Ethical Business Practices in Purchasing and Supply Management

Ethical Business Practices inPurchasing and SupplyManagement

AUG 07 Tel +44(0)1780 756777 • Fax +44(0)1780 751610 • Email [email protected] •Webwww.cips.org 2

Ethical Business Practices in Purchasingand Supply Management“The best and most successful organisations recognise that theywill only prosper in the long term if they satisfy the aspirations oftheir stakeholders; including customers, suppliers, employees,local communities, investors, governments, public interest andenvironment groups.”

“To satisfy this intense scrutiny and thedemands for greater accountability in society, businessesandother organisationsare increasinglyrecognising theneed tomeasure, trackand report on their social andethical performance.”Source: The Institute of Social andEthicalAccountability

BackgroundThe Chartered Institute of Purchasing & Supply (CIPS) has aPersonal Ethical Code with which members undertake tocomply. This Code sets out principles of:• integrity• professionalism• high standards• optimal use of resources and• compliance with legal and other obligations

and offers guidance in relation to:• declaration of interest• confidentiality and accuracy of information• fair competition• business gifts and hospitality and• seeking advice

The Code is the basis of best conduct in the purchasing andsupply profession and is reproduced asAppendix 1 to thisdocument.The CIPS position on Ethical Business Practices inPurchasing and Supply Management expands on theprinciples in the Code and addresses business to businessethical issues and social responsibility issues within supplychains.It also takes into account issues that have arisenthroughout business regarding social responsibility,personalaccountability,corporate governance and so on,which have inturn been addressed in reports produced in recent years;Turnbull,Nolan and Higgs to name but a few.

Purchasing and supply management professionals areincreasingly required to demonstrate that the supply chainsthey manage take ethical and social responsibility issues intoconsideration.The main reasons for ensuring that supplychains meet these criteria should be professionalism andmoral and legal obligations,but other drivers include:• media or consumer pressure• the need to comply with a particular code of conduct orlegal imperative

• a requirement to include such issues in annual financial orsocial accounts

• social audits• ethical investors• supply chains that include sources in a particular countryor for a particular product which may be perceived to behigh risk

'Ethics' in purchasing and supply management can relate to awide range of issues from doubts about suppliers' businessprocedures and practices to corruption.The vocabulary

associated with this field can,in itself,be confusing,andincludes such terms as:• fairtrade• ethical trading• ethical sourcing• social accountability• social auditing• corporate social responsibility• corporate citizenship• codes of conduct• reputation assurance

Audience,Objective andScopeThe CIPS position on Ethical Business Practices inPurchasing and Supply Management is intended primarilyfor purchasing and supply management professionals,but itapplies equally to anyone who has responsibility formanaging the supply of goods or services from an externalsource.The purchasing and supply management professionalhas a responsibility to at least be aware, if not have athorough understanding,of ethical issues in purchasing andsupply management and to endeavour to address problemareas in a positive manner.

The objective of this Knowledge Summary document is toidentify the major ethical issues in purchasing and supplymanagement and to offer some guidance.However,itscoverage cannot be exhaustive.Purchasing and supplymanagement professionals work in a wide range ofenvironments,and different industries and sectors willinterpret these issues in different ways.Purchasing and supplymanagement professionals should identify the values that arespecific to their own employing organisation and itsstakeholders in order to incorporate these into their policy onethical purchasing and supply management.

Every organisation requires an ethical policy or code ofconduct.CIPS believes that purchasing and supplymanagement professionals should universally apply thepractice set out in this document and should encourage theirown organisations to include good ethical business practicesin all areas of their work.

Purchasing and supply management professionals should alsoinvolve all stakeholders in this process.It is vital that anorganisation's chief executive officer visibly endorses theorganisation's ethical policy. This CIPS Knowledge Summarydocument provides a basis which purchasing and supplymanagement professionals may find of use in initiating a

sector,the organisation's requirement to comply with the ECprocurement rules.

Everyone involved in purchasing and supply management inan organisation should be aware of the organisation's ethicalpolicy and be actively encouraged to embrace its principles.

