P-02 | PURCHASING ETHICS

Objectives of The Procurement Management Module

• Identify Key Activities of Purchasing

• Understand the concept of Ethics

• Understand the Importance of Ethics in Purchasing

• Understand the code of Ethics in Organisations

LECTURE P- 02 | PURCHASING ETHICS
 1 Procurement Process

Content 2
3
Introduction on Ethics

Ethics In Purchasing

4 Importance of Ethics In Purchasing

5 Ethical & Unethical Practices

6 Code of Ethics & Example Code of Ethics

7 ISM Principles & Standards of Ethical Supply Management Conduct

8 Corporate Social Responsibility (CSR)

9 Laws applicable to Procurement Actions

10 Purchasing Policies
Procurement Process
• Recognition of Need

• Description of Need

• Identification & Analysis of Possible Sources of Supply

• Supplier Selection & Determination of Terms

• Preparation & Placement of Purchase Order

• Follow-up / Expediting the Order

• Receipt & Inspection

• Invoice Clearing & Payment

• Maintenance of Records & Relationships

Introduction
• In purchasing the exchange of money (the buyer’s responsibility) for goods &
services (the supplier’s responsibility)

• All Procurement communications, agreements, & understandings internally &

externally have ethical & legal implications

• Legal Perspective : the obligation of the seller is to transfer & deliver & that of
the buyer is to accept & pay in accordance with the contract.

• Ethical Procurement behavior will help avoid ethical breaches & position the
organization to capitalize on its reputation
Introduction

• Procurement Team should understand the basic principles of commercial law &
ethics

• Help to recognize problems & situations that require professional counsel

• Provide knowledge to avoid pitfalls in day-to-day operations

• What is Business Ethics

• Video : What is business ethics_.mp4
Ethics
“principles or standards of human conduct, sometimes called
morals (principles of right & wrong)”
Ethics is basic concepts & fundamental principles of decent human conduct on our beliefs,
actions & decisions.

• Numerous factors influence ethics,

• Family
• Education
• Religion
• Peers
• Gender
• Age
• Socioeconomic status
• Culture
• Experience
Ethics
• When a group of diverse people are brought together in one organization, it is
important to consciously create an ethical culture.
• This culture is documented by The Standards Of Conduct In A Code Of Ethics.
• It is brought to life by the attitude, behavior, & practices of company leaders as
well as each individual in the organization
• It is reinforced by the procedures put in place to monitor ethical behavior & by the
language used in the course of doing business
• This is especially true when ethical challenges occur. (Ethical Dilemmas)
• “An ethical dilemma or ethical paradox is a decision-making problem between
two possible moral imperatives, neither of which is unambiguously acceptable
or preferable”
• Video : Business Ethical Dilemmas and Stakeholders.mp4
Ethics

• Most professions have their own code of ethics

• However once a code of ethics is adopted by a professional body, all members of that
profession are expected to abide by it
• Members who do not abide by the code are liable to be struck off the roll of that body for
unprofessional conduct
• All agree with the need for a code of ethics for the purchasing ethics
• Research studies reveal that written ethical policies are helpful in
shaping the beliefs & guiding the behaviour of the employees.
Ethics In Purchasing

• Procurement represents the exchange of money for goods & services

• Large amount of money is involved in this exchange
• Temptation is always present where large amounts of money are involved
• Vital that the transactions associated with this process be carried out at the highest ethical
level
• Sometimes suppliers will go to considerable lengths to secure business & Profits to
unethical practices, such as bribes or large gifts
• Sometimes purchasers take advantage of their privileged position to extract personal
rewards that are unethical as well as illegal
Importance of Ethics In Purchasing

• Purchasing staff are the representatives of their organization in its dealing with supplies
• Sound ethical conduct in dealing with supplies is essential to the creation of long term
relationships & the establishment of supplier goodwill
• Purchasing staff are probably more exposed to temptation to unethical practices than
most other employees
• It is impossible to claim ‘Professional’ status for purchasing without reference to
consideration of its ethical aspects
• Procurement Code of Ethics
• Video : Procurement Code of Ethics.mp4
Unethical Practices
The unethical policies adopted by the organization include among others:
• Showing partiality towards suppliers preferred by senior management
• Exaggerating the severity of problem in order to extract concessions from supplier
• Asking suppliers for information about competing firms
• Allowing public, personalities in influence buying
• Showing bias against salespersons who circumvent the purchase department
• Calling for offers without any intention of purchasing
• Switching off quantity changes, postpone, cancel orders without adequate notice
• Creating cleavage between suppliers
• Exploiting seller’s weakness, mistakes etc.
Extracts from guidelines on ethical practices
It is the basic tenet of a company to be ethical & legal in dealings
In daily interactions with suppliers, certain principles are observed
• Treat supplier’s representatives courteously
• Live up to the word
• Do not mislead a supplier by misrepresentation, phantom prices etc.
• Fair in demands on a supplier
• Adjust all claims and disputes on factual and fair basis
• Do not take advantage of honest supplier errors
• Handle all supplier prices and information confidentially
Supplier relationship should be conducted so that there are no personal obligations, actual or
implied, which might affect the buying decisions.

