CHAPTER No,13

PURCHASE MANA GEM EN T ETHICS

I M P O R T A N C E OF E T H I CS

One of the hotly discussed topics in today's

materialistic word is a G r e e k w o r d ‘
ethics*, a n d t h a t

too in the context of i n d u s t r i a l buying. H i t h erto,

the econo m i c s of b u s i ^ s s and p r o f i t s of e n t e r p r i s e s

were the main determinarfts in t h e b u s i n e s s world. The

emphasis to a lesser degree was on professional

aspects and not on the ethos and s ocio economic

setting in which the buyer should and ought to

function. The r e l e v a n c e of n a t i o n a l a n d i n t e r n a t i o n a l

compulsions, which recognize the importance of

socio-economic ethical conditions and of social

benefits along w it h co m m e r c i a l profits, is b e i n g felt

more and mcro by the b u yer of today. In the

relentless pursuit of accuiivulation of we a l t h , one

hopes that Oliver Goldsmith's words, "ill f a r e s the

land, to hastening ills a prey, where wealth

accumulates and men decay", d o e s n o t c o m e true. It

is, however, a fact that despite several

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developinent.s,the ancient. warning of the "coveat

emptor” , or buyer beware still operates. The words of

George Herbert, **the buyer needs a hundred eyes, the

seller not one", are relevant today. Absolute power

in any sphere - social, political, economic,

religious, industrial - corrupts absolutely, forcing

unethical decisions.

In the context of ethics, Mahatma Gandhi mentioned the

seven ills of the society which should be avoided

a) politics without principle,

b) wealth without work,

c) pleasure without conscience,

d) knowledge without character,

e) science without humanity,

f) commerce without morality and

g) worship without sacrifice.

These statements are particularly true in the context

of purchasing, which is the largest spending

department in the organization and hence is bound to

be a wisdom of temptations and allurements and

compromises in the form of wine, women, wealth, arts,

commission, kickbacks, donations, winding up charges,

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bribery, fraud, gifts, hospitality, complementaries

and entertainment. How we avoid these temptation is a

difficult question to answer? But ethics is the

first and foremost engine to shape the moral character

to its best. Have we given a decent burial to

Gandhian ethics in public life?

BUSINESS ETHICS

Ethics represent the eternal and prevalent moral

standards, personal values, corporate code of conduct

and are generally part of the cultural tradition of a

country. According to John Huxley, major steps in the

human phase of evolution are achieved by breakthroughs

to new dominant patterns of mental organization of

knowledge, ideas, ideological beliefs, instead of

physiological or biological organization. Hence, this

influences the socio-economic environment, while the

socio-economic ethos itself is determined by the

interaction of cultural ethics and psycho-social

factors. Ethical values are inseparable from the

pursuits of ordered human society and dharma is the

value that binds people together to form an integrated

organization - the society. The essence of our

socio-economic ethics should be a pervasive social

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awareness contributing towards efficiency and

humanizing our outlooks and actions.

The conduct of an individual citizen or a corporate

citizen involves the destiny of one or more

individuals or corporate bodies in the society and

affects others. It is like the state taking taxes

from the people, only to ensure their own prosperity

in return; just as the sun takes up the moisture only

to give back in thousandfold measure. One should

devote oneself to porforin with a spirit of dedication;

the pursuit of excellence through efficiency in work

is held out as the highest form of yoga and improves

the quality of life, in this context, ethics can be

defined as a self-generated system of moral standards

in the realm of business, to which a substantial

majority of executives give voluntary assent; genuine

differences of opinions and dissidence should not be

stifled as indiscipline. The concepts such as work is

worship, *action is thy duty - fruit is not thy

concern', 'trust begets trust' and other ideals should

be practised by institutions and not discarded as

theoretical slogans.
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ETHICS IN BUYING

Ethics is a philosophy of life and based on the

principle, "do unto others as you would like others do

unto you". Ethics is the discipline which points out

the obligations between persons or group of persons,

based on a written code of civilized conduct. If

there is such a thing as a profession, as distinct

from a vocation, it must consist of the ideals in

which they maintain character, which they bring to the

performance of their duties and the austerity of

self-imposed ethical standards. It is the most

important element among others, which is related to

the simplest principle of the purchasing profession,

as it is the prime mover and motivating force for

shaping moral character. Ethics try to set standards

in absolute terms, as ethical behaviour gets a man

respect, social recognition, moral strength and

internal satisfaction. The personal characteristics

of the buyer will largely determine what other people

think of him. The personal ethics are derived from

well-set moral standards and must be on a higher plane

than business ethics, if there is to be improvement

and must be pulled up but not pushed up. The buyer

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has not only to build his reputation, but must

appreciate that the reputation of his organization

depends on his thought, action and deeds.

