Chapter 4 1

Chapter 11

٠ Ethics in Purchasing٠ Purchasing Law

2

Definition of ethics

A set of moral principles that mature and decent people feel should guide behavior.

Business ethics is centered on

• Honesty

• Fairness

• Respect

3

Ethics in Purchasing Firms have reputations, just like individuals. Buyers can have significant influence on corporate reputations.

Buyers have great authority in granting contracts. Sometimes suppliers attempt to secure this business with unethical practices. Unfortunately, temptation is always present when large amounts of money are involved

4

Ethics is a big issue in purchasing

Buyers, more than any other group within the firm experience enormous pressures to act in unethical ways

Firm’s reputation is involved Firm’s competitive position is at

risk

5

U.S. Air Force’s Darlene Druyun and Boeing 30-year career federal procurement executive Lease 100 tanker aircraft from Boeing

Higher price than Air Force cost analysts recommended. “A parting gift to my future employer.”

Shared Boeing proprietary information with a competitor

Accepted a $50,000 signing bonus to join Boeing Boeing executive bought her Virginia house

Other shenanigans on behalf of her son-in-law

6

Darlene Druyun and Boeing “Druyun admitted in court

that she favored Boeing in negotiating a $412 million settlement concerning a clause in the C-17 contract. She said she was influenced by her son-in-law's ongoing job negotiations with Boeing when she agreed to the settlement.”

--Federal Executive Magazine

123 Sixteen months in a federal penitentiary. Now the “poster child” of unethical behavior in purchasing.

7

Four general standards for buyers to keep in mind A buyer’s loyalty must be to his

organization’s goals, to the exclusion of personal gain.

A buyer must avoid every real or perceived conflict of interest or personal obligation to a supplier.

A buyer must act professionally and ethically toward suppliers and potential suppliers.

A buyer must consider any potential actions in light of “How would this look if reported in the company newsletter?”

8

Types of Unethical Behavior

Gratuities (receiving something of value from a supplier with intent to influence)

- The issue of meals- Foreign cultural practices

• The issue of gifts • The FCPA Conflicts of interest Sharp business practices

• Misleading

• Taking Advantage

• Quibbling

• “Small print”

ISM Policy (Page 481 of

text)

9

Types of Unethical Behavior

Gratuities (receiving something of value from a supplier with intent to influence) - The issue of meals- Foreign cultural practices • The issue of gifts • The FCPA

Conflicts of interest Sharp business practices Poor treatment of confidential information Poor treatment of supplier representatives [Personal purchases for employees]

10

Types of Unethical Behavior

Acceptance of samples from supplier representatives for evaluation without proper follow-up

Inappropriate conduct in competitive bidding by not . . • Inviting only those firms to whom you would consider awarding

the contract to bid• Honoring the bid-close date• Treating all bidders alike with regard to information• Keeping proprietary information confidential• Notifying suppliers of errors in the bid (and thereafter taking

advantage)• Awarding to the lowest responsive bidder or being prepared to

explain why you did not• Closing the loop with unsuccessful bidders

11

Ways to promote professional standards and ethics in a purchasing organization

Support of top management is critical. Expectations and standards of conduct should be formalized in the PPM.

Policies on standards of conduct should be formally reviewed periodically in training programs or otherwise.

Whistle-blowing policy Encourage suppliers to report sub-standard practices Rotate buyers Do post-purchase audits occasionally Informally observe buyer lifestyles

12

Strategic Sourcing

Has the trend toward strategic sourcing had any implications on the issue of ethics in purchasing?

Using the team approach to select suppliers limits the opportunity for unethical behavior.

13

Safeguards in ethical behavior for buyers to remember:

When in doubt consult the PPM When in doubt discuss the issue

with your boss When in doubt document your

actions

14

The Laxtec Case

15

Introductory thoughts relating to Purchasing Law A buyer’s basic responsibility is to conduct

procurement wisely and expeditiously A highly legalistic approach is unnecessary and

unprofitable Disputes with suppliers can normally be resolved

amicably and effectively with negotiation Litigation is costly, slow, alienates parties, and

has uncertain outcomes Nonetheless, buyers need to be familiar with the

legal dimensions of their job.

16

Legal Issues

Laws of Agency Issue of Personal Liability

Buyer exceeds his actual authority but not his apparent authority

Buyer exceeds both actual and apparent authority

Misuse of proprietary information Taking actions for personal gain Taking illegal actions

17

Legal Issues

Contract Law An enforceable contract requires

1. Competent parties

2. Legal subject matter

3. Offer

4. Acceptance

5. Consideration (bargained-for exchange)

Issue of acceptance

18

Legal Issues

Contract Law Cancellation of orders

Supplier defaults For convenience of buyer firm

Breach of contract remedies Negotiate Alternative Dispute Resolution (ADR)

Mediation Arbitration

privatejudge.com

National Arbitration Forum

Onlineresolution.com

19

Legal Issues Contract Law

Cancellation of orders Supplier defaults For convenience of supplier firm

Breach of contract remedies Negotiate Alternative Dispute Resolution (ADR)

Mediation Arbitration

Litigation Liquidated Damages Clause

20

“Liquidated Damages” clause

A liquidated damages provision represents prior agreement by both parties on the ground rules to be followed in determining costs and damages in case the contract is breached.

21

Legal Issues

Contract Law Uniform Commercial Code (UCC) is a

gap filler in contracts

22

Foreign Corrupt Practices Act (FCPA)—Anti-bribery Law

It is a crime for a U.S. firm to offer payments or gifts of substantial value to foreign officials

It is permissible to make payments to clerical officials (transactions bribes)

23

Under what circumstances might a buyer earn free room and board?

24

Buyer

Books on

Ethics

25

Let’s move on