Purchasing and supply management professionals have aresponsibility for the supply chains fromwhich goods,services and works come into their organisation or directly totheir customers.Good practice in purchasing and supplymanagement includes developing and understandingsuppliers' operations and offering guidance and supportwhen improvement is necessary or appropriate.CIPS believesthis should include ethical as well as commercial andtechnical guidance and support.

Encouraging suppliers to comply with an organisation'sethical policy can take place in parallel with the developmentof monitoring procedures,and may need to take place over aperiod of time,or be introduced in phases.Purchasing andsupply management professionals should consider the effecton suppliers of compliance costs,and seek guidance aboutexisting codes that may be applicable to their business so thatnew codes are not unnecessarily created.This may wellrequire helping the organisation confront long-standingcustom and practice which is of dubious ethical standing butwhich has the appearance of being a sectoral norm.

Transparency, Confidentiality and FairnessThe purchasing and supply management process should be astransparent as possible,within commercial and legalconstraints.This means being open with all those involved sothat everyone,especially suppliers,understands the elementsof the process,that is,the procedures,timescales,expectations,requirements,criteria for selection and so on.

Suppliers' confidential information must not be disclosed toany third party or used in any way without the consent of thesupplier.In particular,it must not be shared with othersuppliers.This is particularly important when an output-basedspecification is being developed.Although it is acceptablebusiness practice to share ideas amongst suppliers in order todevelop the most appropriate solution,suppliers' confidenceshould be respected.Everybody involved in purchasing andsupply management should understand the implications ofcommercial confidentiality and it is the responsibility of thepurchasing and supply management professional to reiteratethis to colleagues at the start of each new project.

No relevant information should deliberately be withheld byeither party (unless it has been obtained from anothersupplier in commercial confidence),nor should anymisleading information be given.

In general,when a supplier asks for clarification during theprocurement process the purchasing and supply managementprofessional should give all suppliers involved the informationrequested.However,if a supplier asks an insightful questionthe answer should not be circulated to the other suppliers asto do so may remove the competitive advantage the supplier

change of culture within their employing organisation,whereappropriate.

UK public sector purchasers are reminded that theGovernment's policy is that all public procurement of goods,services and works is to be based on value for money.Publicsector purchasers also have to comply with the ECprocurement rules.

CIPS has produced guidance notes to help purchasing andsupply management professionals understand and address theissues covered in this document.

This document and guidance notes will continue to beupdated from time to time.

Purchasing and supply management professionals are invitedand encouraged to contribute to this process by providingcomments or case study material.

Guidance and further information onmany of the mattersdiscussed in this document is available from a number ofsources and a list of contact names and telephone numbers isavailable from the CIPS Professional PracticeTeam.

CIPS may,at a future date,address additional socialresponsibility issues such as sourcing from countries withoppressive regimes or poor human rights records.

CIPS has a separate position on Environmental Purchasingand Supply Management.

Business toBusinessEthicsThe CIPS Personal Ethical Code is the starting point forbusiness to business ethics.This section provides guidelines forpurchasing and supply management professionals in dealingwith business to business ethical issues in their supply chains.

Those in the public sector must be aware of the compliancecriteria they must meet;others may need to satisfy standardsof ethical practice and look to organisational reputation.

Purchasing and supply management professionals in someindustries face complex problems in addressing ethical andsocial responsibility issues and may lack codes or standards ofpractice.Many of these issues are extremely sensitive.

CIPS encourages purchasing and supply managementprofessionals to consider the long term implications of theiractions and to question objectives that may unintentionallyhave negative ethical consequences.An example may be animmediate objective to create savings by rationalising thesupply base - but this may then result in smaller suppliers failingto be developed and amonopoly situation beginning to emerge.

Purchasing and supply management professionals should seekappropriate guidance,be open about concerns,and engagepositively with suppliers and internal customers or peers,however difficult that may be.The resource implications ofaddressing these issues must be balanced against the potentialrisk to the reputation of the organisation and,in the public

3 Tel +44(0)1780 756777 • Fax +44(0)1780 751610 • Email [email protected] •Webwww.cips.org AUG 07

Ethical Business Practices in Purchasingand Supply Management



is seeking to provide.The purchasing and supply managementprofessional is obliged to use best judgement in every case,seek advice if in doubt and act in an appropriate andprofessional manner.

Unsuccessful suppliers should be debriefed with as muchtransparency about the procurement process as can beprovided,e.g.on the weaker aspects of their tender.

