“FRONTOFFICE” COLLABORATION
4. ETHICAL ISSUES IN BUYING
3.2 A Time to Do Nothing!
A Rube Goldberg is the term for doing with great complexity what could and should be done simply. It is often as important in our business world to know what not to do, as it is to know what to do.
President Eisenhower told how Churchill notified Ike of his intent to be with the first troops setting foot in Normandy in the invasion of Europe during World War II. Ike tried to persuade him this was out of the question, as he was too valuable to the cause.22Churchill felt it was his prerogative, and he asked Ike if he had complete authority over the entire invasion. When told that was true, Churchill stated that since the British Navy was a part, he had a right to be on a ship as a member of the crew.
Rather than confront the situation directly, Ike got word to King George, who promptly sent a note to Churchill. Churchill wasn’t ordered not to go, but the king wrote, “Splendid idea Winnie. I intend to be at your side when we step together on the soil of France.” Churchill saw at once the danger of losing his king, and said not another word to Ike about crossing with the troops. This is a good example of handling a conflict without directly challenging the person causing it.
serious trouble, and further erode confidence in the profession for the rest of us.
Many ethical questions center on distinguishing between legitimate sales promotion and inducements meant to unduly influence buying decisions.
Like it or not, this is a potential problem area for anyone engaged in the buying profession. Ideally, decisions should be made on price, value, and service considerations, with freedom from outside influences.
In sports, if you don’t play by the rules, you’re penalized. In football, if you clip you’re assessed 15 yards; if you strike a low blow in boxing it may cost you the round; so too, in business the rules of the game must be adhered to. In the supply game the rules are not always clearly defined or well known, as they should be.
4.1 Where to Draw the Line
Ethics, simply put, is a standard of how you will act in certain circumstances—“basic principles of right action!” One’s actions in dealing with others create an impression, whether accurate or not. Obviously, a person will be judged by the ethical standards of the person doing the judging, and what appears proper for one person may be quite offensive to another. This is why gray areas exist.
An auditor, asked for an opinion of purchasing, once said, “You have to find out who’s getting the graft.” When questioned, he admitted that he didn’t quite mean this—at least there was nothing specific in mind. The answer is typical of the emotional response when some business people think of purchasing. A former salesman, after becoming a top manager, may recall
“wining and dining” the buyers he used to deal with. So, if there is any area where the “Simon Pure” should prevail, it is purchasing. There might be less of a double standard in business ethics if everyone remembered that they must answer for their behavior not only to the company, but also to themselves.
In creating a positive atmosphere conducive to a successful supplier partnership, here are a few questions that the PM should consider. Does this department subscribe to and display the “Principles and Standards of Ethical Supply Management Conduct” as adopted by the ISM in 2002 and shown below?23 Is the ethical policy of the company given in writing? Do the buyers and purchasing people feel free to discuss ethical conduct among themselves and with those with whom they come in contact? Does the department notify suppliers, in writing, of its policy on acceptance of gifts?
From the ISM Website at www.ism.ws
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ISM Principles and Standards of Ethical Supply Management Conduct:
Loyalty to your organization Justice to those with whom you deal Faith in your profession
From these principles are derived the ISM standards of supply management conduct (Global) shown in Table 7-2 below.
Probably the most important factors that determine ethical practices within a company are the traditions of the industry, one’s personal convictions and values, the behavior of the individual’s superiors, and the behavior of one’s equals. Everyone leans on the boss to some extent in finding out what is expected in this regard. Unless senior management shows a good example, how can others be expected to do so? Buyers are prone to pick up the group’s ethics; if most buyers do not accept gifts, newcomers are likely to follow the lead.
A newspaper editor wrote that much could be said in favor of politicians publicly announcing any favors or gifts. Then there is a minimum of gossip, a minimum of suspicion. “Having a complete fill-in, we ask no questions.
The fellows who get into trouble are those who try to sneak out of town on a
yachting trip and conceal the source of their vicuna coats and Oriental rugs.”
Perhaps a good guide is for the PM to act as if everything he or she does will be reported in the local newspaper.
