Ethics - Supplier and Customer Relationships

Before Supply Chain Management became the action statement we were Purchasing Professionals with concerns for our employer. Those concerns included the "Seven Rights" which included; quantity, quality, price, time, source, service, and place. Our success was often measured on how well we met the expectations of our organization within these seven action items. When I had to fill an open Purchasing position I always asked the applicant, "How do you identify who your customers are?" The question seems simple enough but often the applicants either did not know why I was concerned with the customer or they only saw the end-user as the customer. From my point of view, this question is more relevant today than at any other time because as a Supply Management Professional we are now concerned with the whole picture and not just the purchase of goods or services, or materials management, or logistics, or any other single component. I started my career in distribution and as a result, I learned early on that the relationship we have with our customers and understanding their needs and expectations is paramount to what makes us and our organization successful.

So when I ask that question, "How do you identify who your customers are?" - My expectation is that you will say that there are three areas that are customers. They are internal to the organization, our suppliers, and the end users/customers. Since our organization is functioning to meet our customer's needs and expectations, then we need to understand those needs and expectation and how they impact the other departments that are also trying to do the same. So a customer to the Supply Management Professional is anyone that we provide a service.

It is fairly easy to see end-users as customers. Many do not define or think about their fellow staff members as customers because they work alongside them. However, our goal should be to meet their requirements, thus allowing them to meet the needs of the organization's customers. As a result, we are providing a service to them and they are our customers. The last part of this trio is the supplier. So why are suppliers customers? First, let's look at the terms vendor and supplier. Many Supply Management Professionals use the terms interchangeably. However, there is a difference. A vendor is someone that is used once or infrequently, you do not include them in design, and it is a probably a low value purchase. On the other hand, a supplier is an organization that you will have an on-going relationship with for a product or service or equipment. Officially or unofficially a supplier occupies a certain status within a purchaser's company (i.e. preferred, certified, etc.) and depending on the level they attain you may share confidential information, they may be on your design team, etc. Now that I have made the distinction, does that mean you treat them differently? The answer is no. Many argue that suppliers are not in the customer category. But we provide them with the opportunity to expand their knowledge and business. They often share information with us that assists us in our decision-making processes. We interact and recommend ways that make our relationship easier or in other terms help each other improve efficiencies. As a result we are providing something to them that has value because they may not make a sale but the exchange may help them in other ways. As an example, your organization may evaluate a sample of there stock merchandise (i.e. nitrile gloves). If their product does not perform and you provide them feedback, you have provided them real world use experience that they may not have been able to do in their test facility.

How do you enhance these relationships? The best way is with common courtesy. Common courtesy should be employed whether you are dealing with a vendor, a supplier, a customer, or internal staff. There are several components to common courtesy.

1. A Supply Management Professional should always strive to create a positive environment when dealing with anyone that can be considered a customer.
   
2. Treat everyone as you would want to be treated: "The Golden Rule." We will come back to this a little later.
   
3. Be prompt. This includes answering the telephone when it rings, returning voicemail and e-mails promptly, be on time for appointments, etc. Prompt communication will create an atmosphere of understanding and cooperation.
   
4. Have established and published procedures that are followed by all impacted by them.
   
5. In decision-making be fair and impartial showing no favoritism in any actions.
   
6. Create an atmosphere that emphasizes the elimination of misunderstandings and conflicts.
   
7. Maintain confidentiality at all times.
   
8. Be open and honest by providing guidance and supervision based on both the letter of the law as well as the spirit of the law for both legal as well as ethical practices.

Let's go back to the "Golden Rule." This rule basically states to give to someone else what you would like to receive. This may not be what they want to receive at all. You may be content to receive your order at a restaurant anywhere between thirty to sixty minutes. This may not be what another customer wants. So there is the "Platinum Rule" which is to meet the other person's expectation. Since each customer has different expectations, the challenge is to learn what they are and make every effort to accomplish that goal. The last Rule is the "Double Platinum Rule" which basically means to exceed what the customer expects. For instance, your company may offer another product that enhances the one being purchased by your customer but they do not know about it. By offering and explaining to them you may exceed their expectations. There is an excellent article written by Bryan K. Williams for Hotel OnLine in June 2007 called, "Three Service Rules: The Golden Rule, Platinum Rule, and Double Platinum Rule." This should always be our goal - to exceed our customer's expectation.