All suppliers should be treated fairly and even handedly at allstages of the procurement process.Suppliers who are knownto have no prospect of winning the business should not beinvited to tender (unless there is an obligation to invite allsuppliers who have expressed an interest in tendering,as in thecase of the Open Procedure in the EC procurement rules).Unless they are aware of all the circumstances,suppliers shouldnot be required or encouraged to undertake activities or incurcost when there is little chance of their obtaining businesswithin a reasonable period.

UseofPowerPower is a key element in supply relationships.Purchasing andsupply management professionals should understand how touse the purchasing power of their organisation appropriately.

For instance,it is common practice to aggregate requirements asa means of leverage to secure greater value for money.

Purchasing and supply management professionals areresponsible for determining the extent to which power shouldbe used in relationships with suppliers.The exertion of undueinfluence or the abuse of power,as well as being unprofessional,may contravene relevant legislation and is unlikely to achievelong-term best value for money.Purchasing and supplymanagement professionals should discourage the arbitrary orunfair use of purchasing power or influence.

Purchasing and supply management professionals should ensurecompliance with all applicable legislation such as restraint oftrade and anti-trust legislation,the CompetitionAct 1998 (inparticular Chapter II,Abuse of Dominant Position),and theTreatyofAmsterdam (Articles 81 and 82,which address anti-competitive practices and abuse of dominant position).

CorruptionPurchasing and supply management professionals should seek toencourage the application of both the word and the intention ofthe CIPS Personal Ethical Code.



Purchasing and supply management professionals must nottolerate corruption in any form.CIPS believes that there is noexcuse for corruption and it can never be blamed on naïveté,lack of professional knowledge or poor management.Purchasing and supply management professionals aware ofany corrupt activity have a duty to the profession and to theiremploying organisations to alert their senior management.

Bribery is a criminal offence in the UK (and in most othercountries).

CIPS fully supports the Organisation for Economic Co-operation and Development (OECD) convention oncombating bribery of foreign public officials in internationalbusiness transactions.In the UK,legislation nowmakes it acriminal offence for UK citizens to do this,thus outlawingpractices common in some international markets,for example,facilitation payments.

Purchasing and supply management professionals have aresponsibility to determine what is acceptable behaviourbetween suppliers and colleagues,irrespective of their role orstatus in the organisation and to influence policy makers todefine standards.Suppliers often liaise directly with end usersand other internal customers.The purchasing and supplymanagement professional should not necessarily discouragesuch liaison,indeed maintaining product developmentawareness amongst users may well make it essential,butshould develop organisation-wide policies and educatecolleagues about unacceptable or unethical relationships withsuppliers.

Declaring InterestPurchasing and supply management professionals shouldencourage colleagues to declare any material personal interestwhich may affect,or be seen to affect,their impartiality orjudgement in respect of their duties.Examples includeowning a significant shareholding in a supplier or close familymembers being employed by a key supplier.

Organisations should have a clear policy on acceptingbusiness gifts.Purchasing and supply managementprofessionals should encourage colleagues to comply withany such policy.CIPS believes that normally the onlyacceptable gifts are items of small intrinsic value,such as deskdiaries.

Purchasing and supply management professionals,and othersinvolved in the supply chain should not accept hospitalitywhich may be perceived as influencing their judgement orimpartiality in any way.Hospitality accepted should never beexcessive or frequent,should be managed openly andcarefully,and be capable of being reciprocated.The same rulesapply in relation to gifts or hospitality offered to close familymembers.

It is generally unethical to accept travel or subsistencepayments from suppliers during product familiarisation visits.

Acceptance of equipment,samples and demonstrationmodels from suppliers without contractual protection can bedangerous e.g.due to a lack of clarification on liability andindemnity.In particular,the ethical implications of appearingto accept these offers without full transparency can bedamaging to both the buyer and the buying organisation.

Staff should not accept anything that their taxation authoritieswould consider to be a taxable benefit.

Free issues from the buying organisation e.g.of items forincorporation in rigs,products etc are,in most cases,acceptable business practice.

Payment for beinganApprovedSupplierPurchasing and supply management professionals should notrequest payment from suppliers as a condition of beingplaced on an approved or preferred supplier list.Suppliersshould be selected on the basis of meeting appropriate andfair criteria.See section on Supplier Imposition.