It is well-known that a buyer can purchase everything,

but he can not buy reputation or honesty or integrity,

which have to be built by professional ethics, moral

character, wisdom, reliability, etc. The concept that

all methods are fair in war, love and buying, must be

avoided in the field of purchasing. The ethics and

integrity of the purchasing personnel must be such

that their suppliers always trust them. Since their

decisions affect the company's business, their conduct

must be above reproach. The qualification of a good

buyer should be a confidence in his own judgement in

fair dealings, relating to source development, source

selection, adherence to purchase order placing,

disputes, quantity to be ordered, negotiated price,

inspection, documentation, etc. Hence the

buyer-seller relationship should be correct, cordial,

fair and long-lasting. However, the concept of

morality, fair dealings, trust and other ethical

values is confined only to youngsters, probationers.

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temporary staff, etc. and changes with experience in

service for a long period in consonance with the

central values of the organization.

CODE OF ETHICS

The ethical code of the international federation of

purchase and materials management states that members

shall not use their authority or office for personal

gain and shall seek to uphold and enhance the standard

of purchasing by:

a) maintaining an unimpeachable standard of

integrity in all their business relationships

both inside and outside the organization in which

they are employed,

b) complying with the letter and spirit of the laws

of the country in which they work.

Loyalty to the company, justice to those with whom he

deals and faith in his profession are the basic codes

of a purchasing professionals. In this context, the

code of a professional organization, the Indian

Institute of Materials Management is given below:

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a) to consider first the total interest of one*s

organization in all transactions without

impairing the responsibility and dignity to one's

office;

b) to buy without prejudice, seeking to obtain the

maximum ultimate value for each rupee of

expenditure;

c) to subscribe and work for honesty and truth in

buying and selling, to denounce all forms and

manifestations of commercial bribery and to

eschew anti-social practices;

d) to accord a prompt and courteous reception, so

far as conditions will permit, to all who call up

on legitimate business mission; and

e) to respect one's obligations and those of one*s

organization consistent with good business

practice.

It will be admitted that these codes are worthless if

it is not backed up by deeds, preferably supported by

policy statements. It is expected that the buyer

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should never forget that he is the symbol of all

ethical standards and at all costs, in all

circumstances, he would never deviate from the ethical

standards to fall prey to temptations and allurements.

PROBLEMS IN ETHICS

It is well-known that purchasing executives negotiate

contracts worth millions of rupees and hence are

exposed to temptations which few other executives in

other functional areas have to encounter. The

foundations of transactions are based on honesty,

equity, fairplay, integrity, etc. between the two

parties of the game and hence must enjoy the support

and confidence of their companies and the relationship

V

between the two parties is one of trusteeship. If

there is a lack of trust, or the actions of the

purchase executive is suspect, the company cannot be

expected to prosper. If the chief concern of a

purchase executive is of getting rich quickly, then

the relationship will weaken and crumble. Dishonesty,

corruption, cuts, kickbacks, commissions, etc. in the

area of purchasing are merely a reflection of the

prevalent creed in the organization, industry,

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society, public life, as well as in the

socio-political environment in the national and

international arena.

It is noted that in many organizations, all purchasing

decisions are influenced by the user department which

indicates the sources of supply. The marketing

department sometimes exerts its own pressures on the

plea of reciprocal buying. Top management dictates to

purchasing, particularly when large contracts and

capital equipments are involved. It is a common sight

to see double standards practiced in that, marketing

departments is forced to give gifts to the consumers,

while the vendors are prohibited to give presents to

the buyers. The comments such as 'no smoke without

fire’, man who takes honey is bound to suck his

fingers^. are often heard in the corridors of large

organizations. The attitude of people to bribery and

their actual behaviour in critical situations are

diametrically opposite.

In this context, we recall the speech of the then

Indian Prime Minister Shri Rajiv Gandhi, who said in

the Congress convention in Bombay during December

1985, .corruption is regarded as the hallmark of

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leadership. Flagrant contradictions between what we

say and what we do become the way of life in our

party...'*. When it comes to the crunch, the behaviour

of people oven in the highest political and executive

policy making levels, is contemptible in the matter of

personal honesty and integrity, which is obvious when

one goes through the reports of inquiry commissions at

the highest level. One can easily come across

corruption and kickbacks, in defence scandals, at

political level, executive policy-making level,

implementing and operating levels, etc, the government

turning a Nelson’s eye to the dubious tactics of

businessmen.

Scandals like Bofors, Recruit, Watergate, wiretap,

getting cuts, agreement violations are well-known. In

such an environment, the industrial buyer will also be

affected by this process and it is impossible to

expect the purchasing executive to be a saint, who has

renounced all worldly attachments and pleasures.

Trust is difficult to measure, not only in politics,

but also between the buyer and the seller. It is not

created by romantic or sentimental gestures, but the

ethical value system rests on trust. Alcoholism,

nepotism, power brokers, influence peddlers, etc. turn

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the corridors of power into careeristic, opportunistic

and sycophantic, while the standards of integrity have

fallen, with honour and patriotism becoming

unfashionable in most countries today with supreme

indifference to ethical values. A business gift

means big business and the palm that works has to be

greased!

BACKDOOR SELLING

Backdoor buying by self-styled experts, bypassing

purchase department, is always a problem that affects

all buyers. Engineers often try to bypass the buyers

in the purchase of spares, fabricated items etc.

