PURCHASING MANAGEMENT

ETHICAL STANDARDS IN
PURCHASING
 ETHICAL STANDARDS IN PURCHASING

• ETHICS
– Ethics have their basis in the field of philosophy and identify
common principles associated with appropriate versus
inappropriate actions, moral duty, and obligation.
– Ethics are the set of moral principles or values guiding our
behavior.
• ETHICAL BEHAVIOUR
– ethical behavior is the use of recognized social principles
involving justice and fairness throughout a business
relationship.
 ETHICAL STANDARDS IN PURCHASING

• RULES OF ETHICAL BEHAVIOR

– First, buyers must commit their attention and energies for the
organization’s benefit rather than personal enrichment at the
expense of the organization.
– Second, a buyer must act ethically toward suppliers or potential
suppliers
– Finally, buyers must uphold the ethical standards set forth by
their profession. A code or statement of professional ethics
usually formalizes the set of ethical standards.
 ETHICAL STANDARDS IN PURCHASING

• Risks of Unethical Behavior

– A buyer who performs an unethical act runs the risk that the act
is also illegal.
– Unethical behavior also presents a personal risk to a buyer’s
professional reputation.
– A final risk of unethical behavior is the risk to a firm’s reputation.
A buyer who makes purchase decisions based on factors other
than legitimate business criteria risks the reputation of the
entire firm.
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• Types of Unethical Purchasing Behavior

– Reciprocity
– Personal Buying
– Accepting Supplier Favors
– Sharp Practices
– Financial Conflicts of Interest
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• Reciprocity
– This action involves giving preferential treatment to suppliers
that are also customers of the buying organization.
– In simple terms, it refers to a purchasing arrangement that
dictates “I’ll buy from you if you buy from me.”
• Personal Buying
– This occurs when a purchasing department purchases material
for the personal needs of its employees.
– Some states have outlawed such practices with statutes called
“trade diversion laws.”
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• Accepting Supplier Favors

– Accepting gifts and favors from a supplier is the most common
ethical infraction involving buyers.
– These gifts and favors can affect a buyer’s judgment to
evaluate and select the most capable suppliers.
– Firms can address this issue in their ethics policy by specifying
exactly what a buyer may accept from a supplier.
 ETHICAL STANDARDS IN PURCHASING

• Sharp Practices
– sharp practice is any misrepresentation by a buyer that falls
just short of actual fraud.
– Sharp practice occurs whenever a buyer “plays games” with a
supplier and operates in an underhanded manner.
 ETHICAL STANDARDS IN PURCHASING

• Sharp Practices
– The practice includes many different behaviors:
» Willful use of misinformation, when a buyer knowingly deceives a supplier to
realize some advantage. For example, requesting quotes on inflated volumes
and then placing smaller orders at the reduced price is a willful use of
misinformation.
» Exaggerating problems. A buyer who exaggerates the size of a supplier
caused problem to extract a larger penalty or concession from a supplier is
using a sharp practice.
» Requesting bids from unqualified suppliers for the sole purpose of driving a
qualified supplier’s price lower. A buyer should request bids from qualified
suppliers only.
» Gaining information unfairly through deception.
 ETHICAL STANDARDS IN PURCHASING

• Sharp Practices
– The practice includes many different behaviors:
» Sharing information on competitive quotations. The integrity of the
competitive bid process requires confidentiality. Buyers who share supplier-
quoted information violate the ethics of the bid process.
» Not compensating a supplier for design or other work. Buyers often request
design and cost-savings assistance from suppliers. A supplier that helps a
buyer should receive fair compensation for its efforts.
» Taking unfair advantage of a supplier’s financial situation. A buyer who
» knowingly pressures a financially troubled supplier into providing a lower
than-normal price places the supplier in further financial jeopardy. Taking
advantage of a financially susceptible supplier is an unethical business
practice.
» Lying or misleading. Any instance of lying or misleading a seller is a sharp
practice.
 ETHICAL STANDARDS IN PURCHASING