Payment towardsJoint ProjectsPurchasing and supply management professionals may invitesuppliers to contribute towards the costs of joint projects orinitiatives such as sector-wide supplier databases,marketing anew product range or investing in a new IT system,providedthere are clear and tangible business benefits to the supplier.

This process should be undertaken carefully and fairly andmust not discriminate against suppliers,for example small andmedium-sized enterprises (SMEs).

Suppliers should not be selected solely on the basis of theirfinancial contribution.

Payment toAgreedTermsPurchasing and supply management professionals shouldensure that their suppliers understand and agree to thenegotiated payment terms.Payment terms are the subject ofEU legislation Late Payment of Commercial Debts (Interest)Act 1998.

Late payment undermines the organisation's credibility.

Buying organisations should try to ensure that valid invoicesare paid in accordance with the agreed terms and in theagreed way.

Purchasing and supply management professionals shouldwork with colleagues to ensure that their employer's businessprocesses enable payments to be made promptly.Anyproblemwith an invoice should be addressed and resolvedappropriately in order that the invoice can be processed.

BarterBarter is trade by exchange of goods or services for othergoods or services.There is no exchange of money and,asbarter is not usually a condition of contract between twoparties,coercion is not an issue.



Where is it appropriate,barter is acceptable business practice,provided both parties have a current business need for thegoods/services of the other party.

Reciprocal TradingReciprocal trading (countertrade) which makes being acustomer of an organisation a condition for being a supplier,isgenerally unacceptable business practice.CIPS has a separate position on Knowledge Summary whichdetails the CIPS view on this matter.In essence CIPS believesreciprocal trading to be only acceptable when:• there is no coercion• both parties are in agreement and• there is mutual benefit and transparency

Supplier Relationships andCompetitionMost organisations purchase some commodities and servicestactically,using short-term contracts,and others,for reasons ofstrategy,security or leverage,by means of longer-termarrangements.

From time to time,longer-term agreements with suppliersshould be subject to open and transparent competition:

• to provide new or alternative suppliers with anopportunity to win the business and

• to enable the buying organisation to access and obtain thebest current market offering

Supplier ImpositionSupplier imposition is the situation in which a customer orend user stipulates that a particular supplier should be used.In many cases there is a valid reason for this.However,purchasing and supply management professionals shouldalways challenge such a situation since it can lead toestablished internal business controls being ignored,and thequest for the best value for money solution beingcompromised.

Purchasing and supply management professionals should,through act or influence,only use or permit supplierimposition where there are transparent and objective reasonsfor it.An example is when there is only one supplier with thecapability to ensure the required level of quality required bythe customer,and where existing contractual relationshipscan be respected.

There are sometimes cases where supplier impositionappears to have happened but in reality there has been amisunderstanding e.g.where end users are asked to useframework contracts without fully appreciating theprocurement process that was undertaken to create thecontract.Purchasing and supply management professionalsmust ensure that the decision making process for appointingsuppliers is visible and transparent.

SupplierMistakesAmistake is a non deliberate error.CIPS has a separatedetailed Knowledge Summary document on this subject,theessence of which is as follows:

“Purchasing and supply management professionals shouldadopt a professional and understanding approach to thesupplier when a mistake is brought to light unless of course itbecomes apparent that the mistake was not a mistake at allbut a deliberate attempt to gain unfair advantage”.

Purchasing and supply management professionals shouldsearch for anything that looks odd or unusual in a supplier'soffer and seek clarification prior to contract award.

Mistakes identified post-contract award should be investigatedimpartially and ethically with a view to generating options forresolution.

Size,Maturity and LocationIt is good practice to balance the risk of awarding contracts tonew or small suppliers with the opportunity of encouragingnew business to flourish.It is not good practice to excludesuppliers simply because they are small or new to the market.Capability and experience are examples of relevant supplierselection criteria.

Purchasing and supply management professionals shouldconsider the magnitude of business they award to a supplier,the impact on that supplier and the level of dependence thatmay be created.

Serious consequences for the supplier can result if business isremoved at a later date.It may,in certain circumstances,bewise to agree exit strategies during contract finalisation so thatsocial and other factors can be taken into consideration.

