Ethical Behavior in Purchasing

The modern-day purchasing process is a complicated set of activities important to companies for many reasons including cost savings, supplier relationship management, impelling innovation, and improving quality and reputation (Monczka, Handfield, Giunipero, & Patterson, 2016, pp. 9-10). Purchasing professionals have the responsibility of sourcing quality goods and services at the best prices possible. With these responsibilities, purchasing agents may become involved in situations that are questionable from an ethical standpoint.

Unethical activities undertaken by purchasing professionals have the potential to harm their company’s reputation, performance, and competitiveness in the industry and marketplace to which the organization belongs (Saini, 2010).

Purchasers in all organizations have ethical responsibilities to uphold in order to remain successful in the marketplace in which their company resides. Therefore, most organizations have developed policies regarding the conduct and behavior by purchasing professionals (Monczka, et al., 2016, p. 92).

The policies provide a framework on the commitments to ethical behavior and guide purchasers who are confronted with situations in their positions that may be questionable.

the principles that identify appropriate versus inappropriate actions and determine moral conduct, duties, obligations, and motives. The principles are applicable in all aspects of life including personal lives and business practices. In business, ethical standards help determine business practices (Ashcroft & Ashcroft, 2011). The following four cases discuss ethical situations showing the importance of having purchasing policies in place and how purchasing professionals should address each situation in-line with the policies.

Scenario One – The Clock

Brief History

Attempting to persuade Bryan Janz into awarding contracts to his company, James McEnroe sent a clock as a gift to Bryan.

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Instead of giving the clock to Bryan at his office, Mr. McEnroe mailed the item to Bryan’s home. Going one step further, the clock was specifically address to Bryan’s wife, not to Bryan. Bryan’s wife, not understanding the situation, is insistent on keeping the clock.

Bryan’s Decisions

The first thing Bryan should do is decide whether accepting the clock goes against his ethics and moral compass. Bryan also needs to act according to his organization’s ethics policy. Then, Bryan will have to explain to his wife why accepting the gift is against his company’s policies regarding acceptance of gifts or favors. Mr. McEnroe is a potential supplier trying to curry favor with Bryan in order to obtain more contracts. Accepting the gift could jeopardize Bryan’s employment. The next thing Bryan should do is disclose the gift to the purchasing manager or person identified in the policies. His company’s policies may dictate Bryan return the gift directly to Mr. McEnroe or Bryan take it to work and have his manager handle the situation.

Some companies have a written policy with guidelines describing conflicts of interest, acceptance of personal gifts, and any exceptions to the guidelines. In some organizations, clearly defined policies indicate the employee disclose the gift if they would like to retain for themselves. As such, when circumstances require the employee to accept a gift, the employee must fill out and submit a disclosure statement and have the statement filed with the President (Central Michigan University [CMU], 2005). There are other policies to be considered in this situation, as well.

Institute of Supply Management-Favors and Gifts

The most common ethical infractions are the acceptance of gifts or favors from a supplier (Monczka, et al., 2016, p. 603). The gifts or favors may be a way for a supplier to attempt to influence a purchasing professional’s judgment and sway purchasing decisions (Monczka, et al., 2016, p. 603). The Institute of Supply Management (ISM) has specific guidelines regarding the acceptance of gifts, gratuities, or entertainment (Institute of Supply Management [ISM], 2017).

The ISM indicates the possibility of suppliers influencing purchasers can be eliminated by establishing policies preventing inappropriate actions that may influent the supply chain (ISM, 2017, p. 4). Suppliers offering gifts, gratuities, or entertainment can affect the purchaser and influence decision-making. In doing so, Bryan must also use discretion and courtesy in order not to harm the relationship between his organization and the supplier (Monczka, et al., 2016, p. 607). If Bryan feels that returning the clock could harm the relationship, he should seek direction from management, even if policy does not dictate such (ISM, 2017, p. 4). The offering of such potential influencers is not limited to just the purchaser. Suppliers may try to influence people involved in the purchase decision or family members of the purchaser (ISM, 2017, p. 4),

Sending Gifts to Family Members

The actions on the part of Mr. McEnroe clearly indicate his attempt to influence Bryan in a purchasing decision. His sending the clock to Bryan’s wife also indicates that Mr. McEnroe knows that sending or giving the clock directly to Bryan would have been met with polite declination. The supplier is banking on the fact that Bryan’s wife is unaware of company policy regarding the receiving of gifts. He is also appealing to her possible emotional attachment to such a nice gift. Bryan’s wife will not understand why accepting the gift is such a big deal. Mr. McEnroe will probably argue that he was trying to establish or maintain a relationship with Bryan and Bryan’s organization. The fact is, Mr. McEnroe’s actions could be considered unethical.

