Ethical Dilemma: when a potential supplier is your customer

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By: Ipsita Suman -- Principal Analyst, Indirects

07 July, 2019

Ethical Dilemma: when a potential supplier is your customer
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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

Key Takeaways:

  • What is purchasing ethics? It is the fair treatment of suppliers. At times, purchasing ethics can get complicated when a customer is a potential supplier.
  • Ethical issues are complex at times because situations, where the organization must make a choice, can lead to an ethical business dilemma. This is particularly the case with reciprocal business.
  • Reciprocal business is likely to get into ethical issues in procurement because, in the midst of negotiations, priority can be given to a particular supplier because of its existing customer status.
  • If an organization has reciprocal business relationships with suppliers then they must tread with caution to ensure they follow the ethics of reciprocity.
  • Reciprocity is similar to reciprocal marketing where two parties engage in a practice that is mutually beneficial.
  • An example of reciprocity is when organizations and suppliers make a commitment to buy or sell according to mutually beneficial terms. Reciprocity is a win-win situation.
  • The intention behind the partnership between two parties can be deemed unethical and so ethical dilemmas in procurement can arise. In this case, the involved parties are liable to punishment such as legal action.
  • Reciprocal buying is acceptable when there is no coercion involved from either party and both parties are in agreement with the terms. 
  • Reciprocity is acceptable when there is transparency between the terms and mutual benefit is being experienced by both parties.
  • There are antitrust laws in place in the U.S. and South Africa which do not promote reciprocity such as the Robinson Patman Act (U.S.), Clayton Act (U.S.), Sherman Act (U.S.), and the Competition Act (South Africa).
  • There are ways to approach reciprocity without any ethical issues with suppliers arising in the process.
  • There should never be a case of coercion. That is, one party should not coerce suppliers and vice versa. When there is an agreement between the two parties, only then can ethical reciprocity be achieved.  
  • Careful consideration must be done before a business decides to partner with another business in a reciprocal business. Ideally, C-level executives should play an active role in the discussion so partners can be selected.
  • The internal teams of the organization should thoroughly analyze all aspects of the partnership beforehand. This will ensure no problems arise in the future due to the partnership. For instance, the procurement team can do the analysis in advance. 
  • When businesses wish to engage in reciprocal business, they must ensure they make it clear that all suppliers are equal and so there is equal competition. 
  • If an organization does not favor reciprocity or reciprocal agreements, then the same should be specified in the contracts to ensure there is no confusion. 
  • In cases where the supplier is the buyer, a supplier questionnaire can be utilized to find out about the supplier's partnerships if any.
  • Organizations that wish to enter reciprocal partnerships should keep protocols in place so that if any unethical activity takes place, they know what should be done.
  • Communication between key teams is critical to ensure everything regarding reciprocity is going smoothly such as choosing ethical suppliers 
  • Organizations should ensure they choose based on important factors such as the quality of suppliers so ethical practices are followed. 
  • Reciprocity can hamper the ability of suppliers to compete as it affects their quality and price among others.

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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