Of course, our first responsibility is to our organization but poor supplier and customer relations will eventually eliminate the organization, both competitively and existence. Remember, supplier have to want to do business with those in the organization. If they are treated with threats, poor invoice payments, rule, or other similar behavior they will not want to do business with you. They may keep prices high hoping you will go elsewhere or not quote at all. A reduction the the competitive base results in increased costs, which will impact the profitability of an organization. I believe that the above will assist in your efforts to exceed the expectations that many suppliers and customers have seen too often from the Supply Management Professionals.

Ethics - Responsibility to the Employer

When accepting a Supply Management position with a company the relationship between the company and staff member are different than most other staff members within the organization. The position that is closest in nature to the Supply Management position is the sales representatives. Supply Management and Sales create an agent relationship with the employer because each position represents the interest of the company to other companies or individuals. Both positions are given parameters within which they must operate.


The Institute for Supply Management (ISM) lists several guidelines that a Supply Management Professional should adhere to. They include understanding the authority granted, obtain maximum value, avoid activities that compromise the interests of the employer, look-out for unethical and unlawful activities and notify the employer, do not use the employer's name without authorization, and avoid using the employer's purchasing power to benefit individuals.


Let's look at granted authority to act for the employer. For example, the Supply Management staff member may be assigned capital equipment responsibility in which purchases can be made up to $5,000.00 with the requisitioning department director's signature. If an order was placed for MRO items, or over the $5,000.00, or without the proper authorizing signatures, they have exceeded their authority. This is one of those ethical standards that are supported by a legal statute, "The Law of Agency." This law establishes the agent relationship between the employer and the Supply Management Professional to allow him/her to act of the employer's behalf as an employed third party. The law establishes three levels of Agency; Universal, General, and Special.

1. Universal Agent: This agent holds a broad range of authority to represent and act on the principals behalf. The individual my hold the power of attorney or be a professional (i.e. lawyer).


2. General Agent: This agent had limited or defined authority to perform a series of transactions over a continuous time period.


3. Special Agent: This agent has authority to act for the principal for either a single transaction or for specified related transactions defined by a period of time.

The Supply Management Professional is normally classified as a "General Agent" that covers the length of employment and the duties and responsibilities assigned to them upon hire or any changes that are made during employment.

As in the example above there are normally parameters assigned these staff members. Their actions can impact how they and the company are viewed by others. I discussed perception in a previous writing and here is one area that perception may impact the Supply Management Professional directly. There are three areas of authority that is recognized; Actual, Apparent, and Implied.

1. Actual Authority is established by the employer by either their words or actions. This can be created and changed either verbally or in written format (i.e. policy, contract, letter, or e-mail). This authority is clear and allows the agent to act within the scope provided and to bind the employer based on the actions performed by the agent.


2. Apparent Authority is based on words or actions that lead a reasonable person to believe that they have received authority to act on behalf of the principal. The assignment of an individual to a position that there is an assumption that certain authorities are attached.


3. Implied Authority are those acts that are necessary to carry out the expressed authority to act.

It is best that the Supply Management Professional has actual authority granted so that the actions that they take are specifically laid out and not open to interpretation. However, individuals outside the organization may make assumptions based on the company's representative based on how they act or even by the title they hold. A company should be careful with the creation and assignment of job titles because authority may be erronerously assumed by both the employee and/or outside individuals.

The main resposibility to the employer is fiduciary. This is where the Supply Management Professional should be excelling by producing the best value for the dollars that they commit on behalf of their employer. It does not matter whether this is hard or soft dollars or even the difference between cost savings and cost avoidance. We should strive to manage the dollars efficiently so that there are more dollars available for use within the organization. This starts with basic education of how the organization functions, it's accounting practices (i.e. paying invoices within terms, etc.), understanding the function of materials purchased and their alternatives, value analysis, etc. Based on these and other financial items the Supply Chain Professional should always keep the best interests of the company first. For example, years ago there was an ISM ethical standard about using the company's purchasing power to get price concessions for staff. This was later changed because many companies offer any of their customer's employees discounts off of purchases. What has to be watched for is that the company is not receiving additional discounts based on the dollars the employees spend with the supplier.

I mentioned education and I need to expand on this. It is our responsibility to maintain our own education on new theories and practices, so that we will be able to continue to maintain the best interests of our employer. Many feel that it is the responsibility of the company to pay for ISM Chapter meetings, seminars, etc. It is a benefit many companies have provided and with many it has become an expectation. But it is something that you agreed to upon hire - to do the best you can for the company hiring you, so make sure the salary you agree to will allow you to continue your education. If you do not maintain your education you are not providing what is expected as a part of your job performance. Over time, doing just your job will impact your company and ultimately you. The Supply Management Professional should always strive to provide value added performance and functions because anyone can place a purchase order.