• Financial Conflicts of Interest

– When a buyer awards business to a supplier because the
buyer, the buyer’s family, or relatives of the buyer have a direct
financial interest in a supplier, this is considered a major
unethical practice.
– This behavior is one reason many companies require
employees to detail any investments in outside companies.
– Awarding a purchase contract to a company in which a buyer
has a significant personal financial interest is a serious breach
of ethics.
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• Influence and Ethics

– INFLUENCE - is defined as the power to sway: “the power that
somebody has to affect other people’s thinking or actions by
means of argument, example, or force of personality.”
– SUPPLY PROFESSIONALS - regularly make decisions about
what their organization buys, who they buy from, how much
they buy, and how they buy it.
– SUPPY PROFESSIONALS - must overcome the negative
aspects of influence to ensure that they are objective in their
decision making and that they are operating in an ethical
manner.
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• INFLUENCES

(1) suppliers sharing new ideas, methodologies, and

technologies
(2) sharing data when being involved early in design issues
(3) a cross-functional team being involved in a comparative
analysis of competing suppliers are positive and appropriate
influences;
 ETHICAL STANDARDS IN PURCHASING

• Examples of negative influences

(1) giving personal interests priority over employer interests;

(2) inappropriate sharing of confidential or proprietary information
with suppliers; and
(3) accepting gifts, entertainment, or meals as a reward for a
decision that could be made in favor of the supplier.
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• ISM Professional Code of Ethics

– The Institute for Supply Management is the largest organization
representing the purchasing profession. In 1959, the ISM
officially adopted its initial Standards of Conduct.
– The document serves as a guide for the ISM membership by
imposing rules of conduct, particularly when a buyer’s own
company lacks a policy or statement of ethics.
– In the words of the code, “It is necessary for all of us to
exercise a strict rule of personal conduct to insure that relations
of a compromising nature, or even the appearance of such
relations, be scrupulously avoided.”
 ETHICAL STANDARDS IN PURCHASING

• ISM Professional Code of Ethics

– The Standards of Conduct specifies three guiding principles of

purchasing practice:

(1) loyalty to company

(2) justice to those with whom a buyer deals
(3) faith in the purchasing profession.
 ETHICAL STANDARDS IN PURCHASING

• From these principles ISM derived its standards of

purchasing practice, or Code of Ethics:
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The ISM standards specifically state that its members

should maintain standards on an even higher plane than
those accepted by society—what becomes the “true test of
greatness.” This is stated as follows in the code:
Nothing can undermine respect for the purchasing profession more than
improper action on the part of its members with regard to gifts, gratuities, or
favors. People engaged in purchasing should not accept from any supplier or
prospective supplier any money, gift, or favor that might influence, or be
suspected of influencing, their buying decisions. We must decline to accept
or must return any such gift or favor offered us or members of our immediate
family. The declination of these gifts or favors must be done discreetly and
courteously. Possible embarrassment resulting from refusals does not
constitute a basis for exception.
 ETHICAL STANDARDS IN PURCHASING

• Supporting Ethical Behavior

– Developing a Statement of Ethics
– Top-Management Commitment
– Closer Buyer-Seller Relationships
– Ethical Training
– Developing Consistent Behavior
– Internal Reporting of Unethical Behavior
– Preventive Measures (Commodity Rotation and Limits of
Authority)
 ETHICAL STANDARDS IN PURCHASING

• Developing a Statement of Ethics

– Most research on purchasing ethics concludes that adopting a
formal ethics policy helps define and deter potentially unethical
purchasing behavior.
– A formal ethics policy helps define the boundaries of ethical
behavior.
• Top-Management Commitment
– Executive management sets the ethical code of behavior within a
firm. Lower-level managers quickly recognize top management’s
commitment to ethical behavior and imitate the commitment,
especially when other managers are fired because of their
unethical behavior.
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• Closer Buyer-Seller Relationships

