Ethical Dilemma: when a potential supplier is your customer

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By: Ipsita Suman
Principal Analyst, Indirects

calender07 Jul 2019

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Often times there are cases where the potential supplier is already a customer. It even seems appealing to go for a win-win relation, where both parties cut a deal to ‘thrive’ together; low costs make it possible to provide goods/services even in the most difficult external situations. The possibilities are endless.

Every organization struggles with ethical issues while conducting reciprocal business. Reciprocal business in itself is not unethical. It is perfectly alright to buy from customers. However, if reciprocity creeps in, that is, if at any point during negotiations, a potential supplier is given importance just because the supplier is an existing customer, it kills competition.

Procurement Organizations have to be highly aware of all the reciprocal business engagements in the organization and extra careful when negotiating with suppliers who are already buyers. C-level involvement and collaborative relationship is the key to maintaining peaceful reciprocal business.

Reciprocity

Reciprocity is both a legal and ethical issue that could lead to legal sanctions against an organization, its management, and/or its supply management personnel.
Reciprocity can be viewed as a form of partnership, or means to encourage each other’s business.

However, at any instance, if the intent behind the partnership is questionable, this reciprocity is deemed unethical and punitive.

What Does Reciprocity Mean?

  • When organizations or their procurement professionals give preference to suppliers because they are also customers, or the organizations influence a supplier to become a customer, those professionals or organizations are engaging in a practice known as reciprocity.
  • Agreements involving a specific commitment to buy in exchange for a specific commitment to sell also constitute reciprocity.

What Constitutes Reciprocity?

  • Liberty to procure from customers at any time.
  • Giving preference in buying decisions to customers.
  • Restricting competition by requiring suppliers to buy from customers.

When Is Reciprocity Acceptable?

  • There is no coercion.
  • Both parties are in agreement.
  • There is mutual benefit and transparency.

Why One Should Not Engage in Reciprocity

Laws Against Reciprocity—Antitrust Laws around the World

 

  • Robinson–Patman Act (U.S.)

Federal antitrust law requires a supplier to sell the same item to all customers at the same price (assuming the same purchase quantity).

  • Clayton Act (U.S.)

Clayton Act lists the specific practices that are unlawful; here, the effect may substantially lessen competition or tend to create a monopoly.

  • Competition Act (South Africa)

The Competition Act gives the Competition Commission powers to investigate complex monopoly conduct in a market.

The Act prohibits any agreement between parties that substantially prevents or lessens competition, unless it can be justified on grounds of technology, efficiency, or other procompetitive gains.

The focus is on issues such as promotion of small businesses, interests of employees, and black economic empowerment.

  • Sherman Act

Sherman Act makes it illegal for parties to act in combination, conspiracy, or collusion with intent to restrict competition.

Price fixing, reciprocity, and group boycotts fall within the parameters of this law.

Approach to Reciprocity—What Can Be Done?

How Can Procurement Organizations Contribute?

  • Aim for Collaborative Partnership

In reciprocal business, the main idea is collaboration and mutual development. At no point should one party be coerced or forced into business.

  • Involve C-level Executives in Discussion

Sensitive matters such as reciprocity can be best handled at the C-level. A top-level discussion on selection of partners for reciprocal business is essential to have a high-level, long-term vision of the relationship.

  • Anticipate the Effects of Reciprocity Before Entering into One

Before going into negotiation, the procurement team should ensure that the business relationship would not be hampered in any way. This can be done by the internal teams conducting a thorough analysis on the business relationship.

Governance teams can help eliminate reciprocity by creating a bridge between the sales and procurement teams.

Things to Remember in Reciprocal Business

  • Use a supplier questionnaire to find out about the supplier’s engagements with the organization where the supplier is the buyer.
  • People involved with the negotiation should not be from the supplier account.
  • Contract clauses should specifically state that the organization does not favor reciprocal agreements.
  • Create equal competition for all suppliers.
  • Non-disclosure agreement to be signed.

Factors to Consider for Success

  • Internal communication between the sales and procurement teams
  • Top–down approach for analysis and decision making
  • Governance protocols to deal with suspected unlawful or unethical activities

Conclusion

To maintain the highest ethical standards, all purchases of organizations must be based on the suppliers’ quality, price, and reliability.
An organization using reciprocity as a purchasing tool would limit its ability to create healthy competition and would eventually jeopardize the suppliers’ quality, price, and ability to compete.

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