Unethical Salesperson

Referring to the ISM, gift giving has the possibility of influencing a purchaser. Gift giving is not only a concern a purchaser has to contend with personally. Influence over a purchasing decision can be made to others, including the purchaser’s family. Sending the clock to Bryan’s home and addressing the gift to his wife does seem to be a bit on the unethical side. However, the ISM concerns the actions of the purchaser on the buying end. Gift giving to vendors from suppliers may be the norm at Mr. McEnroe’s place of employment and could not only be acceptable but encouraged. In that case, Mr. McEnroe may not be acting unethically. If Mr. McEnroe’s employer has policies against the practice of giving gifts or providing favors to prospective customers, then he is acting unethically.

Scenario Two – Competitor’s Equipment

Brief History

During contract negotiations, Lisa Jennings was confident that her company, Assurance Technologies, was finally going to be awarded a large contract from Sealgood Instruments. The bid was for a contract worth about $2.5 million per year. All of her team’s documentation and ability to meet requirements of the contract were in order so when Troy Smyrna, Sealgood Instruments’ buyer, requested a meeting, Lisa gladly accepted. Troy commended Lisa and her team for executing a solid proposal for the contract but then changed the tone of the meeting.

The meeting also included Troy indicating his discomfort in seeing his competitor’s parts in being used by Assurance Technologies in a company that would also be privy to his company’s plans and design. Troy would feel more comfortable if Assurance stopped using his competitor’s equipment. Changing out current equipment for Sealgood’s equipment would cost Assurance hundreds of thousands of dollars. Troy then implied in order for Sealgood Instruments to seriously accept Assurance Technologies’ bid, Assurance would have to switch to using Sealgood instead of their competitor.

Reciprocity

Troy is requesting Lisa replace her company’s machinery with his company’s machinery as a condition for Sealgood to award the contract to Assurance. The request is an unethical demand known as reciprocity (Mullins & Walker, 2013, p.133). One of the key behavior’s personnel must be aware of is a buyer looking favorably on competitive contract bids from suppliers who purchase the buyer’s products (Monczka, et al., 2016, p. 93). By placing their machinery in Assurance, Sealgood will favor them as a supplier. Assurance’s use of Sealgood’s machinery means they will also become customers of Sealgood. Problems may occur when organizations engage in reciprocity including undermining the morale of buyers and sellers who are forced to use companies based on reciprocity agreements rather than capability, performance, and quality (Mullins & Walker, 2013, p. 133).

Lisa’s Response

According to the ISM (2017), reciprocity presents ethical and legal risks to organizations involved in the practice. Favoritism and quid pro quo through mutual benefits put organizations at risk for legal sanctions (ISM, 2017, p. 8). Reciprocity behavior also stems the flows of free competition and increases vulnerability through unfair competition and antitrust laws (ISM, 2017, p. 8). Should Lisa accept the new, unwritten terms of the contract bid, she would compromise her ethical standards while subsequently putting Assurance in a situation that could be considered illegal.

Lisa’s response to Troy should make it clear that the current competitive bid process does not include whether or not her company also uses a competitor’s equipment. Replacing the competitor’s equipment is costly and Assurance may not have the budge or the time to switch to Sealgood’s equipment. Lisa could also turn Troy’s suggestion into a potential contract bid for her company by suggesting that Troy contact her buyer about putting his hat in the ring for any equipment contracts that may come up in the future. Troy should also be reminded that contracts are based on performance, quality, and capability, not on the use of materials or equipment from other manufacturers.

The ISM has guidelines pertaining to avoidance and prevention of reciprocity agreements including discussions of the situation with upper management (ISM, 2013, p. 8). Lisa must discuss the contract bid, Troy’s request, and the possible implications with her management team and legal department since there are potential legal issues at play. Putting an entire organization at risk for one contract has the potential to backfire and cause more harm than losing the $2.5 billion contract.

Scenario Three – Corrugated Boxes

Brief History

Packaging material expenditures are high at Coastal Products, especially corrugated containers from Southeastern Corrugated. While discussing the costs, Ben Gibson, the purchasing manager, tells Jeff Joyner he does not like the salesman at Southeastern corrugated (Monczka, et al., 2016, p.824). The salesman is always bragging about his material possessions and vacations and Ben is unhappy that the employees at Southeastern Corrugated make so much money off Coastal Products. Jeff mentions Southeastern Corrugated may also be implementing a price increase to cover rising raw material costs and the increases may be higher than appropriate (Monczka, et al., 2016, p. 824).