A conflict of interest is not always easy to define, but the following are possible conflicts:
Investing personal money in a supplier’s business Borrowing from or lending money to a supplier Accepting more than incidental gifts and entertainment Misuse of privileged information
Having outside work that affects effort provided your employer Trading in the commodities market for materials you buy
Divulging company proprietary pricing or other data in a group setting where non-company personnel are present (as at an industry association meeting)
Whatever the form, attempted supplier influence on employees is as difficult to eliminate, as it is to locate. Purchasing people are by no means the only recipients of such attention; superintendents, foremen, engineers, management, inspectors, and rank-and-file manufacturing employees who are in a position to influence sources of supply may also become involved.
Where lack of control enables the minority of unscrupulous suppliers to approach factory employees directly, they may, through small inducements such as an occasional fifth of whiskey, persuade employees, who might not realize it, to find fault with competitors’ products so that a particular one will be favored. For example, a large foundry had to discharge a foreman because even nominal gifts, such as cigars and pencils, influenced his judgment. The seller was asked not to call again.
4.2 Buying Practices
Response to bidders - Failure to give unsuccessful bidders an honest reason why they have not been awarded a purchase order is one factor contributing to an unethical purchasing image. There can be no excuse for not supplying such information, except in the most unusual of circumstances. It may be in the interest of the PM’s company to withhold certain facts; however, the PM should never willfully mislead a supplier in cases where business has been placed elsewhere.
Price disclosure - From the PM’s standpoint, putting specific price information in the hands of the supplier is poor buying, even if no ethical consideration is involved. There may be special instances where setting
“ballpark” prices may be acceptable practice, especially when a fair amount
of investigation and development is necessary before quoting. A better approach is to provide a target price derived either from a cost and margin calculation or from an analysis of alternative solution costs. If it makes sense to use a second source of supply, certain facts may have to be provided to induce a new potential supplier to put real effort into their quotation.
Practically speaking, however, only in an exceptional few cases should ballpark prices be given, and in no case should the actual prices paid be divulged to a competitor.
Serious intentions - As noted earlier, requesting price quotations from suppliers with whom there is no serious intention to place an order is another questionable practice. Such requests for price imply that if quality and price are acceptable, an order will be forthcoming. Failure to adhere to this expectation often invites suspicion; salespeople want to know why they lost out. They may blame bad ethics—and they could be right. Remember, for every satisfied supplier in a three-bid situation, there are two who may find cause to complain.
Misleading information - The practice of supplying misleading information with inquiries also should be avoided. Overstating the volume of business that may be forthcoming simply to get a lower price is one example, as is giving misleading information regarding the ultimate end use of a product. For instance, a buyer, faced with the problem of a rubber product that has been causing him trouble for some time, goes to a new supplier. But the supplier isn’t told about previous rejections blamed on the partner’s design. First the supplier quotes an attractive price, and then is hit with the magnitude of the problem during the production process.
Design assistance - A troublesome conflict arises when a supplier invests in a new product design with engineering, only to find that the buyer has placed the order with a competitor. Company policy should ensure against such occurrences. Some companies make it a policy to explain to the supplier that their product will be used until the investment is recouped.
After that time, others will be allowed to bid in free competition. Or the buyer may choose to reimburse the supplier that contributed to the design, as an integral part of the decision to buy from another source.
Adequate notice - Any supplier about to be dropped from being an active source deserves adequate notice, as they will have schedules, manpower and tooling to adjust. The need for such adequate notice is greatest when the supplier is small and the purchases are large. Depending on the circumstances, the buyer may be morally responsible for working out a reasonable cut-off date, even if no legal obligation exists. Be wary of a short-term profit at the expense of the long run. Shifting purchases from a faithful supplier to an untried one should occur only after there is valid evidence of
the new supplier’s ability to perform in superior fashion to the current supplier.
4.3 Gifts from Suppliers
As a practical matter, a buyer can’t meet with foreign visitors without being given an occasional small gift. It is difficult to refuse, and often would be an affront to the supplier based on local custom. In such a case, make sure it’s of minimal value, and reciprocate. Unlike Americans, many cultures around the world like to give and get small token gifts and these are not bribes! In fact, an occasional token gift can enhance the business relationship.