Some specific are :

Gifts from suppliers should not be accepted

Entertainment in any form that could result in a feeling or expectation of obligations

on the part of either the employee or a supplier should not be accepted

If luncheon or dinner meetings are appropriate share of costs of such a meeting

When visiting, suppliers the company expects to pay transportation & living
expenses. Travel expenses should not be paid by the supplier

Contributions to fund –raising campaign for charitable purposes should not be

solicited from suppliers
Code of Ethics

Code of Ethics

Personal Ethics Business Ethics Corporate Ethics

Code of Ethics
1. Personal Ethics
• Confidentiality Parties associated with Procurement Actions, namely, suppliers/contractors &
officials shall ensure that they maintain strict confidentiality throughout the process
• Corruption The officials involved in a Procurement Action shall not abuse their powers. An
official who abuses one’s position in a Procurement Action to derive benefits for oneself or one’s
close family or business associates, would be deemed to be engaged in corrupt practices
• Conflict of Interest Officials shall declare that they shall remain without a conflict of interest
throughout the process. Should such a compromising situation arise, the official shall declare
his/her interest & disassociate himself/herself from the process
• No gifts or inducement to be accepted Officials shall refrain from receiving any personal gain
from any Procurement Action. No gifts or inducement shall be accepted. Suppliers/contractors
are liable to be disqualified from the bidding process if found offering any gift or inducement
which may have an effect of influencing a decision or impairing the objectivity of an official
Note : For the purpose of Government Procurement Guideline, officials shall mean any public officer or any
other person who is engaged in any activity related to a specific Procurement Action.
Code of Ethics

2. Business Ethics
Business ethics is a ‘self generating system of moral standards in business realm to which
substantial majority of executives give voluntary assent”

3. Corporate Ethics
Corporate ethics are statements issued by organizations describing their value system & they
provide guidelines for decision making consistent with the stated principles. These may
relate to the social responsibilities & responsibilities of the individuals.
 Example Code of Ethics
Values & Norms of Ethical Behaviour
Values : Members will operate & conduct their decisions & actions based on the following values:
• Honesty/Integrity : Maintaining an unimpeachable standard of integrity in all their business relationships
both inside & outside the organizations in which they are employed
• Professionalism : Fostering the highest standards of professional competence amongst those for whom they
are responsible
• Responsible Management : Optimizing the use of resources for which they are responsible so as to provide
the maximum benefit to their employers
• Serving the Public Interest : Not using their authority of office for personal benefit, rejecting & denouncing
any business practice that is improper
• Conformity to the Laws : In Terms of
• The laws of the country in which they practice
• The Institute’s or Corporation’s Rules & Regulations
• Contractual obligations
Example Code of Ethics
Values & Norms of Ethical Behaviour
Norms of Ethical Behaviour : Behaviour & attitudes which are considered normal
1. To consider first, the interest of one’s organization in all transactions & to carry out & believe in its established policies
2. To be receptive to competent counsel from one’s colleagues & be guided by such counsel without impairing the responsibility of
one’s office
3. To buy without prejudice, seeking to obtain the maximum value for each expenditure
4. To strive for increased knowledge of the materials & processes of manufacture, & to establish practical procedures for the
performance of one’s responsibilities
5. To participate in professional development programs so that one’s purchasing knowledge & performance are enhanced
6. To subscribe to & work for honesty in buying & selling & to denounce all forms of improper business practice
7. To accord a prompt & courteous reception to all who call on a legitimate business mission
8. To abide by & to encourage others to practice the Professional Code of Ethics of the Purchasing Management Institutes
9. To counsel & assist fellow purchasers in the performance of their duties
10. To cooperate with all organizations & individuals engaged in activities that enhance the development & standing of purchasing &
materials management
Example Code of Ethics
• Rules of Conduct : In applying these rules of conduct, members should follow guidance set out below

• Declaration of Interest : Any personal interest which may impinge or might reasonably be deemed by others to impinge on a
member’s impartiality in any matter relevant to his or her duties should be immediately declared to his or her employer

• Confidentiality & Accuracy of Information : The confidentiality of information received in the course of duty must be respected &
should not be used for personal gain; information given in the course of duty should be true & fair & not designed to mislead