Remember, whether you look at hard or soft dollars, or cost savings and/or cost avoidance, or other financial criteria for a Supply Chain Professional a dollar saved is a true dollar earned and seen on the bottom line. We need to use every ethical and legal tool possible to assist a company in their efforts for a good bottom line.

Ethics - Issues of Influence

I will repeat myself from a previous blog, in that it is the Supply Management Professional's responsibility to educate their company's management and staff about the various aspects of Purchasing ethics as defined by the Institute for Supply Management (ISM). That being said, this is probably the most misunderstood and complex issue that will need to be dealt with on an on-going basis. What is influence? Webster defines it in three ways:

1. The act or power of producing an effect without apparent exertion of force or direct exercise of command.
2. Corrupt interference with authority for personal gain.
3. The power or capacity of causing an effect in indirect or intangible ways.

As you can see this indicates that anyone that acts in a manner to change or alter the course of decisions or those who have the power to effect changes in the decision-making process. How are decisions made within your company? Are decisions made by an individual, an individual’s actions, a manager's decision, through committees, following or not following policies, administratively, or some other forum? There are those inside and outside the company that have the opportunity, desire, and/or the power to influence decisions. There are two ways to influence decisions:

1. Corporate, division, department, and employee policies and procedures.
2. Gifts, gratuities, and entertainment.

The first is easier to put in place, train, and require compliance as long as there are penalties in place for non-compliance. The hardest part of establishing policies is getting consensus from the various levels. However, once the policy is established, training becomes a requirement and continued due diligence is necessary because management and staff constantly change. Depending on your company, staff turn-over ranges from 5% to 30% on average. The higher the turn-over rate the more time will be required for training. Do not expect compliance based on staff members reading and signing an ethics statement. There are a couple of reasons.

1. They may sign the document without reading, they may skim over it, or they may not understand what they have read. In any of those examples they sign because it is a requirement of employment.
2. They interpret what they have read based on their own value system and/or past experience.

A dedicated training session allows you to gauge understanding and future compliance. This is the perfect time to clarify any gray areas in the minds of the staff. It is also the time to emphasize the importance of not only following the letter of the policy/guidelines but, also the spirit in which they were written. During an Internet search I found plenty on the "Golden Rule." With further searching this turned out to be the letter of the principles. What I found that makes me say this, is the "Platinum Rule." This became the spirit of the principles in my mind. The "spirit" in other words is beyond that which is stated verbally or in writing.
ISM states that a company should have a written policy that defines what ethical behavior encompasses and that it should be communicated to the staff. Included in ISM's statement is the frequency of accepting (if allowed), solicitation of, and acceptance of personal benefits. Let us look at the three components in ISM's guideline.

1. Gifts: Can be anything given upon first meeting, as part of negotiations, a thank you, or other occurrence. It includes marketing materials, food, merchandise, etc. It is given voluntarily without compensation.
2. Gratuities: Are basically the same as a gift except it is usually given beyond an obligation or service provided.
3. Entertainment: Is something that provides enjoyment or a diversion from normal activities. These include invitations to parties, sporting events, performances, etc.

Let us look at gifts first. It should be a company’s basic policy, that no gifts are accepted, including promotional items. That being said, I have had many students over the years challenge me on what harm does accepting a pen, a coffee mug, a calendar, etc. cause. At some future date, it fulfills its purpose in the sense that when a project starts and the identification of suppliers is necessary, the first one's mentioned are often those that have provided marketing merchandise. It is not a conscience decision to call that name up when asked - who should we include in the negotiations? This occurs on the sub-conscience level because you use the mug everyday or you look at the calendar everyday. Its there and it will surface without anyone realizing it.
The next issue is food and meals. There are two parts to this one:

1. Food brought in for staff: Often times companies will allow food to be brought in periodically (i.e. holidays, etc.). Often it is brought in by the same company. In healthcare, whether in a hospital setting or a doctor’s office, it is looked on as an expectation to the point that if food is not provided staff will not show up for a meeting or an appointment will not be given.
2. Meals (i.e lunch, dinner, etc.): It is often said that there are not enough hours in a day to meet with sales representatives and the only time I have is lunch. Even with a company policy that states that documentation (agenda/minutes) is needed and the frequency with a supplier is minimal - this is never a good idea. Supply Management Professionals are probably the busiest staff in a company and it is my belief that meals are a time away from the office to recharge. It is not a continuation of work.

