Ethics in Procurement

Ethics in Procurement

The word ‘Ethics’ is derived from a Greek word ‘ethikós’, which means ‘moral’. The Greek word ‘ethikós’ was derived from the root word ‘ethos’. Ethics refer to moral principles that govern or influence the conduct or behaviour of an individual or an activity or a process.

Principles such as fairness, morally upright, fair, just, correct, integrity and transparency form the basis of ethics.

Ethics are applicable to almost all areas in people’s life as well as in the context of an organisation. For example, when a student takes an examination, it is expected that he should write his paper based on his knowledge and learning. Any attempt of cheating or unfair means accounts for unethical behaviour.

Let us take another example, when a government organisation rolls out a certain tender in the public and invites bids from dealers to supply a particular product (say cement). In such deals, it is expected that all government officials conduct the process of tendering and dealer selection in a fair manner.

The contract should be awarded to a dealer that can supply the required amount of cement (having the required quality) at the lowest price and in a time-bound manner.

Some other examples of unethical behaviour in procurement includes accepting gifts & bribery from vendors, leaking price at negotiation stage, and pushing personal favour via suppliers.

Some of the best practices related to ethical conduct of/in any organisation are as follows:

• Behave in an honourable and professional manner with all internal and external customers of the organisation
  
  
• Uphold values, such as trust, confidence and integrity in all activities
  
  
• Do not take undue advantage of any person
  
  
• Do not take undue advantage of the loopholes in the system; rather the loopholes should be brought into the notice of the appropriate authority so that others may also not be able to misuse it
  
  
• Uphold the standards and policies of the organisation
  
  
• Avoid conflicts of interest with other parties/individuals

Similarly, ethics also form an important governing factor in the procurement of goods. Ethics become all the more important in the case of international procurement because the goodwill and reputation of two or more countries is at risk.

In case of buyers, it is considered a good practice to treat all sellers in a just manner. In addition, sellers must also treat all their customers in an ethical manner.

In the past, procurement or sourcing was considered to be non-critical and clerical work. However, with the increased level of competition in the market, it has become important for organisations to maintain harmonious relationships with sellers by keeping fair and just practices. Therefore, the concept of procurement has now gained eminence. Organisations nowadays have a separate department that is responsible for ensuring ethical practices within the organisation.

Purchasing is one of the few areas of management that can demonstrate genuine leadership in the field of ethics. However, it is also an area of management that is prone to pressure and influence. Purchasing or the procurement departments are headed by procurement managers. The role of purchasing executives begins with purchasing, evolves into procurement material management and supply chain management. Since purchasing is one of the areas of management that demands the highest levels of ethical practices, even the top management of the organisation looks up to this department.

Therefore, the purchasing department needs to ensure that:

• the department demonstrates exemplary ethical conduct.
  
  
• all the purchase executives and managers maintain and follow the said and unsaid protocols related to ethics in dealing with all the supplier organisations.
  
  
• all the suppliers are given exactly the same treatment by all the employees of the department.
  
  
• a policy statement document is in place. This document lists down the dos and don’ts (professional code of conduct) while procuring goods/services at a broad level. This document must also explicitly state that any department can consult it and seek guidance related to ethical practices.
  
  
• the department conducts recurring and annual workshops related to ethical practices.
  
  
• the no gifts (from vendors) policy is implemented even during festivals.
  
  
• no employee of the procurement department takes or seeks indirect favours (such as dinner at premium places or premium gifts) from vendors

Ethical Concepts in Purchasing

Ensuring a fair and ethical trade deal (buying and selling) requires effort and commitment of:

•  Employer
  
• Supplier
  
• Professional Body
  
• Person

Employer

Employers (ultimate buyer) purchase goods through their agents (employees/buyers). It is the duty of the buyer to ensure that he/she incurs no favour or gain from the supplier that may directly or indirectly affect the employer negatively.

The knowledge that a buyer gains while conducting his duties are considered as proprietary and must be kept safe.

Supplier

The buyers should ensure that each supplier is treated fairly and in a courteous manner. The code of conduct and the process of tendering from tender invitation to awarding the tender contract must be ethical, fair and transparent.

The purchase orders and all other related documents must be written with maximum possible specifications. Any issues or disputes that arise must be solved within the least time and in a fair manner.

The buyers must encourage their best and trustworthy suppliers to generate and share new ideas with the buyer. Any proprietary knowledge belonging to a supplier that is shared with the buyer must be protected. The buyer should endeavour to develop long-term relationship with suppliers even it means sacrificing short-term gains.

Professional Body

Almost all the professions of the world that are formally recognised and practised by organisations and individuals usually have a national and/or international organisation or body. These professional bodies sometimes play an important role in policy-making decisions related to the profession.

