Ethics in Procurement. It’s Absolutely Essential!

When Susan Avery asked me to participate in a recent My Purchasing Center webcast on Ethics in Procurement, my first reaction was “What do I know about the topic that would be useful discussing with the audience?” But as I thought more about it, I realized that this is a topic that is essential to all of us as supply management professionals and something that I have very strong feelings about. I wanted to share with you some of the things we covered in the webcast.

All one has to do is pick up the newspaper and you will see, almost on a daily basis, a number of stories detailing bad ethics and poor moral judgment. Beyond the failings of Enron, BP and the sub prime mortgage debacle, of which we are continually reminded, I picked up an internet article recently that listed the top 100 corporate crime stories of 2011 and listed only a few of them. The ethical failings ranged from FDA sanctions, poor product quality and OSHA violations, to bribery, FCPA prosecutions and false advertising and product claims. And the surprising thing is that the violators are mostly very well known, large and successful companies. So, this is a topic near and dear to all types of organizations, in the US and around the world.

I thought that this definition from Wikipedia captured the essence of what business ethics is all about. And I particularly liked the references to self-interests, profits and actions affecting others.

“Business Ethics” can be defined as the critical, structured examination of how people & institutions should behave in the world of commerce. In particular, it involves examining appropriate constraints on the pursuit of self-interest, or (for firms) profits, when the actions of individuals or firms affect others.

While doing some research on this topic, I found an interesting article in the HBR (Ethical Breakdowns: Why Good People Often Let Bad Things Happen. Harvard Business Review, Max Bazerman and Ann Tenbrunsel , April 2011) that dealt with the underlying causes of ethics failures.

• ill Conceived Goals. We all need to think carefully about how we set goals, as they absolutely do drive behaviors. If your procurement group rewards only those who achieve a certain level of savings goals without balance across other key objectives, you may create some bad behaviors on your team and push teamwork, and fair treatment of suppliers to the back burner. I can think of an instance where a very senior executive needed to get a system in place by a certain date or lose virtually their entire bonus for the year. As a consequence, the executive and team pushed ahead without the required due diligence. While they all celebrated the accomplishment, over the next 2 years they dealt with the problem with a bad plan, bad supplier and failed effort to bring up the system properly that touched many of our customers.
• Motivated Blindness. How many times do we see people turn a blind eye, when the unethical actions benefit us? It is only the highly ethical and courageous person who will push back and this is where a strong company culture of ethics and integrity will ensure you make the right business decisions.
• Indirect Blindness. We often soften our assessment of unethical behavior when it’s carried out by third parties. We all need to take ownership of the implications when we outsource or work with third parties.
• The Slippery Slope mutes our awareness when unethical behavior develops gradually over time. Be alert for even trivial infractions and investigate them immediately
• Overvaluing Outcomes may lead us to give a pass to unethical behavior. Examine good outcomes to ensure they’re not driven by unethical tactics.

ISM developed Principles and Standards of Ethical Supply Management Conduct and I believe that they should be top of mind for all supply management professionals. They address a number of critical areas that include integrity in decisions and actions, conflicts of interest, confidentiality and proprietary information and reciprocity, among others. You can access the complete set of Principles and Standards at

I always believed that we could benefit by sharing our procurement goals, supplier code of conduct and standards for behavior with our suppliers. That way it was perfectly clear what we expected from them and what acceptable behavior looked like. The profession has come a long way from the hard nosed, zero sum form of negotiations that can damage the relationship with suppliers and keep them from considering you a customer of choice and sharing their best ideas and access. Something I always talked about with our suppliers was fair price (for you), fair profit (for them). If you are working with the best suppliers who are continually learning and improving, this works and can form the basis of a long and productive relationship.

A big part of ethics rests on culture and visible behaviors. Let me finish with a couple of thoughts that make this work, in my view, at the best companies in the world.
• Focus on the social norms. Leaders need to model behaviors that make it clear that unethical behavior is outside the norm and will not be tolerated, within the company or from suppliers/partners.
• Results and the corresponding behaviors used to achieve those results are both important. Make strong ethics a part of what you interview for and key promotional criteria.
• Unequal treatment is the gateway to rationalizing misconduct. Walk the Talk as leaders as discrepancies only give employees a reason to act inappropriately in their own self-interests.
• No Yes Men allowed. Surround yourself with people with the courage to question if actions truly fit into the ethical culture and fabric of the company. It is so easy to go astray without this input.

