CPOs should resist the temptation to 'steal' from their suppliers, and instead work to a higher ethical standard
The pressure on procurement leaders to reduce costs is relentless. Last year's savings are invariably lost in this year's commodity inflation, in price decreases to customers, to accounting machinations, in the mystery of cost avoidance versus cost reduction, and so on.
As CPOs we are both suppliers to our shopfloors and end customers, and customers to our supply base. Under these dual pressures, procurement organisations are often tempted to turn to the "dark side" and manage suppliers with negotiating tactics that ultimately fail. But rather than succumbing to this, we must affirm an ethical code that transcends quarterly earnings pressure and threats to offshore operations to cheaper countries.
Two personal experiences from the sales side of the table have convinced me that this is essential to the way we operate. In the first case, I was negotiating the end of a $45 million equipment contract with our biggest customer. We had delivered 500 large industrial units to this firm - let's call it "Apex". It was our first contract with Apex and we were hungry for the huge potential follow-on business.
Unfortunately, we delivered the units six months late, as a result of design changes, late receipt of raw materials, initial quality problems, and textbook poor planning and manufacturing. Although we did everything we could to turn things around, by the time we made the final shipment our company had lost $5 million on the deal.
Apex's response was to demand an additional $3 million in late delivery fees - something clearly stipulated in the contract - even though it admitted it had not had to pay any damages to its own customers. I told Apex: "We're already $5 million in the hole on this contract and cannot afford another $3 million loss. You've had no charges, please don't charge us." Its response? "Pay up!"
Despite my protestations, our CEO accepted the terms and paid the penalty. No doubt the buyer at Apex was considered to be a hero for bringing in an extra $3 million in revenue. As for me, I was fired within six months, but my spineless CEO lasted less than a year and the company never got another order from Apex. So much for paying the ransom!
In the second case, my employer, a manufacturer of condiments, was asked by a "big box" retailer to reduce the cost of our one-litre product from $1.09 to 90 cents. Our variable cost was 93 cents. This was a high-volume manufacturing item for us and absorbed lots of overhead.
"Where did the 90 cents come from?" I asked. "One of your competitors, XYZ, offered it," Big Box inferred. "But XYZ is losing money every quarter," I protested. "It is close to bankruptcy!" This time, our gutsy CEO told Big Box: "We cannot sell you a product lower than our cost - that's stealing from our shareholders!" In response, Big Box gave the $25 million order to XYZ. Seven months later XYZ duly went bankrupt and Big Box resumed purchasing from us - with no shame!
When I related these anecdotes to MBA students at a prestigious university, most booed the Apex "thief" and cheered the condiment CEO. "What ethical code is your decision process based on," I asked them. Their answers ranged from "do the right thing", to "won't be embarrassed if our actions show up in the newspaper", to "what did your grandmother teach you?"
I've asked hundreds of my fellow procurement executives the same question. Some have given similar answers to the students, while others have simply repeated their company's business practice statement. These generally reflect what I would call "situational ethics" - in other words, not ones that are securely grounded.
My point is that as CPOs we must affirm an ethical procurement code and practise it. I define "ethics" as the values we hold dear and "morals" as our specific behaviour measured against those values. On this definition, if the Apex buyer's ethics were always to maximise supplier payments, then he was simply exercising his morality. Yet I still believe he was a thief because he violated my ethical standard. Big Box's actions also fall foul, since it accelerated XYZ's charge to insolvency by accepting product below its real cost.
And how do I define my ethical standard? Well, I lifted it from the Bible, Leviticus chapter 19. Paraphrased, it says simply "do not steal, do not lie, do not deceive one another". That's the ethical position in my company, and in my own life. You can measure me by it and hold me accountable to it. I would like to think the same is true of my procurement peers.
Peter Connelly (peter.connelly@leggett.com) is CPO of diversified manufacturer Leggett & Platt in Carthage, Missouri