Purchasing and supply management professionals should,wherever possible,be aware of opportunities to support thelocal community and SMEs whilst maximising opportunitiesfor global sourcing when this is appropriate.

Social ResponsibilityThe CIPS position on Ethical Business Practices in Purchasingand Supply Management distils aspects of currentdevelopments in the area,including:• the EthicalTrading Initiative (ETI) Base Code• the Core Conventions of the International LabourOrganisation (ILO)

• the UN Declaration on Human Rights• SA8000 (a standard relating to social accountabilitydeveloped by the Council on Economic PrioritiesAccreditationAgency in NewYork - now known as SocialAccountability International (SAI)

Purchasing and supply management professionals should notassume,however,that compliance with the CIPS positionnecessarily implies compliance with any of the above codesor standards as there are some differences between them.

Purchasing and supply management professionals shouldwork with new and current suppliers to improve their statusin respect of all aspects within this CIPS Knowledge Summarydocument.


The CIPS position on Social Responsibility Issues inPurchasing and Supply Management is as follows.It forms akey part of the CIPS position on Ethical Business Practices inPurchasing and Supply Management.

Employment isChosen (NoForced Labour)• Employees should be free to choose to work for thesupplier,i.e.their employer

• Employees should be free to leave the supplier afterreasonable notice is served

• Suppliers should not use forced,bonded or non-voluntaryprison labour

EmploymentRelationships• Suppliers should establish recognised employmentrelationships with their employees that are in accordancewith their national law and good practice

• Suppliers' employees should be provided with an easy toread contract of employment with particular clarity inrelation to wage levels.

• In the event that employees are unable to read,the contractof employment should be read and explained to them by aunion representative or another appropriate third party

• Suppliers should not seek to avoid providing employeeswith their legal or contractual rights

FreedomofAssociation• Suppliers should not prevent or discourage employeesfrom joining trade unions

• Suppliers' employees should be able to carry outreasonable representative functions in the workplace

• Suppliers should not discriminate against employeescarrying out representative functions

• Where the law restricts freedom of association andcollective bargaining,suppliers should facilitate alternativemeans of representation

LivingWagesarePaid• Wages and benefits should at least meet industrybenchmarks or national legal standards.As a minimum,thewages paid to suppliers' employees should meet their basicneeds

• Suppliers should not make deductions fromwages unlesspermitted by national law or with the permission (withoutduress) of the employee

• Suppliers should always pay in cash and not in kind,e.g.goods,vouchers

Suppliers’ Employees’WorkingHours• Working hours should comply with national laws orindustry standards


• Suppliers' employees should not be expected to workmore than 48 hours per week on a regular basis

• On average,suppliers' employees should be given one dayoff approximately every seven days

• Suppliers should not pressurise employees into workingovertime;overtime should be voluntary and not bedemanded on a regular basis.Where overtime is requestedby the employer it should be reimbursed at an appropriaterate and should not exceed 12 hours in any week

Suppliers’ Treatment of Employees• Under no circumstances should suppliers abuse orintimidate,in any fashion,employees

• Any disciplinary measures should be recorded• Suppliers should have a grievance/appeal procedure that isclear,easy to understand and should be given to theemployee in writing

• In the event that suppliers' employees are unable to read,the grievance/appeal procedure should be read andexplained to them by a union representative or anotherappropriate third party

Law• Suppliers should always work within the laws of theircountry

Health and Safety• Suppliers should assign responsibility for health and safetyto a senior management representative

• Suppliers should have appropriate health and safetypolicies and procedures and these should be demonstrablein the workplace

• Suppliers' employees should be trained in health and safetypolicy and procedures

• Suppliers should monitor compliance with health andsafety policy

• Suppliers should provide employees (at the supplier'sexpense) with any necessary health and safety equipment,e.g.gloves,masks,helmets

• Working conditions should be comfortable and hygienic• Suppliers should identify specific hazards,e.g.substances orequipment,and should implement processes to minimiserisk

• Suppliers' employees should have access to clean toilets• Suppliers' employees should have regular breaks and haveaccess to water suitable for drinking and washing as aminimum

Child LabourIn principle,CIPS is against the use of child labour andbelieves its long-term elimination is ultimately in the bestinterests of children.However,the elimination of child labourmust always be undertaken in a manner consistent with thebest interests of the children concerned.Purchasing andsupply management professionals should seek to ensure thattheir organisation's suppliers comply with the following:• Suppliers shall develop or participate in and contribute topolicies and programmes which provide for the transitionof any child found to be performing child labour to enableher or him to attend and remain in quality education untilno longer a child.

