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Unethical Procurement Practices?

September 20, 2013

We often hear about the problems dealing with overseas markets. China has come in for extensive criticism regarding its business practices, especially with regard to intellectual property, but also in terms of the overall respect for ‘the rule of law’.

But as this case study shows, it may not all be one-way traffic when it comes to issues of ethics and trust. This example is a situation that was referred to us at IACCM by a member. What would you do in these circumstances?

Pressure to terminate the contract without cause  Your purchasing department is under constant pressure to deliver savings. Over recent years, more and more business has been sourced to low-cost countries. Several months ago, you awarded a large supply contract to a manufacturer in a remote region of China. It resulted in substantial savings and included a minimum monthly call-off and a committed two-year term. You have been told that this contract was a major boost to the local community and resulted in significant hiring by your supplier.

However, due to a temporary drop in demand, your monthly shipments have actually been lower than forecast and you know the supplier has a stock build-up. Now, the category director tells you she has received a lower price offer from another Chinese supplier and she wants to terminate the original contract. When you explain there is no cause for termination, she simply demands that you switch supplier since the chances of the original contractor taking legal action against you are almost nil. You agree with this risk assessment, not least because this action will probably put your current supplier out of business and they are unlikely to have the funds to pursue an action.

In the ‘real life’ situation, the contract manager accepted the business pressure for savings and switched to a new supplier.

What would you do?

  1. No question on this one. Continue doing business with the existing supplier. If you have a termination for convenience clause in the agreement you should notify the supplier that you intend to terminate and work with them until their existing supplies are depleted. But, terminating the agreement immediately and leaving them with excess inventory that they created for you? Never.

  2. Amit Kapoor permalink

    A good buyer would also have a code of ethics that I hope an action like this would violate – although I wouldn’t be surprised if something like this was out of scope. I would have blown the whistle.

  3. haward permalink

    If it’s a breach of contract ; don’t do it. Even if it saves money and breach is , in the words of the economists “efficient”.

    If there is a termination for convenience clause in the contract follow it to the letter.

    • Haward
      Thanks for your comment. But the question here is not ‘should this be done?’ From an ethical (and contractual) perspective, the answer clearly is ‘no’. But the situation is one that creates a personal dilemma for the Procurement / Contract Manager where they are being instructed to take this action.

      So what should they do? Follow orders or ….?

  4. Ageaain there should be no doubt. Stick to your agreement. If the category director wants to pull rank and over rule you do, then get them to do it…and rethink your employ?

    There might be a professional competence issue though. Did the buyer ensure the wider business was aware of the constraints of the contract before agreeing? Why no option to terminate? If the buyer by themselves chose to agree the kind of contractual constraints that were not in the business’s interest, outside of their competence, or even outside their delegated powers it would be different. Ultimately the business should – ethically – stand by its agreement, but the buyer may need to look for a new employer for very different reasons than in the first case.

    But then what if it transpires that the supplier promised market-leading prices in exchange for the long term deal? Whilst we may have been negligent not to document this well in the contract, I might look to enter negotiations based on the intention and spirit rather than the letter

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