Finally, food that becomes a habit becomes an expectation. Doctor’s offices actually promote supplier lunches as a benefit when looking for new hires. This is one influence that you can control and it should not be allowed in any fashion.

Entertainment: I was once told that the SC State Ethics Commission stated, if a supplier provides tickets to all of their clients, then it is not an issue of influence. It may not be. However, the perception by other is that it will influence your decisions sometime in the future. This perception is escalated if a bid is not performed or the contract renewal goes unchallenged, etc. If only that supplier provides tickets but no other suppliers in the same industry does, then that will be considered an influence by the other companies. In addition, someone who sees you at the event may not know that the supplier gives the tickets to everyone.

One other issue stated by ISM, is "Avoid accepting monies, loans, credits, preferential discounts." This can be both for the employer and personally. One, NEVER accept anything that would personally benefit you, your family, or friends. It will come back to haunt you. The same goes for business. One, it will impact decisions and it may even be against the anti-trust laws.
ISM states that extreme caution should be used when deciding to accept a gratuity. You should ask yourself the following questions:

1. Is it legal to accept the offer?
2. Is it in the best interest of your employer?
3. Will it influence your decision?
4. Will accepting the gratuity appear to be unethical?

Let us assume that Purchasing is not allowed to accept gratuities but your company's salesman have a promotional items and an entertainment budget, what perception is the company sending out? I believe the perception of other is that it is not okay for others to influence our purchasing department but it is okay for us to influence your staff.

This is a very complex subject that companies often address with less than strict or even well-defined guidelines. Even ISM only offers suggestions. However, I have found that in relation to this issue of influence, I prefer the black and white approach. This means, I accept NO gifts including promotional merchandise, I do not accept food, including lunch and holidays, and I do not accept any form of entertainment. If I do not accept it, I do not have to explain it to anyone, including my management.

Ethics - Conflicts of Interest

As Supply Chain Professionals, it is our responsibility to ensure that there is no personal, business, or other activity that will influence the decision-making process. Our responsibility is not only for the decisions that we make in the performance of our job. It is also our responsibility to ensure that others involved in the decision-making process within the organization are making those decisions without conflicts of interest. How do we ensure that conflicts do not become an issue?

To answer that question, the Supply Chain Professional must understand what creates a "conflict of interest." First, it is important while performing the various job functions, that the decisions being made are in the best interest of the employer and not in the best interest of the staff member making the decision. It is not possible to make a decision that benefits both the employer and the staff member, mainly due to the perception of others that the staff member's judgment was influenced because of their benefit or benefits gained by their decision.

What creates a conflict? Any decision that affects the Supply Chain Professional personally, their family, friends, a business that they receive compensation from, or other types of activities that could provide a benefit. A benefit does not need to be monetary gains. A gain can be increased influence, position, power, etc. or it can be perceived as influencing the decision, thus resulting in a conflict.

Second, if the company does not have a policy addressing conflict of interest the Supply Management department should create and have a policy. This policy should be included in the corporate section of the company policy manual instead of in the Supply Management's policy and procedure manual. The main reason is that the corporate section normally requires CEO or a senior manager's signature prior to placement in the manual and distribution to other managers and staff. Having this level of approval increases the validity and enforceability of the policy. The policy should be all inclusive and apply to all levels of staff and not just the Supply Chain Professional and their department's staff.

Third, includes some form of mandatory inter-departmental education. The form of education could be at the next manager's staff meeting, could be computer training and testing, or even one-on-one training. If the staff members involved in the decision-making process are not managers then computer training might offer the best solution. The goal is to have everyone that could be involved in decision-making have documented training about the conflict of interest policy.

Fourth, is the validation that no conflict exists. Initially, during the roll-out of the policy every manager and staff member should sign a statement that no conflict exists with the job that they are currently performing. For instance, a manager should not be making decisions related to the use a specific company if they or a family member has ownership. The other part of this is to ensure that when teams are created to make decisions on products, services, or equipment that none of the team members will have a conflict. This can be done either verbally and documented in the minutes or in written format. I would recommend that the verification should always be performed in writing and that it becomes a part of the teams documentation. A standard form can be utilized for this documentation. Written documentation allows for the replacement of anyone who has a conflict prior to any discussion or influence and the documentation will eliminate any future questions that a conflict might have existed.

