Do You Know the Rules for Ethical Supplier Interaction?

You might think you do, because ethics are just doing the right thing, and doing the right thing is just using common sense to apply your morality to the situation at hand. But do you? For the most part, you probably do but I’d bet there are situations where you don’t. Because ethics aren’t hard and fast like regulations and laws. There are no well-defined lines to push or cross. And if there is no well defined ethics policy at your company, it can be trickier than you think.

This is made clear in Next Level’s Purchasing great express course on 15 Rules For Ethical Supplier Interaction, which is free as part of a premium Next Level Purchasing Association Premium Membership (which is $99.99/year) or $14.99 as a standalone purchase. (SI would strongly suggest the annual membership as you then get access to over 18 express courses, over 100 articles, dozens of archived webinars [and transcripts], white papers, and the salary guide.)

The NLP express course covers bribes, which are usually (but not always) obvious, (personal) relationships, stock ownership, donations, and gifts. Bribes are usually obvious since, under laws like the FCPA (Foreign Corrupt Practices Act) and the Modern UK Bribery Act, they are illegal, but sometimes bribes can be hidden in (seemingly) legal transactions and not even appear as a bribe to anyone investigating a purchase decision because the briber and the bribed might have hidden information. For example, instead of offering you $10K or an all-expense paid trip to Hawaii for awarding the business, the supplier might make a large purchase from a business you are the majority shareholder in (and, from which, you would get a large dividend or bonus) at above market rate. From a third party perspective, the supplier made an unrelated business decision to buy its new office equipment from an unrelated company, that just happened to occur before it was awarded the (much) larger contract from your organization. But even though there might not even be a perceived conflict of interest in this situation, there is, because it’s hard to not see a supplier favourably who awards business to a company you control, even if you are making an conscious effort to try and be unbiased. But this is just one example where ethics can get tricky. The short course does a great job of outlining others.

Donations for charitable organizations are less obvious because everyone just wants to help a good cause, and what does it hurt if a supplier makes a decision to support your favourite charity? Well, it depends. How much? Does the supplier expect favouritism for the donation? Will the donation unconsciously bias you toward the supplier? Will there be a perception of bias? It’s tough.

But toughest as all is the question of accepting supplier gifts or meals. A meal is just a meal and a gift with nominal value is just a polite introduction, right? Well, maybe. Is it just lunch to discuss a proposal, or is it a fancy dinner at the up-scale private club at the local sports stadium that just happens to overlook the big game? And what is nominal value? It’s shaky ground, which is made even shakier by the fact that refusing a gift could be considered rude and damage the relationship. What do you do then? It’s a much tougher subject than you first think it is, and the more you examine it, the harder it is to define ethical versus non-ethical behaviour and good business rules vs. bad. This is a subject the course spends a considerable amount of time on and a subject you as a Procurement professional need to spend a considerable amount of time on to really understand the intricacies. At the end of the course, you will have a much better understanding of the, sometimes hidden, ethical dilemmas that you will face on a daily basis and, as a bonus, get a starting list of 15 rules that you can use to jump start the creation of a Procurement ethics policy that will help you and your team to always get it right.

Next Level’s Purchasing course on 15 Rules For Ethical Supplier Interaction is a great course on the subject matter and SI recommends that you check it out if you can get access to it.

Geopolitical Damnation 27: UNCLOS

No, that’s not a typo. We’re not talking about UNCLES, we’re talking about UNCLOS, short for the United Nations Convention on the Law of the Sea — an international agreement that resulted from the third United Nations Conference that took place between 1973 and 1982 and finally came into effect in 1994 (a year after the 60th nation signed the treaty). (So if you think your Legal department is slow approving your latest contract, they’re running at breakneck speeds compared to the glacial United Nations.)

This international agreement, that has been agreed to by 166 countries and the European Union as of 2015, replaced the conventional freedom of the seas concept that was the de-facto, unwritten, agreement between nations from at least the early 17th to the late 20th century that stressed the freedom of all nations to navigate open waters.