• Suppliers shall not employ children and young personsunder 18 at night or in hazardous conditions

• In any event the course of action taken shall be in the bestinterest of the child,conform to the provisions ofInternational Labour Organisation (ILO) Convention 138and be consistent with the United Nation's Convention onthe Rights of the Child In this context,'child' refers to anypersons less than 15 years of age,unless local legislation onthe minimum age stipulates a higher age for work ormandatory schooling,in which case the higher age shallapply

'Young person' refers to any worker over the age of a child,asdefined above,under the age of 18

Discrimination• Suppliers should have a policy of equality for all in theworkplace with no discrimination on the basis of race,caste,religion,nationality,age,gender,marital status,sexualorientation,disability,union membership or politicalaffiliation.

Appendix 1Personal Ethical Code of the Chartered Institute of Purchasing& Supply

Introduction1. Members of the Institute undertake to work to exceed theexpectations of the following Code and will regard theCode as the basis of best conduct in the purchasing andsupply profession.

2. Members should seek the commitment of their employerto the Code and seek to achieve wide spread acceptance ofit amongst their fellow employees.

3. Members should raise any matter of concern of an ethicalnature with their immediate supervisor or another seniorcolleague if appropriate,irrespective of whether it isexplicitly addressed in the Code.

Principles4. Members shall always seek to uphold and enhance thestanding of the purchasing and supply profession and willalways act professionally and selflessly by:(a) maintaining the highest possible standard of integrity inall their business relationships both inside and outsidethe organisations where they work

(b) rejecting any business practice which might reasonablybe deemed improper and never using their authority forpersonal gain

(c) enhancing the proficiency and stature of the professionby acquiring andmaintaining current technicalknowledge and the highest standards of ethical behaviour

(d) fostering the highest possible standards of professionalcompetence amongst those for whom they areresponsible

(e) optimising the use of resources which they influenceand for which they are responsible to provide themaximum benefit to their employing organisation




(f) complying both with the letter and the spirit of:(i) the law of the country in which they practise(ii) Institute guidance on professional practice(iii)contractual obligations.

5. Members should never allow themselves to be deflectedfrom these principles.

Guidance6. In applying these principles,members should follow theguidance set out below:(a) Declaration of interest -Any personal interest whichmay affect or be seen by others to affect a member'simpartiality in any matter relevant to his or her dutiesshould be declared.

(b)Confidentiality and accuracy of information -Theconfidentiality of information received in the course ofduty should be respected and should never be used forpersonal gain.Information given in the course of dutyshould be honest and clear.

(c) Competition -The nature and length of contracts andbusiness relationships with suppliers can varyaccording to circumstances.These should always be

constructed to ensure deliverables and benefits.Arrangements which might in the long term preventthe effective operation of fair competition should beavoided.

(d) Business gifts - Business gifts,other than items of verysmall intrinsic value such as business diaries orcalendars,should not be accepted.

(e) Hospitality -The recipient should not allow him orherself to be influenced or be perceived by others tohave been influenced in making a business decision as aconsequence of accepting hospitality.The frequencyand scale of hospitality accepted should be managedopenly and with care and should not be greater thanthe member's employer is able to reciprocate.

DecisionsandAdvice7. When it is not easy to decide between what is and is notacceptable,advice should be sought from the member'ssupervisor,another senior colleague or the Institute asappropriate.Advice on any aspect of the Code is availablefrom the Institute.

This Code was approved by the Council of CIPS on 16October 1999.


Easton House, Easton on the Hill, Stamford, Lincolnshire PE9 3NZ, UKTel: +44 (0)1780 756777 • Fax: +44 (0)1780 751610 • Email: [email protected] • Web: www.cips.org

Ethical Business Practices in Purchasing and Supply Management

Documents

Transcript of Ethical Business Practices in Purchasing and Supply Management