While we may often think that high ethical standards are a given, it is an area that needs to be continually managed and monitored. I would be very interested in hearing your thoughts on this topic.

SRM, The Next Logical Step

Supplier Relationship Management or SRM is still relatively new for many companies and in many cases badly misunderstood. A simple definition is “SRM is the process of fully leveraging your supply base to ensure that you are taking advantage of the assets, knowledge, technology and deep expertise of your key suppliers.” So often, your suppliers are in a position to see your company from many different perspectives, across multiple divisions and in many cases, how you operate across many different geographies. If you have done a good job in selecting the very best suppliers, then why wouldn’t you want to engage them to the fullest extent and get their input and ideas? When I addressed suppliers participating in SRM programs I have run, I would often say to them that they know more about the particular area in which they serve our business than we do. That comes from what they do so well for our company and for many other similar customers. And I always wanted to hear what they were doing with their best customers that they were not doing with us.

The following chart from Vantage Partners, a thought leader in SRM, does a good job in defining what SRM is and is not.

srm future procurement

Along so many different parameters, the SRM view of the relationship with suppliers is based on mutual respect, trust and open and honest communications. This is a major step forward from the old school approach to dealing with our suppliers that was based on limited and infrequent communications, mistrust , coercion and zero sum negotiations. I will always remember sitting in on another company’s SRM forum with so many of their suppliers and the first words out of the CPO’s mouth were that the suppliers needed to reduce their prices by 5% across the board. You can imagine how that was received by the participants and what that did to their engagement.

So why am I such a big fan of SRM? I have seen what SRM can deliver, if done well. In those situations where you have sourced a category for many years and experienced diminishing returns, it is time to think about different ways to create value. SRM can uncover new ideas and ways in which to work with your key supplier/partners that you would not ordinarily find through the normal sourcing process. The time normally dedicated to the long and arduous RFP process can be invested in working with a select group of key suppliers, yielding incredible results, if done properly. Some of the activities and focus of SRM are:

  • Process efficiencies for the customer and supplier. This could relate to how the companies plan and interact as well as the more technical aspects of how each company operates in producing the specific goods or services. The supplier often has many similar customers and can draw on a deep body of best practices that they have seen in the marketplace.
  • New Product or Revenue Ideas. This takes Procurement to a very different place in the eyes of their company when they are participating, as they should, in driving the revenues of the company.
  • Specifications and product design. Suppliers can provide important input to specifications and product improvements and provide important resources and ideas for continuous improvement.
  • Demand management or what I like to call consumption and specification management. This involves right sizing the specifications and making sure that demand is monitored appropriately within the company. A simple example of this was the work we did in travel, making sure that our employees traveled with the appropriate airlines and on the appropriate class of service, with reservations made 15 days or more in advance of the travel to ensure that the very best rates were obtained.
  • Joint planning. So many of the inefficiencies we see in our operations and in those of our suppliers have to do with lack of coordinated planning. This is a simple activity that will ensure that each party clearly understands their commitments and timelines for delivery, to avoid unnecessary delays, inventory builds or added costs to expedite.
  • Market Intelligence. Your suppliers are a valuable source of information on the marketplace in general (sales, growth, new products, pricing, etc.) as well as for specifics on competitors.

Key components of all of these processes are a formal governance process that lays out exactly what and when you will do certain activities, a commitment to frequent and candid communications and two way feedback.

So why aren’t more companies embracing SRM? I think that many companies still see significant and measurable value through traditional sourcing and have not yet seen the pressure of diminishing returns. So many of our sourcing professionals have been measured and rewarded from the traditional activities and have a hard time devoting the time and effort to something that they are not sure will deliver value. So part of this is making sure that SRM is part of a team’s goals and objectives and making sure that you do this with a select group of suppliers who are as interested in doing this as you are. Focus on those suppliers who can have a significant impact on your business and only work on those ideas that can generate great value for both parties. And lastly, dedicate the appropriate resources to these activities across the company, and closely track your progress. Here is to SRM and to expanding the ways in which Procurement can add value to the enterprise.