In addition, these professional bodies also establish basic ethical standards that individuals in that profession should follow. For example, the Institute for Supply Management (ISM) is the largest not-for-profit professional supply management organisation in the world.

It has presence in over 100 countries of the world. ISM-India is an affiliate of ISM, US and is located in Gurgaon, Haryana. This organisation has impacted supply management and purchasing by providing education, certification, leadership development and research in the field of supply and purchase.

ISM has also developed a professional code of ethics for the purchase and supply professionals. This document is formally known as the Principles and Standards of Ethical Supply Management Conduct. There are three major principles and ten standards described by the ISM.

The principles and standards as they appear in the ISM’s document are as follows:

• Principle 1: Integrity in Your Decisions and Actions
• Principle 2: Value for Your Employer
• Principle 3: Loyalty to Your Profession

The ISM standards derived from the above-mentioned principles are as follows:

• Impropriety: Prevent the intent and appearance of unethical or compromising conduct in relationships, actions and communications.
  
  
• Conflict of interest: Ensure that any personal, business or other activity does not conflict with lawful interests of your employer.
  
  
• Influence: Avoid behaviours or actions that may negatively influence, or appear to influence supply management decisions.
  
  
• Responsibilities to the employer: Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer.
  
  
• Supplier and customer relationships: Promote positive supplier and customer relationships.
  
  
• Sustainability and social responsibility: Champion social responsibility and sustainability practices in supply management.
  
  
• Confidential and proprietary information: Protect confidential and proprietary information.
  
  
• Reciprocity: Avoid improper reciprocal agreements.
  
  
• Applicable laws, regulations, and trade agreements: Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management.
  
  
• Professional competence: Develop skills, expand knowledge and conduct business that demonstrates competence and promotes the supply management profession.

Person

All buyers/agents bring with themselves a set of their dearly held values. There are times when the personal ethics of the buyer (as an individual) and the ethical standards of the profession or the standards related to buyer’s job are at loggerheads with each other.

In such cases, the buyer should try to manage the situation. To avoid such instances, the buyer and the employer must establish sound ethical standards and may even conduct training programmes for sound ethical practices.

Purchasing Code of Ethics of the University of California

The Procurement & Contracts Division of Business and Financial Services (BFS) fosters and promotes fair and ethical business practices while acting in the best interest of the University of California and the people of the State of California. This includes adhering to a strict code of ethics.

It is important that the suppliers understand that the university expects faculty and staff who are involved in any aspect of purchasing goods and services for UC San Diego, to adhere to the purchasing code of ethics.

These codes of ethics are:

• Give consideration to principles of community
  
  
• Obtain a maximum value for each dollar spent
  
  
• Decline personal favours, gifts and gratuities
  
  
• Grant all competitive suppliers fair and equal consideration
  
  
• Conduct business with potential and current suppliers in an atmosphere of good faith
  
  
• Demand honesty in sales representation
  
  
• Receive consent of the originator for the use of proprietary ideas and designs
  
  
• Make reasonable effort to obtain equitable settlement of any controversy with a supplier
  
  
• Accord a prompt and courteous response to all who call on legitimate business
  
  
• Foster fair, ethical and legal business practices
  
  
• Protect the university’s interest by ensuring suppliers honour all terms of their contracts

International Buying Ethics

To explain simply, an international purchase refers to an activity wherein a buyer in one country procures goods from a seller in another country. However, activities in the world are now no longer international; they have become global. It means that a buyer purchases goods from a seller in another country who has production or assembly in some other countries of the world. For example, a buyer in Russia can buy materials from a Scottish supplier, who buys his components from the UK and gets them assembled in Ireland.

To explain simply, an international purchase refers to an activity wherein a buyer in one country procures goods from a seller in another country. However, activities in the world are now no longer international; they have become global. It means that a buyer purchases goods from a seller in another country who has production or assembly in some other countries of the world. For example, a buyer in Russia can buy materials from a Scottish supplier, who buys his components from the UK and gets them assembled in Ireland.

International ethics are those ethics or guidelines that can possibly keep a buyer away from ethical troubles related to any culture of the world that may be involved in a transaction. There are no standard set of guidelines in this regard.

However, some key points are as follows:

• Try to adjust according to the local custom of the supplier.
  
  
• Establish a limit till which the buyer will adjust home-country standards in the case of conflict with foreign standards.
  
  
• Create a code of ethics applicable in the home country so that the buyers may establish how much adjustment they can and should not make.
  
  
• Seek support and guidance from senior-level management back in his home country in the case of situations in which he (buyer) is unable to make decisions.
  
  
• Share experience and encourage others to do the same.