– Dealing with a smaller supply base or a single supplier for an
item will probably do more for ethical purchasing behavior than
any other recent trend or action.
– Firmsare increasingly using buying teams to evaluate potential
suppliers across different performance categories.
• Ethical Training
– New buyers, usually at larger firms, often enter a training
program before actually assuming their professional duties.
– Ethics training reinforces a firm’s commitment to the highest
ethical standards.
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• Developing Consistent Behavior

– Confusion about proper ethical behavior can arise when
marketing and purchasing have separate ethical standards.
– When different standards of behavior exist within the same firm,
it becomes easier for one group to rationalize or justify
unethical behavior.
• Internal Reporting of Unethical Behavior
– Executive purchasing management should create an
atmosphere that supports the reporting of unethical behavior.
 ETHICAL STANDARDS IN PURCHASING

• Preventive Measures (Commodity Rotation and Limits

of Authority)
– One common strategy is to rotate buyers among different items
or commodities, which prevents a buyer from becoming too
comfortable with any particular group of suppliers.
– Another preventive measure is to limit a buyer’s purchase
authority without higher-level approval.
 ETHICAL STANDARDS IN PURCHASING

• CORPORATE SOCIAL RESPONSIBILITY

– Corporate social responsibility is the idea that organizations
and institutions have an obligation to society that extends
beyond compliance with regulations in considering the broader
effects of their actions
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• CORPORATE SOCIAL RESPONSIBILITY

– ISM has developed a guide to assist supply managers in
developing their socially responsible practices. The areas
covered in the policy are:
(1)community;
(2) diversity;
(3) environment;
(4) ethics;
(5) financial responsibility;
(6) human rights; and
(7) safety.
ETHICAL STANDARDS IN PURCHASING
 ETHICAL STANDARDS IN PURCHASING

• LAWS AFFECTING GLOBAL PURCHASING

– The United Nations Convention on Contracts for International
Sale of Goods (CISG)
– Foreign Corrupt Practices Act
– Anti-Boycott Legislation
– Export Administration Act
– Customs Laws
– Foreign Laws
– International Laws
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• The United Nations Convention on Contracts for

International Sale of Goods (CISG)
– This is an attempt by the United Nations to facilitate
international trade by removing legal barriers.
– Unless the parties have specified to the contrary, the CISG
applies to the sale of goods between parties with places of
business in the contracting states.
– One of the key provisions to its success is the flexibility to take
exception to specified articles of the code on a contract-by-
contract basis.
 ETHICAL STANDARDS IN PURCHASING

• Foreign Corrupt Practices Act

– This law prohibits payments (such as bribes) that might benefit
a foreign official personally.
• Anti-Boycott Legislation
– Various laws address doing business with countries that
support the boycott of one nation against another.
– These laws require reporting of any request to participate in a
boycott, which purchasers often fail to do.
 ETHICAL STANDARDS IN PURCHASING

• Export Administration Act

– Various laws and regulations govern, and sometimes even
restrict, the export of goods, information, and services.
– The law views certain types of drawings, specifications, and
prototypes forwarded to a foreign entity as restricted exports of
technology.
• Customs Laws
– This body of law addresses the importation of goods into the
United States. Customs brokers who are familiar with customs
laws can be quite valuable in understanding the rules and
regulations governing importation.
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• Foreign Laws
– The laws and regulations of other countries involved in a
business transaction may also apply.
– These laws will likely address contract law, export control,
currency control, and criminal law.
– Some transactions could be illegal if structured in a certain
manner.
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• International Laws
– Other laws may apply to a business transaction that are
not part of any specific country’s laws and regulations.
– Maritime laws are a good example of international laws
that affect international commerce.
– Several international documents are also pertinent to
international transactions. These include International
Contracting Terms.
 ETHICAL STANDARDS IN PURCHASING

The laws governing purchasing are complex and varied.

Other laws address environmental and labor issues. This
overview simply points out that today’s purchaser must be
aware of the laws and regulations governing domestic and
international purchasing.

A purchaser is urged to discuss with legal counsel any

questions that arise during the performance of job
responsibilities. Ignorance of the law is not a valid defense.