• Competition : While considering the advantages to the member’s employer of maintaining a continuing relationship with a supplier,
any arrangement which might prevent the effective operation of fair competition should be avoided

• Business Gifts & Hospitality : To preserve the image & integrity of the member, the employer & the profession, business gifts other
than items of small intrinsic value should not be accepted. Reasonable hospitality is an accepted courtesy of a business relationship.
The frequency & nature of gifts or hospitality accepted should not be allowed whereby the recipient might be or might be deemed by
others to have been influenced in making a business decision as a consequence of accepting such hospitality or gifts

• Discrimination & Harassment : No member shall knowingly participate in acts of discrimination or harassment towards any person
that he or she has business relations with

• Environmental Issues : Members shall recognize their responsibility to environmental issues consistent with their corporate goals or
missions

• Interpretation : When in doubt on the interpretation of these rules of conduct, members should refer to the Ethics Committee of their
Institute or Corporation
ISM Principles & Standards of Ethical Supply Management Conduct
Institute for Supply Management

“LOYALTY TO YOUR ORGANIZATION JUSTICE TO THOSE WITH WHOM YOU DEAL

FAITH IN YOUR PROFESSION”
From these principles are derived the ISM standards of supply management conduct. (Global)
1. Avoid the intent & appearance of unethical or compromising practice in relationships, actions, &
communications
2. Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using
reasonable care & granted authority
3. Avoid any personal business or professional activity that would create a conflict between personal
interests & the interests of the employer
4. Avoid soliciting or accepting money, loans, credit, or preferential discounts, & the acceptance of gifts,
entertainment, favors, or services from present or potential suppliers that might influence, or appear to
influence, supply management decisions
ISM Principles & Standards of Ethical Supply Management Conduct
Institute for Supply Management

6. Handle confidential or proprietary information with due care & proper consideration of ethical
& legal ramifications & governmental regulations
7. Promote positive supplier relationships through courtesy & impartiality
8. Avoid improper reciprocal agreements
9. Know & obey the letter & spirit of laws applicable to supply management
10. Encourage support for small, disadvantaged, & minority-owned businesses
11. Acquire & maintain professional competence
12. Conduct supply management activities in accordance with national & international laws,
customs, & practices, your organization’s policies, & these ethical principles & standards of
conduct
13. Enhance the stature of the supply management profession.
Corporate Social Responsibility (CSR)
• Organizations are more conscious today of their responsibilities to protect the natural
environment (e.g., sustainability) & to ensure that they conduct business in a manner that
is socially responsible

• Procurement has a significant role in sustainability initiatives & establishing codes of

conduct for managing suppliers
Corporate Social Responsibility (CSR)
• Social responsibilities to suppliers:

• Helping suppliers to purchase more efficiently & economically

• Assistance to finding non-competitive customers providing feedback on unsuccessful bids

• Providing advice & assistance with design & production

• Provision of advice & help with regard to training & HRM

Laws applicable to Procurement Actions
• Legal perspective, the obligation of the seller is to transfer & deliver & that of the buyer is
to accept & pay in accordance with the contract
• A valid contract is based on four factors:
1. Competent parties Either principals or qualified agents
2. Legal subject matter or purpose No illegal activities or violations of existing laws
3. An offer & an acceptance
4. Consideration Bargained-for exchange, typically money for goods or services

• In Government sector, the laws applicable to Procurement Actions shall be the Laws of the
Democratic Socialist Republic of Sri Lanka
• Common Law Of Sri Lanka & Specific Laws of E-commerce & The Law, Electronic Signatures,
Intellectual Property Laws, Copyright Law, Patents, Trademarks, Industrial Design,
Environmental Regulations
Purchasing Policies
Purchasing Policies (What Is A Policy Slide 30)

• Placing a portion of orders with local suppliers thus assisting the prosperity of the local community.
• Supplier development
• Measurement of supplier performance & providing feedback.

Monitoring Supplier Practices

• Dealing only with suppliers who have ethical standards & environmental policies.
• Encouraging suppliers to adopt a responsible attitude to various community groups.

Prompt Payment
• Paying invoices on time
• Dealing with supplier complaints expeditiously
Policies, Procedures & Rules
Policy
• A statement & a pre-determined guideline that provides direction for decision
making & taking action, policy cover a broad area of action
Procedure
• Procedures prescribe the exact manner in which an activity is to be completed
• A series of steps established to accomplish a specific Task
• Indicate how a policy is to be implemented & carried out
Rule
• Procedures specify a chronological sequence of steps to be performed, a rule is
very specific & narrow guide to action