Every department feels it is an expert in the items to

be procured and bypasses the purchase department.

Steps should be taken to bridge the mistrust by

adequate technical knowledge of the items with the

buyers. There are instances when a requisitioner*s

dealing with a certain supplier is an indication that

he is overdependent on a particular vendor. This can

be avoided by an information system on new products,

educating the user about the capability of the

purchase section, prompt feedback on indents status,

processing the requisition promptly and gaining the

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confidence of the buyer. The buyer should not only be

honest but also appear to be honest. He must prove

that he is honest to all his colleagues, so that

backdoor selling is minimized in the short run and

eradicated completely in the long run. Job rotation

between buyer and user, if possible, will also try to

eliminate backdoor selling and improve the motivation

of industrial purchasing executives. Further

political pressures and interference from the top are

other causes of backdoor selling, which have to be

gradually eliminated.

A TO Z TIPS FOR ETHICAL BUYING

The following are some of the tips that may help in

improving ethical buying practices:

a) avoid sharp practices,

b) adhere to the corporate/departmental codes,

c) do not get suppliers' consent under duress and

trust them,

d) give fair treatment to all suppliers,

e) avoid personal purchases for employees from the

same suppliers.
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f) do not make an individual personal purchase

invoice in the company's neune and pay cash to the

employee,

g) avoid switching off quantity changes, postpone,

cancel orders without adequate notice,

h) avoid discussion of one vendor' with others and

maintain confidentials and accuracy of

information,

i) minimize special treatment to vendors preferred

by related to top management,

k) avoid creating cleavage between suppliers,

1) do not exploit seller's weaknesses mistakes,

m) discourage division in quotations, after receipt

of tenders,

n) keep specifications complete, clear and fair with

drawings, documents, etc.

o) show consideration to seller's difficulties and

cooperate with them in the difficulties,

p) avoid rejections on petty grounds by converting

the situation into a give-and-take one,

q) have buying policies consistent with the

companies' selling policies, without giving

corporate secrets,
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r) observing strict truthfulness in all transactions

with suppliers in every respect,

s) keep free from any obligation to the suppliers,

and avoid vendors of an unethical nature,

t) answer letters courteously and promptly and

enhance the corporate image,

u) expedite testing, sampling and inspection to make

quick decisions on payment,

V) openness to new methods and technologies by

encouraging test trials and interest in new

items,

w) rely on a commonsense approach to problems rather

than a legalistic frame,

X) visit major sources of supply to know about the

stability,

y) settle disputes on the basis of facts and

fairness, and

z) to submit facts to arbitration, if a mutual

agreement cannot be reached.

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PROFESSIONALIZATION

The ideal buyer should be ethical, competent, honest,

decent, courteous, tactful, fair, capable,

cooperative, morally responsible, thoughtful,

open-minded, humble, respectable, cheerful,

dependable, courageous, forgiving, helpful,

gentlemanly, imaginative, independent, intelligent,

logical polite, with drive, active, professional and

with integrity. It is impossible to find a buyer with

all these qualities, but by perserverance, hard work

and professionalization, the buyer can earn the

reputation of being ethical.

One of the reasons why India has lagged in the

development, in spite of material and human resources,

is the scorn with which we look at traders, purchasers

and sellers and treat them as dhania bhanias. This

culture has permeated out industrial climate as well

and is also reflected in the salaries and levels of

purchase professionals in many companies. Only

recently has the purchasing profession begun to

receive its importance. Purchasing as a profession

demands a great deal from the practitioners. He has

to first of all consider the interest of his company

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in all transactions and carry out his obligations,

even his private behaviour should not be detrimental

to the firm. He has to improve his performance by

listening to the comments of his colleagues and

peers. He should have sufficient courage to refrain

from indulging in passing the buck.

Unless the buyer keeps abreast of the latest

developments, he will not be in a position to buy the

right material or suggest alternatives. If his

information is up-to-date, he will be the change agent

leading his firm from strength to strength. The buyer

must obtain the maximum value for the rupee spent,

without taking undue advantage of sellers* problems.

It is his professional duty to treat selling agents

courteously and keep up the image of his company. The

professional is under obligations, both to his

organization and to the suppliers with whom he has

transactions. It is the organization which gives him

the chance to deal on its behalf and in turn his

actions should live up to the expectations placed on

him. Similarly, but for the suppliers, he would not

be able to serve the organization's needs. In fact.

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his is a tightrope walking exercise, where he has to

please everyone and the more honest he is, the easier

will be his job.

Professional associations, like the Indian Institute

of Materials Management, strive a great deal to

influence the thinking of professionals on ethical

lines. They can play a significant role in promoting

the professional image, as these associations act as

the beacon light for the professionals. Being

voluntary organizations, the full benefits can be

reaped only by the efforts of individual members. It

would not be out of place, if we end this chapter by

pondering over the biblical St. Mathew 16-26

quotation. ”For what is a man profited, if he shall

gain the whole world and lose his own soul!”