Chapter 11

1. Chapter 11 ٠ Ethics in Purchasing ٠ 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 unethicalbehavior 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 ISM Policy (Page 481 of text) • Misleading • Taking Advantage • Quibbling • “Small print”

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 What should Larry do?

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 • Competent parties • Legal subject matter • Offer • Acceptance • 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. Accepting Bribes Buyer Books on Ethics Violating Environmental Law

25. Let’s move on