Supply alliances pose new ethical threats
By Anne Millen Porter -- Purchasing, 5/20/1999
Ethics have always been a prominent issue in purchasing, but new approaches to supply chain management are giving rise to new ethical dangers for buyers, according to a recent reader survey by Purchasing Magazine. Four trends that appear to be creating dilemmas for buyers:* A switch from frequent buyer rotations to the fostering of deep buyer expertise in one commodity area.
* Dispensation of conventional bid approaches to supplier selection.
* Greater sharing of confidential or "inside" information between suppliers and customers.
* The tendency to single source or to favor "preferred" suppliers.
Asked to cite the greatest ethical dangers confronting purchasing professionals, only a handful of buyers cite gross infractions such as bribes or kickbacks. Today, most say it's the simple risk of becoming too friendly with supplier personnel as relationships with suppliers become more cooperative. Also, because companies want buyers focusing on strategic issues such as building market intelligence, improving supplier performance, and developing supplier capabilities, many have done away with their practices of rotating buyers frequently among commodities to prevent friendships from happening.
Buyers say the consequent blossoming of personal relationships with supplier personnel is problematic for a number of reasons. In one respect, they say friendships can lead to sub-optimal sourcing decisions, and--given the trend to long-term contracts--the negative effects of bad decisions can be magnified substantially.
Brian Murphy, purchasing manager for Vermont Machine Tool in Springfield, Vt., sees danger in "forming too-close relationships with suppliers" to the extent that purchasing agents "stop getting competitive pricing." Tom Bistayi, purchasing agent for The Andersons Inc. in Maumee, Ohio, says the greatest ethical danger is "allowing contact with a supplier to influence a [buying] decision." Samuel Halpern, director of procurement, for Teledyne Electronic Technologies in Los Angeles, says purchasing pros must worry about "developing too-close personal relationship with suppliers, then losing sight of [their] ethical responsibilities."
Excessive friendliness can also lead to injudicious sharing of information between two companies, buyers say. For example, Kurt Torres, senior buyer for Daikin Drivetrain Components Corp. in Mascon, Tenn., sees ethical danger in giving "preferential treatment to suppliers" and the "disclosure of competitive information." Meantime, the buyer for a health-care industry supplier in Texas says "relationships with suppliers can become too personal or friendly with a tendency to share too much information." The senior buyer for a firm in Jamestown, N.Y., says purchasing pros can run into trouble by "sharing confidential information."
In favor of long-term supplier alliances, many companies have also done away with their old three-bid-and-a-cloud-of-dust rules for awarding business to suppliers. But while popular wisdom says competitive bidding seldom yields the true low-cost supplier, the practice has always provided buyers with an important shield against often deeply-held perceptions that they're probably "on the take" or open to influence through favors of gifts.
The materials manager for a cleaning products manufacturer says "other people's perceptions" present the greatest ethical danger for purchasing professionals in today's purchasing environment. Another PM agrees, citing the "perception of unethical practices merely by association."
Insider trading?
At a time when the U.S. stock market has undergone one of its greatest bull runs, the free flow of strategic information between suppliers and customers--with buyers acting frequently as conduits--also raises prickly ethical (not to mention legal) issues when it comes to the personal investing habits of buyers.
If, for example, a publicly-held supplier shares its ten-year technology road map with a customer's buyer or strategic sourcing team, can said people be expected to withstand the temptation to trade on their knowledge or to pass information in the form of stock tips to friends or family members? "Using inside information to profit," is, according to one buyer, the greatest ethical danger confronting purchasing professionals today. Of note: According to the survey, 54% of firms absolutely prohibit buyers from holding equity positions in supplier companies, 16% have no explicit policies, 13% allow the practice outright, while another 17% allow buyers to hold equity in supplier firms with appropriate disclosures or other restrictions.
Bidding habits
The modern tendency to favor long-term supply alliances raises also the question of how to establish fair market pricing for products without--
* Passing confidential bid information from an outside supplier to a preferred supplier (legally questionable).
* Conducting a general bid simply to establish market pricing without intent to award business to the winning supplier (ethically questionable).
As the PM for a tooling company in Colorado sees it, the greatest ethical danger for purchasing may be the award of contracts to "suppliers that have inside information or unfair advantage."
According to the survey, quite a number of purchasers say competitive bidding remains their method of choice for keeping supplier partners honest. But most in this group are silent as to whether their bidding processes could pass litmus tests for both legal and ethical standards. At least one purchasing pro reports "exposure of quotations directly to competitors"--a practice he deems "ethically wrong and legally questionable" but which he says is "promoted by corporate" and implemented by "untrained sourcing teams." At the same time, the survey finds other procurement operations taking great pains to establish fair market pricing in ways that would be considered both ethical and legal. For example, cost-plus or indexed pricing, scheduled price reduction over the duration of a contract, and cost reduction incentives such as early design involvement.
Stricter standards wanted
Three in four buyers surveyed by Purchasing say their company's ethics standards have not changed as relationships with suppliers have grown more cooperative. Still, there is evidence that buyers might be wishing for clearer, stricter standards. Asked to evaluate how well their company's ethics policy works, many provide positive reviews for their companies' moderately lenient policies (e.g., small gifts and supplier favors allowed). However, a surprising number of respondents suggest their companies may be too lenient.
While classifying his firm's policy as "well balanced, clear, and understood," the PM for a manufacturing firm in Harleysville, Pa., suggests also that the policy is "probably too lenient." Likewise, the PM for a printing firm in New Jersey says his firm's ethics policy is "too lenient, standards are unclear."
At the same time, purchasing pros working under extremely prohibitive ethics policies (i.e., no gifts, no meals, no favors from suppliers) turn in some of the most favorable reviews. "[Our policy] is well-balanced, clear, and people understand it," says the materials manager for a manufacturer in Salt Lake City of his firm's strict policy prohibiting acceptance of all gifts or favors from suppliers. Likewise, the VP of global purchasing for a Texas-based firm says his firm's prohibitive policy "works because there are few gray areas." The purchaser for a Minnesota-based graphics company says his firm's stringent ethics policy fairs well because it is "black and white."
End note. The extension of buying decisions to larger multifunctional groups and the delegation of tactical buying decisions to non-purchasing professionals may make it necessary to extend ethics policies to other corporate personnel, buyers suggest. "Standards are clear in the formal purchasing department," says one PM, "but in our decentralized setting where non-professional purchasing is done, [standards] are too lenient." The PM for a castings firm in California remarks that "engineers and others should have the same policies." Another purchaser says his firm's ethics policy "works well for purchasing people but is not applied to the sales force."
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