Lastly, the Supply Chain Professional should be involved in all teams making decisions about the products, services, or equipment that are to be utilized by the company. A quick look at products, services, and equipment may be necessary because there are times that Supply Chain Professionals are not involved in the decision-making process. Some of these include projects for research, or travel, or staff insurance policies, etc. Whether the Supply Chain Professional is involved or not, this "Conflict of Interest" policy should apply.

There are many instances that we see decisions being made and a conflict exists. For example:

1. Promotion of a staff member to manage a department that would utilized specific companies of which they own one of the competing companies. In this example the staff member was promoted with the understanding that the company is either closed or sold. The staff member sold the company. However, their manager either did not verify the sale or the sale was not validated as eliminating the conflict. In this example the staff member sold the company to a immediate family member. Conflict still exists.

2. Spartanburg, South Carolina School District Seven signed a contract to allow their golf team to utilize a local country club. As it turns out the superintendent and several of the Board Members were a member of this country club.

3. A Purchasing agent creates a consortium of specific products that they are responsible for purchasing for the organization.

4. A manager has invested throught the company's 401k in stocks of various companies. If the company offers and allows their staff to manage their portfolio instead of having an outside company manage the plan for all staff, a conflict of interest could arise sometime in the future.

There are many more examples of how conflicts influence decision-making. The Supply Chain Professional should always be aware of this when any decisions need to be made on behalf of the company. It is imperative that the party with a conflict remove themselves from the process or the company's policy should be in place to allow documentation and removal of conflicts.

Ethics - Perceived Impropriety

Purchasing ethics are the single most important thing that a Supply Chain Professional can use and train others in the theory and practical application for performing the duties assigned by their company. The Institute for Supply Management (ISM) has a comprehensive set of guidelines that should be followed by anyone that interacts with salespeople. This then requires that the Supply Chain Executive's responsibility is to ensure that everyone in their company that interacts with salespeople, at any level understands what these standards are and how they are applied.

The first one on the list of ISM's Ethical Standards is "Perceived Impropriety" and it is probably the most important. Donald Rumsfeld stated that, "it is easier to get into something than to get out of it." It is often said that perception equals truth and my thoughts agree that it is a true statement. Think about an event taking place along a timeline, which they do. If you view an event in progress from the sidelines you will see a series of individuals entering and leaving that timeline. Each time someone interacts with the event timeline they save that interaction in their memory. As a result they only have a piece of the picture and they make decisions or judgments or take action based on that period of interaction. No one has a complete picture of an event timeline, including the main individual. If that individual leaves to make a copy they may miss an important part of the event that would change their perception of the balance ot the event or even the entire event.

For example: lets look at a salesperson offering a Purchasing Manager a turkey that needs to be cooked for the Manager's company's holiday celebration. Let us assume that the policy states that food may be accepted around holidays as long as it is distributed to all staff. The Manager knows this and they go to the salesperson's car and transfer the turkey from his car to the manager's car. The following week the manager brings back the cooked and sliced turkey for the company celebration. Now, your perception of this story is that the Manager followed company policy. Let us not assume that during the exchange that another company Manager witnesses the exchange from a distance while passing by. This Manager does not witness the return of the turkey for the celebration. A week later they are offered something of equal or greater value by a salesperson that they deal with on a regular basis. As a result of his witnessing the exchange between the Purchasing Manager and the Salesperson a week earlier, he assumes it is now okay for him to accept this gift.

As you can see the other Manager only witnessed a portion of the event and made a decision based on that short time span. The result is the policy has now been circumvented and will expand because that Manager will probably tell other Managers in the company.

Let us look at another activity. You are in a company management meeting and you are taking notes on a pocket PC so that you can, 1) have a more permanent record of the meeting, 2) you can easily share them with others through e-mail, etc., and 3) you can report them to you staff and copy and paste the relevant part into the minutes. This saves you a lot of time by not having to type up your notes after the meeting is concluded. However, one of the company's VP's see you and assumes that you are answering e-mail instead of paying attention. The minimum issue is that if the VP asks you have to explain what you were doing during the meeting or if your not asked the VP has created a picture of you not being attentive in the meeting.

Perception requires every individual to think about their actions before moving ahead. This may be as simple as alerting someone to what you will be doing, posting procedures so that everyone knows what is expected and no deviation is allowed, or try to ensure that anyone that interacts with the event knows what is happening. As you can see that it may not be possible to have every one's perception match the events. The best way to reduce these errors in perception is to err on the side of caution. This is a more black and white approach to practicing good ethics and it will lessen the mis-perception but will not eliminate it.