timing

 Group accounts by POD for a given month

PROC RANK DATA=INPUT DATA OUT=RANK_DATA GROUPS=20;

Default conditioned on the

Copyright © 2007, SAS Institute Inc. All rights reserved. 12

Since bin 1’s default rate is always less than the

Seasonality – Prelude to Forecasting

 Behavior that occurs on the basis of time

“When people do not have the ability to

“Those who have the ability to resolve

Ford Credit Overview

Role of Collection Operations

Role of Collection Analytics

Detail how diverse analytical methods are

Ford Motor Credit Company (FMCC) is an indirect,

Serves as parent organization to the following:

Goals of Ford Credit:

Comprised of 6 U.S. and 1 Canadian business centers

Business customer of analytical research

Collections workload is divided into 2 primary

Analytical Data Management

Collection Operations use:

Use SAS Macros, SAS/GRAPH, reporting PROCs

Probability of Default (POD) Model

POD Model “Splits”

POD Initial Steps

Type of code eliminated with PROC TRANSREG

POD Model Specification

Behavior scores help differentiate delinquent

Entire active portfolio is scored every month

A subsequent analysis is performed to

An “Optimal Assignment Timing” is the

Saved Loss inputs:

Both set of inputs are in terms of annual dollars

Inputs are combined to determine a “break-even

Group accounts by POD for a given month

Behavior that occurs on the basis of time

Isolate the Trend Cycle (Ct) to make forecasting easier

Based on the U.S. Bureau of the Census X-11

Mean Absolute Error

Mean Absolute Percentage Error

Mean Square Error

Root Mean Squared Error

Defined as the optimal number of Full Time

Optimization performed with PROC AUTOREG

Diverse analytical methods can be effectively