However, as of the early 20th century, this de-facto unwritten agreement was not enough for those wishing to engage in global trade as nations that wanted to protect mineral resources, fish stocks, or pollution-free waters started to stretch the conventional definition of territorial waters from the accepted 3-mile limit all the way up to a new 12-mile zone in 66 cases and, in 8 cases, a 200-mile limit. If every country has a different territorial claim, how do you know if your ship suddenly leaves international waters and enters a nation’s waters, and, conversely, how do you know how long you have the protection of your nation while entering or exiting your waters?

Under this new agreement, countries have, from the low-water line or a straight baseline (when the coastline is deeply indented, has fringing islands, or is highly jagged) a:

  • 12 nautical mile territorial zone
    where the nation has complete control as it is free to set laws, regulate use, and use any resource; in this zone, vessels generally have the right if innocent passage
  • 12 nautical mile contiguous zone
    where the nation can continue to enforce laws in four specific areas: customs, taxation, immigration and pollution, but only if the infringement started within the state’s territory or territorial waters, or if this infringement is about to occur within the state’s territory or territorial water
  • 200 nautical mile exclusive economic zone
    where the coastal nation has sole exploitation rights over all natural resources.

This all sounds crisp and clean, but there are a number of caveats that you need to be aware of if you are the Procurement person responsible for managing ocean freight.

You have no protection against theft or piracy beyond the 12 nautical mile territorial zone.

Unless the product originated from, or is being shipped to, the nation the contiguous zone belongs to, then the nation has no claim to customs or taxation, and can’t do anything. So, from a shipping perspective, the continuous and extended zones offer you nothing.

You have no protection from the nation within the 12 nautical mile territorial zone (or even the 12 nautical mile contiguous zone under certain circumstances).

The right of innocent passage is only valid so long as you are passing through waters in an expeditious and continuous manner, which is not “prejudicial to the peace, good order or the security” of the coastal state. If the nation decides that your vessel is a threat, it can be stopped, seized, and the crew brought up under criminal (or terrorist) charges and held indefinitely without release.

You don’t even have protection against the nation in the extended zone.

If your vessel or crew gets associated with a crew or vessel that is trying to illegally exploit natural resources in any way, shape, or firm, your vessel can be stopped, seized, and the crew brought up under criminal charges.

Now, the chances of these last two happening are low, unless your vessel is registered to a nation that is currently at diplomatic odds with the nation whose waters it is passing through. For example, if there are embargoes or military conflict, the vessel can be captured simply to use as a negotiation point. Not always likely, but always a possibility hiding in the darkest corners of the shadows just beyond the corner of your eye.

The crux of this post is that when it comes to open waters, it doesn’t matter whether your ship is in a zone or not, because either way it’s not safe. Protection from pirates leaves it open to seizure by law enforcement and freedom from law leaves it open to pirates. Damnation covers the open sea.

Where do you start on your Supply Management Journey?

In our last post on the subject matter, we noted that there is no one platform, just one workflow, and the only way to make progress is to define the one workflow, identify a set of overlapping/integrating systems to achieve the one workflow, identify vendors that can provide these systems, and then select those vendors that best meet overall organizational needs and move forward.

But where does one start? This is a very tough question, and very organization dependent.

  • What does the organization have now?
  • Where is the organization in its Next Level Supply Management journey?
  • What is the talent profile — what is its average and collective IQ, EQ, and TQ?
  • What are the organization’s biggest pain points?
  • What are the organization’s top pressures?
  • What is the organization’s budget?
  • What resources does the organization have available to support implementation and change management?
  • What resources and programs do its current, and prospective, vendors have to help?
  • And so on.

It’s tough. Typically, an organization makes the jump when it’s desperate to get savings, and typically, when doing a systems buy, the organization will focus on the system that is advertised to identify the biggest return. In Supply Management, that’s a true strategic sourcing system that supports complex sourcing as only decision optimization and spend analysis technologies have been repeatedly found to identify year-over-year savings in excess of 10%, with everything else being single digits.

