Ethical Standards Committee Workshop: "Has This Ever Happened To You?"

Author(s):

Margaret (Peggy) Williams, C.P.M.
Margaret (Peggy) Williams, C.P.M., Ethics Committee Chair, Tandem Computers, Incorporated, Fremont, Ca, 94538-4538, 510/354-4272

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Reciprocity, conflicts of interest, accepting gratuities, failing to keep information confidential, unfair bidding practices are only a few areas of difficulty facing individuals when dealing with suppliers. The entire subject of "Ethics" is a subject that is discussed and debated over and over, year after year. The same questions and issues are addressed with new questions and issues continuing to arise. Why? Because the issues are real and the solutions are not black and white. Because, more people are involved in the purchasing process, especially with the growth of the cross-functional team concept. Further, as new people emerge into the field, training is required. Finally, ethics issues often times hit on gray areas, as the situations vary.

Even though a company may have ethical guidelines, policies or procedures in place and state and government laws exist, we must continue to educate those who must comply with the professional practices that will guide us in how we conduct business.

There are 8 key areas of responsibility the individual must be aware of when dealing with the supply base.

1. Perception
2. Conflict of Interest
3. Gratuities
4. Confidentiality
5. Treatment of Suppliers
6. Reciprocity
7. Abiding by State and Federal Laws
8. Full and Open Competition

The objective is to not only touch upon the general concept of ethics in the Buyer/Seller relationship, but to target specific situations that could arise and thoroughly address the situations that lead up to the dilemma in the first place.

Perception.
To avoid even the appearance of unethical or compromising intent in relationships, actions and communications.

The results of a perceived impropriety may become, over time, more disruptive or damaging than an actual transgression. It is essential that any activity or involvement with active or potential suppliers which in any way diminishes, or even appears to diminish, open and fair treatment of suppliers is strictly avoided. Those who do not know us will judge us on appearances. We must consider this and act accordingly. If a situation is perceived as real, then it is in fact real in its consequences.

Conflict Of Interest.
Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer.

While employees have the right to engage in activities that are of a private nature and outside their employment, caution must be exercised to ensure there is not a situation of personal gain on the part of the individual.

Gratuities.
Avoid solicitation or acceptance of any money, loans, credits, gifts, entertainment, prejudicial discounts, favors or services from present or potential suppliers which might influence, or appear to influence procurement decisions.

Gratuities include any goods or services offered with the intent of, or providing the potential for, influencing a buying decision.

Confidential Information.
Handle information of a confidential and/or proprietary nature with due care and proper consideration of ethical and legal ramifications.

In daily activities an individual may deal with confidential or proprietary information of both employer and supplier. It is the responsibility of the individual to ensure this information is treated in a confidential manner.

It is also the responsibility of the individual that only those who have the "need to know" have access to the information AND they are made aware of the responsibilities of confidentiality.

Treatment Of Suppliers.
Promote positive supplier relationships through courtesy and impartiality in all phases of the procurement cycle.

It is necessary to set the tone for a mutually acceptable business relationship with all suppliers. The reputation and good standing of your company and the profession you represent depends on this. Indications of rudeness, discourtesy, or disrespect in the treatment of a supplier could result in barriers to free and open communications and ultimately in a breakdown of the business relationship.

Reciprocity.
Refrain from any attempts to coerce reciprocity. A company, of course, can unilaterally choose those customers with whom it will deal. But if it follows a policy of favoring a certain customer and the customer follows the same policy, there is a risk that an agreement may be inferred even if none exists.

Abide By State And Federal Laws.
Obey the letter and spirit of laws governing the purchasing function and remain alert to the legal ramifications of purchasing decisions.

Interpretation of the law should be left to your legal department, so when in doubt, seek counsel.

Full And Open Competition.
Promote full and open competition to ensure that the best interests of the company are being served.

The purchasing decision makers are responsible for obtaining the maximum benefit for moneys expended by the company. Wholeheartedly embracing the concept of full and open competition will also reduce the potential for any charges of preferential treatment.

While there are other guidelines that are important, those eight mentioned are the key areas that must be understood and followed. Out of the eight, special attention in this session will be given to two.

Quid Pro Quo (Treatment of Suppliers and Full and Open Competition) Protecting Confidential Information

Vignette #1: The Case Of "Quid Pro Quo"
This vignette addresses two issues: role of non buyers in the purchasing process and treatment of suppliers by buyers.

The situation presented is between a Purchasing Manager, an Engineer in his company and a supplier. The Purchasing Manager felt that his department was being treated like a "rubber stamp" since engineering accepted a design change suggestion from the supplier without working with Purchasing. Clearly offended, the Purchasing Manager decided he would get even by excluding the supplier from the bidding of the new contract even though the design creation was the suppliers.

The Purchasing Manager's decision to exclude the company was based on the lesson he wanted to teach the engineer and supplier to show who really ran purchasing.

Unfortunately for the Purchasing Manager, the selected supplier could not deliver the goods. The Purchasing Manager was forced to go back to the supplier that submitted the design and beg him to save the day.

And save the day he would, but at a cost. The supplier was now demanding that the Purchasing Manager award him the upcoming contract for the new program. When the Purchasing Manager suggests that he'll have trouble justifying an uncompetitive bid, the supplier responds, " What choice do you have?"