Lack of knowledge of the international supplier’s culture has long been a weakness of American buyers, who too often are seen as too direct and impersonal and in a hurry to conclude an agreement. Though clearly not the intended result, this often offends the sensitivities of foreign business people.
Christmas gift giving, once common in the United States, is down considerably in recent years. Not only have tough economic times tended to make people reduce these types of expenditures, but professional associations have discouraged the practice as well. Often, management will exhibit a double standard—offering gifts to their own customers, while looking with a questioning eye at anything received by their buyers.
Unfortunately, this is not unusual; management needs to reconcile these inconsistent behaviors!
It is debatable whether business gifts are illegal or unethical. If gifts can be tax-deductible (as they are), they’re legal. Presumably they influence or affect new business—and, if this is so, it should be unethical to give and accept them. Some feel the practice should be made both illegal and non-tax-deductible, believing that this would eliminate the gift problem. Yet people who give gifts have every right to spend their money as they see fit. Most assert that their purpose is to show goodwill and appreciation for business received. From the purchasing manager’s viewpoint, the chief harm they do in making these gifts is to create suspicion (and jealousy)—to the detriment to the buyer’s company. Suspicion, then, is really the heart of the problem, and, if the PM’s ethical image is to be improved, suspicion should be eliminated.
Legally, any payment, gift, favor, or gratuity received by the agent, without the knowledge and consent of the principal, belongs to the principal.
This is the rule under the general law of agency. Therefore one approach is to turn all gifts received by the purchasing representative over to the company. This may cause the supplier to reconsider the practice of giving gifts.
Lucky is the buyer whose management states an outright policy against giving and receiving gifts, for it’s no longer an issue. If this is not the case, the buyer’s best interest is to adopt this as policy, regardless. Note that buyers for the U.S. Government are forbidden from receiving anything of value from the contractor. However, as previously noted, the buyer will find there will be international practices that run contrary to domestic ethical norms—and these differences may need to be acknowledged and accommodated.
4.4 Lunches and Entertainment
There is nothing inherently wrong with a business lunch and occasional modest entertainment when a buyer visits a supplier. Sometimes a business lunch can be most productive as a way to smooth relationships and get better acquainted. Only the abuse of such courtesies should be questioned.
Excesses, such as time away from work, and a too cozy relationship with favored suppliers are obviously objectionable.
What may be a legitimate business lunch for the buyer and seller may not be viewed as such by the competitor, who assumes the seller is influencing the buyer. The competitor may see this luncheon as the reason for losing the order to the incumbent supplier. Some companies avoid such incidents by having rules against lunches at suppliers’ expense and substituting invitations to dine with the buyer in the company plant; when an outside lunch is necessary, the buyer picks up the check. In fact, one of the surest ways to help the buyer keep his position with suppliers is to provide an expense allowance. This allows the buyer to reciprocate where luncheons and the like are deemed appropriate.
Another approach gaining favor is to simply not combine business and social activities. There is no rule that business discussions must be conducted at lunch or with entertainment. And usually the business is better conducted in the shop or wherever the item being purchased is made. The less opportunity there is for abuse, the less likely there will be abuse.
4.5 The Ethical Double Standard
A meatpacking company sent out a friendly letter to its supplier list, asking for cooperation with its no-gift policy. Two weeks later, a sales letter was sent to the same list of suppliers to advertise its products as suitable gifts to give customers.
Another company’s lunch policy was made to look ridiculous when the buyers heard that a supplier’s president annually took their own chief executive on a boat trip to Florida. Can the president of a company, its vice
president, or its chief purchasing officer be entertained freely when the buyer is reprimanded or fired for accepting the same courtesies?
It is difficult for any PM to convince buyers that they should accept no luncheons or gifts when their own sales department makes a regular practice of handing out gifts and has an authorized budget to cover the expense. Here is an indication that the company does not want those who spend its money to be approachable but, at the same time, considers it good business to foster its own relationships with its customers’ buying people. There is something hypocritical about this common way of thinking, which is explained by some as “business logic.”
It has been said that you can’t make a rule that will cover every situation;
it takes careful weighing of specifics and circumstances. Issuance of a company policy against gratuities and gifts is like writing the rule, “Thou shalt not sin.” This rule is unenforceable, yet it exists to set a necessary example.
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