But identification is not realization. In an average organization without the proper processes and systems to support contract implementation, as per a classic AMR series on reaching sourcing excellence, an average organization will only capture 60 cents to 70 cents of every dollar of negotiated savings at the end of the day.

If the organization is not set up to capture savings, it has to start simple. Processes. e-Procurement. SRM to get suppliers on board with processes and programs that will allow it to capture data and insure the suppliers deliver the value they promise without constant monitoring by the buyer. If the organization is set up to capture savings, but can’t identify any, it has to look at more complex platforms or options. However, regardless of the answers to the above questions, it should start simple and work it’s way up the technology and process complexity ladder. The key to success will be adoption, and that will mean not overwhelming those that will be required to adopt the new systems and processes if success is to be achieved.

Technological Damnation 93: Technological Disasters

When we covered Environmental Damnation 18: Natural Disasters, we noted that natural disasters — including earthquakes, volcanic eruptions, and tsunamis — are on the rise. However, these aren’t the only disasters that can bring your supply chain to ruin. Man made disasters stemming from technological advances can also disrupt, and sometimes destroy, an entire supply chain (region).

Three major disasters we need to be on the lookout for are:

  • Nuclear Meltdowns

    While the proponents might like to sell us on how clean nuclear energy is compared to petro-carbon alternatives, the fact of the matter is that while the energy is clean, the waste is much dirtier, with Plutonium-239 having a half-life of 24 Thousand years and Neptunium-237 has a half-life of 2 Million years! Plus, while an explosion at a petro-carbon energy plant might wipe out the plant and immediate surrounding area, an explosion at a nuclear power plant can make an entire city, or even a small state, uninhabitable for millennia! For example, the 30 km exclusion zone surrounding Chernobyl will not be safe for human life for another 20,000 years (and even today, 30 years later when [over] half of the iodine-131, caesium-134, caesium-137, and strontium-90 — the four most harmful radionuclides that spread as a result of the explosion — have reached their half-life, workers are not allowed to work in the zone for more than 5 hours a day and not for more than one month at a stretch due to the ongoing risk to one’s life).

  • Chemical Leaks

    Most of the chemicals we use in manufacturing and production need to be transported, and most are transported by tanker truck or rail car (or pipeline between plant locations), but some are transported by barrels, especially when being shipped by sea (or air). Leaks can be dangerous if the chemical is explosive, acidic, or poisonous, especially if the leak is near a populated area or a water supply. For example, the Bhopal disaster of 1984 exposed over 500,000 people to methyl isocyanate (a toxin often used in pesticides such as Carbaryl which are designed to kill bugs hardier than us, and banned in many countries) and resulted in 3,787 confirmed deaths, 3,900 severe and permanent injuries, and 558,125 reported injuries.

  • (Natural) Gas Leaks

    Gas leaks, whether chemical or hydrocarbon, are among the most dangerous leaks, and natural gas leaks are among the most dangerous. Not only are they toxic (as we are talking about a mixture of methane, carbon dioxide, nitrogen, etc.), but they are also highly explosive, requiring only a single spark to (potentially) obliterate an area the size of (multiple) city blocks. Recent examples are the 2012 explosion in Springfield Massachusetts that destroyed 2 buildings and damaged 42 and the 1992 explosion in Guadalajara that killed over 200, injured 500, and left 15,000 people homeless.

The more we progress, the more we need more, and, stronger energy sources and more chemicals to produce our new technology, and the more danger we place ourselves, and our supply chains, in.

This necessitates the need for more safety audits, more safety practices, and more oversight — especially as more regulations start popping up to try and prevent more accidents and control dangerous substances. So not only do you have to worry about the well being of people in your supply chain, you have to worry about the well-being of your brand if you fail to maintain top safety practices, go afoul of regulations, or take your time switching away from dangerous chemicals or energy sources to more environmentally friendly sources.

This damnation always needs to be at the back of one’s mind or when it unexpectedly rears its ugly head, one will not be ready.