The issues we see in this scenario are:

• Non buyers circumventing purchasing
• Relationships between buyers and sellers
• Cross functional relationships and communications
• Practices used to obtain competitive pricing
• Ethical conduct in general

Clearly, internal relationships must be established along with a process that allows engineering to interface with suppliers to meet their needs in soliciting technical or other product information: conversely purchasing requires the same to insure that the business (both development and sustaining) supply needs are met. While this may be difficult at times, it is very doable.

The root cause of the problem of the engineer going around purchasing was really an internal issue that was not managed well. Todays more progressive companies have solved many of their relationship problems by introducing the cross functional or commodity team approach to supplier strategy, sourcing, selection and negotiations. By bringing the experts of core disciplines together, they are more apt to appreciate each others skill sets and work with each other in obtaining common goals. While the teams are not a solution to every problem, it builds the foundation for unity, consistency and teamwork.

Relationships between buyers and sellers must also stay fair and consistent in nature. Ethical conduct is essential and sets the foundation for a long term, healthy environment.

As soon as the Purchasing Manager realized there was an issue, he should have worked with engineering on the alternatives that were in the best interest of the company, not himself. It was very clear that the Purchasing Manager reacted to his emotions and let the priority be to "get even" rather than work professionally and ethically to solve the problem.

There is also the issue on why the supplier did not notify the Purchasing Manager of the activity taking place. Clear direction to the supplier on notifying Buyers of such activities could help with an early warning alert process and ensure that the Supplier isn't contributing to improper procedures or protocol. A simple "Letter to Suppliers" that places reasonable ownership of notification on the Supplier might be appropriate.

In summary, had the company had a solid internal process that defined lines of responsibility and ownership, relative to supplier selection and award, educated their people on basic ethical processes and policies and worked together in resolving territory issues without implicating the supplier, the problems noted could have been minimized or eliminated.

Vignette #2: "Protecting Confidential Information"
This vignette centers around the responsibility the Buyer or individual holds relative to maintaining confidentiality of your company or suppliers. While many violations of confidentiality are knowingly executed, just as many are violated innocently. But being naive or lacking knowledge is no excuse, as the liabilities and repercussions could be monstrous and detrimental to all parties concerned.

There are many categories of information which must be considered confidential, some of which are:

• Design information
• Formulas and/or process information
• Supply sources or supplier information
• Customer lists or customer information
• Wage and salary scales
• Pricing or bid information
• Personal information about employees
• Profit or asset information
• Future product information
• Buyer beware when:
  - You hear the words:
  • "This will just be our little secret."
  • "You can trust me."
  • "If you can't tell me my competitors price, tell me the percentage."
  • "Just give me your target number I have to reach."
  • "How do I stack up against 'X' company?"
• Your supplier asks for a testimonial from you about their company, you might find it in the next Purchasing Magazine or trade journal
• A supplier asks to have your picture taken-ditto number 2.
• A supplier offers personal information on someone in your company or theirs or asks personal questions of you.

The basic rule of the road is to familiarize yourself with your company policy concerning confidential information. Next, when transmitting confidential information, do it in writing and clearly label it as; "Need to Know", "Confidential", "Registered", "Internal Use Only", "Proprietary", etc.

Consider use of a formal confidentiality agreement clarifying parameters for use and responsibilities inherent in its use.

Use extreme care and good judgment when receiving confidential information and understand the responsibility that goes with its acceptance.

If passing that information on to others who have a need to know, ensure they understand the content and responsibility that goes with the acceptance.

In summary, individuals have major responsibilities of being mindful of the information that they are receiving or giving and understanding the consequences of revealing such. So before doing so, ask yourself:

• Must the supplier have this information to do their job?
• Is it ethical or legal to give this information?
• Is it against company procedures to reveal this?
• Will this information give the supplier unfair advantage over another?
• Is it in the best interest of my company to give this information?
• What is the reason this person wants this information?
• How could this information I might give be used against my company?
• Could giving this information inhibit a successful negotiation now or in the future?
• Is the information I am giving, in my knowledge, accurate?

Suggested Responses That Might Be Appropriate:
"I consider that information to be confidential. Is there something else I could help you with?"
"I'm uncertain I am authorized to address that. Let me check it out and let you know."
"I'm uncomfortable with this line of questioning. Let's move on to more generic discussions"
"You know our policy on that. A response would be out of line." (to the supplier who continues to persist)
"Our company policy prohibits the giving of such information"
"We work hard to keep our supplier information confidential. You wouldn't want me to reveal your pricing information to your competitor would you?"

In Summary. It is the responsibility of Purchasing to be aware and knowledgeable about upholding the level of confidentiality that is necessary to conduct business fairly and professionally. It is also necessary to help educate those who interface with suppliers who might not understand the implications of discussing information they have that is considered confidential or proprietary.

In Brief. "When in doubt, keep quiet."

In Conclusion.
The health of our profession depends upon the high ethical values that are developed, understood and practiced. The impact of abuse is far reaching and can be incredibly damaging, not only to the individual, but to the company as well.

Legal risk is an inevitable corollary to business growth, and companies must strive to minimize such risk by requiring all employees to comply with the law and exercise sound judgment in the performance of their duties.

The subject of business ethics covers a broad spectrum of conduct, and it is impossible to anticipate every possible situation. However, an understanding of the basic issues and concepts should alert employees to the potential ethical and legal implications of your business conduct and assist in determining the appropriate course of action.

NAPM believes the first step in that process is education and awareness. One way to start that process is to develop a written document that addresses the position the company takes on specific issues in both legal and ethical matters.

REFERENCES

NAPM Publication. "Principles & Standards of Purchasing Practice."

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