To force Southeastern Corrugated to remain competitive, Ben requests a rebid of the contract. Bids would be requested from alternate suppliers but only to get Southeastern Corrugated to reduce costs. Coastal Products has no plans to use one of the other manufacturers. The bids would only be a formality and to create competition between Southeastern Corrugated and the other manufacturers.

Legal and Ethical Considerations

In this case, Ben is not breaking any laws by rebidding the corrugated contract and using those bids as a method to get Southeastern Corrugated to lower their costs. Ben is, however, acting unethically by engaging in the behavior of sharp practices. The unethical behavior of sharp practices can be exhibited in several ways including soliciting bids from unqualified suppliers to force down the prices of a qualified supplier, which is Ben’s plan (Monczka, et al., 2016, p. 603). Also, it sounds like Ben is not going to compare apples to apples. His alternate suppliers use lower-grade cardboard to make their cartons, yet Coastal Products will probably request a bid from Southeastern Corrugated based on the specifications in their current contract, which includes stronger, heavier-weight shipping cartons. Ben’s actions are misleading to the unqualified suppliers and unfair to Southeastern Corrugated. Buyers should only send bid requests to suppliers who have been identified as qualified and are asked to provide quotes on similar goods (Monczka, et al., 2016, p. 603).

Marketing Manager Response

The marketing manager for Southeastern Corrugated should contact Coastal Products and request a meeting regarding the new request for quote. While rebidding contracts is not unusual, if there have been no publicized increases on the side of Southeastern Corrugated yet or the current contract still has several months to go, a new request for quote might be surprising. The marketing manager is not going to know Coastal Products has an issue with the salesperson and will want to find out why Coastal is requesting a complete rebid on corrugated products.

Even though Ben claims the unqualified suppliers are just for show, Southeastern Corrugated does not know this information. As far as the supplier is concerned, the loss of the contract from Coastal Products is entirely possible and Southeastern will treat it as such. Southeastern Corrugated should prepare an honest, new competitive bid incorporating true cost increases, or lowering costs as appropriate. Southeastern Corrugated may also want to include pricing for a lower-grade cardboard, as well. Often, suppliers filling out a request for quote or proposal will include additional options that may not be reflected in the bid request.

Scenario Four– Family Connections

Brief History

Institute of Supply Management-Conflicts of Interest

Conflicts of interest in the procurement setting are unethical practices engaged in by purchasers who use their position for financial or personal gain. A financial conflict of interest occurs when a contract is awarded to a vendor solely because the buyer, buyer’s family, or relatives have a financial interest in the supplier (Monczka, et al., 2016, p. 604). In fact, financial conflicts of interest where a purchaser has significant financial interest or dealings with a vendor awarded a purchasing contract has been likened to the unethical and illegal practice of insider trading (Monczka, et al., 2016, p. 604). Due to conflicts of interest being a highly unethical practice, many organizations have policies in place regarding conflict of interest disclosure.

The ISM clearly states that a purchaser must never use their position in a company to influence or provide improper benefits to either themselves or to others (ISM, 2017, p. 3). Professionals must also make sure that there is never an appearance of a conflict of interest in any situation, even when there is not a conflict (ISM, 2017, p. 3). The ISM provides several guidelines a purchaser should be aware of and how to avoid engaging in conflicts of interest. First, a professional should not use information for their own gain or to show preference toward vendors (ISM, 2017, p. 3). Management should always be made aware of any potential conflicts of interest so that alternate arrangements may be made. Personal business transactions should never be conducted between the purchaser and their employer, their employer’s competition, or any vendors.

References

1. Ashcroft, J.D. & Ashcroft, JE. (2011). Law for business (17th ed.). Mason, OH: South-Western Cengage Learning
2. Institute of Supply Management. (2017). Principles and standards of ethical supply management conduct. Retrieved from management.org/files/About/210-Ethics-Book.pdf
3. Monczka, R.M, Handfield, R.B., Giunipero, L.C., & Patterson, J.L. (2016) Purchasing and supply chain management (6th ed.). Boston, MA: Cengage Learning
4. Mullins, J.W. & Walker, Jr., O.C. (2013). Marketing management: A strategic decision- making Approach (8th ed.). New York, NY: McGraw-Hill Companies, Inc.
5. Saini, A. (2010). Purchasing ethics and inter-organizational buyer-supplier relational determinants: A conceptual framework. Journal of Business Ethics, 95(3), 439- 455. doi: