Supply Chain Management Series: Ethics in Purchasing and Supply-Part II

Supply Chain Management Series: Ethics in Purchasing and Supply-Part II

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For Part 1 of 2-part series, click here.

 

Instances of Unethical Practices

Misconduct or malpractice in the purchasing and supply process will relate to specific processes in the supply chain such as the following:

 

– Specifying supply requirements

  • Providing a vague or general set of requirements to allow more discretion on the recommending authority or decision maker
  • Providing a stringent set of requirements to disqualify vendors, to favor a particular vendor, or to promote or demand bribery
  • Requiring a set of biased design and specifications
  • Too much focus on purchase cost without considering the total cost of ownership

 

– Obtaining Offers

  • Limiting the process for obtaining offer, to favor or disqualify a vendor
  • Manipulating the scoring or ranking of offers and bids
  • Disallowing new technology or qualified offers based on very traditional set of requirements
  • Management interference in selecting offers or bids
  • Violation of the confidentiality of offers and bids

 

– Selecting suppliers

  • Providing a general or stringent set of accreditation requirements to favor or disqualify a vendor
  • Lack of due diligence procedures
  • Lack of proper debriefing of suppliers

 

– Vendor management/performance measurement

  • Not providing a reliable and measurable performance check will prevent the company from efficient and proper management of both the vendors and the product or service provided
  • Secrecy or lack of transparency
  • Poor delivery, quantity and quality monitoring
  • Acceptance of inferior, sub-standard or substitute product or service in exchange for favors or bribes
  • Demand for additional work or supplies to cover faulty procurement
  • Defective payment procedures for incomplete deliveries or work
  • Arbitrary and unfair use of power and influence, whether internally or against third parties
  • Sourcing illegally from the black market
  • Inappropriate lifestyles or activities

 

P&S Code of Conduct

For some companies, implementing a code of conduct across the board can be very costly, impractical or counter-productive given the realities of business where competition puts a lot pressure on the cost of production or the selling price. Many times, suppliers particularly small enterprises are unable to qualify due to, among others, the cost of compliance. Hence, many companies have opted to simply implement guidelines on specific issues and concerns rather than adopt a blanket code of conduct, which is seen as aspirational rather than practicable.

 

When applicable, a company’s P&S Code of Conduct may contain the following:

 

– Specific standards relating to the following P&S functions:

  • Planning supply and specifying requirements
  • Selecting Offers and Bids
  • Accreditation and Selection of Vendors
  • Supply Contract Management (with provision for clauses on disclosure, conflict of interest, corruption and bribery)
  • Performance Measurement

 

– Defined criteria on the following risk areas:

  • Transparency and confidentiality
  • Use of power and influence; Coercion and Extortion
  • Business gifts and hospitality; Solicitation
  • Corruption and bribery
  • Disclosure of interest and relationship
  • Payment terms to suppliers
  • Suppliers’ relationships and free competition
  • Working conditions for suppliers

 

– Ethical monitoring protocols (with focus on prevention rather than detection)

– Training and Awareness

 

Strategy for Ethical Procurement Management

For companies that are not prepared or ready to implement a blanket code of conduct, it may start its own set of ethical procurement practices by conducting the following:

 

– Review the Procurement and Supply Processes. Management may start by identifying risk areas across supply chains and identifying priorities among these risks. Further study should be made by way of interviews, simulation of the actual work flows and identification of the decisions points. Prioritizing risk areas may also relate to the volume and value of purchases and the kind of relationships established with vendors.

 

– Consultation with Others. Once the problem areas are identified, consult with other supply chain professionals on how they manage these problem areas and what best practices may be applicable.

 

– Construct the Policy. After external consultation is made, management may construct the ethical purchasing policy guidelines for each specific problem area. Internal discussions with the affected staffs must be made likewise to ensure that compliance is feasible and practicable, with the least friction and disruption on those affected.

 

– Buy-In by Management and Users. Internal discussions and consultations must be continued to ensure compliance and support from management as well as the users.

 

– Awareness Training and Monitoring. Once the policy is officially released, awareness training must be conducted with practical discussions and examples made clear to all those affected by the policy. The focus of the training must be on prevention rather than detection. As provided in the policy, monitoring shall be made to verify compliance, address non-compliance or misconduct, provide remedial actions when the conditions prevent compliance with the policy, and address loopholes in the policy or procedures.

 

The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. ACT provides trade intelligence through industry updates and features; columns written by customs and trade professionals and experts; and specially commissioned reports. For questions, please email him at agatonuvero@customstrade.asia (www.customstrade.asia).

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