Many companies suffer legal and reputational damage because of unethical sourcing and lack of adherence to procurement-related laws and regulations. However, adhering to ethical and legal practices is critical to the business, consumers, and society as a whole. - BY CECIL PERANG

Unethical procurement practices are not always obvious. They range from showing bids to a preferred vendor to bribery to knowingly utilizing suppliers that violate company values and policies on ethical sourcing and manufacturing. The importance of ethical sourcing and adhering to laws and regulations cannot be overstated because violations mean people, communities, and businesses, including the procurer’s company, are harmed. Even if a buying company strives to remain ethical in its sourcing and procurement practices, there are many examples of honest companies getting caught up in a supplier’s violations. This is usually due to having poor visibility across the supply chain. Fulfilling the corporate moral and social responsibility depends on ethical and legal sourcing and procurement, which also protects the company’s reputation and avoids severe consequences. Just as important, ethical sourcing and procurement practices prevent unintended harm to people, communities, and the environment.

So Many Risks in Complex Supplier Networks

Supply chains today are either complex networks of global suppliers or a few domestic suppliers. The same ethical principles apply no matter the configuration. Sourcing and procurement must be ethical, fair, and legal, internally and externally. Internally, errant professionals have many opportunities to act unethically or illegally. For example, the procurement decision-maker might give favored suppliers access to bid information from competitors during the bidding process. There are situations in which procurement does not treat suppliers equally and actively awards contracts to preferred suppliers who offer something in return outside of the contract. In some cases, procurement allows internal buyers to select non-diverse suppliers even when diverse suppliers are more qualified, violating supplier diversity policies.

Many companies have stringent bidding policies and procedures in place today to ensure a fair bidding and unbiased procurement process. That does not mean ethical practices are employed. Coupled with the internal risks of unethical behaviors are the external risks of unknowingly selecting unethical suppliers or using Tier 1 suppliers with downstream suppliers not operating within legal and regulatory parameters.

There are red flags, and they should not be ignored. For example, if a supplier’s price is significantly lower than other suppliers, it may be a strategy to undercut competitors, but the buying organization will get what it pays for, like cheap materials or poorly constructed products. Lower-quality products are sold to consumers, but worse, there is a risk of causing harm or injury. Another red flag is suppliers who are located in areas known for exploiting child labor. There are also countries where bribery is accepted.

There are an unlimited number of scenarios. Some suppliers use child labor, maintain unsafe working conditions, overwork and underpay employees, decimate a local environment while extracting resources, bribe customs officials to overlook documentation that does not match the shipment, pollute community drinking water, substitute cheaper parts, or violate government regulations. Procurement fraud is intentional deception in the procure-to-pay process. It may involve duplicate invoices, inflating invoices, price-fixing, and cost mischarging, to name a few examples.

Interacting Impacts

Sometimes, the sourcing and procurement team is pressured by internal team members to select lesser-qualified or questionable suppliers. The procurement team needs strong top-down support, with senior management clearly communicating the importance and expectations of ethical and legal sourcing and procurement and a zero-tolerance policy for violations. There is a slippery slope when minor violations of policies are allowed.

Global Business Ethics Survey (GBES) measures the state of ethics in workplaces worldwide. A recent survey found that 84% of employees felt pressured to compromise workplace standards and observed misconduct. Further, some 46% of employees reporting observed misconduct experienced retaliation. One of the reasons unethical practices flourish is that employees are afraid to speak up due to fear of personal repercussions. There are many stories of whistleblowers not being treated fairly for telling the truth, and it is up to an organization’s leadership to prevent this from occurring.

Fulfilling sourcing and procurement responsibilities ethically not only protects the corporate reputation. It supports business goals. Ethics are directly related to ESG. For example, ethical sourcing ensures that materials and products are obtained in a way that minimizes environmental impact. This includes using sustainable farming practices, reducing carbon footprints, and ensuring resources are not overexploited. It considers social responsibility by selecting suppliers that treat workers fairly, provide safe working conditions and pay fair wages. Ethical sourcing involves implementing and monitoring rigorous standards and quality controls. It also helps companies avoid legal issues and boycotts that cause supply chain disruptions.

Ethical sourcing and procurement do not discriminate either, giving diverse businesses opportunities. Companies that have a reputation for ethical practices are better able to attract and retain talent, especially millennials and Gen Z members who are focused on working for ethical and inclusive companies. Adhering to procurement laws and regulations also offers benefits beyond avoiding expensive fines and legal penalties. Legal compliance promotes transparency and fairness in the bidding and contracting process, leveling the playing field for all suppliers, including diverse suppliers. Legal requirements add accountability to sourcing and procurement. Following procurement laws can support local businesses and economies, supporting a procurement process that contributes to broader economic development by supporting local suppliers and creating jobs.

Looking at the Bigger Picture

Faithfully adhering to ethical and legal sourcing and procurement practices brings companies numerous benefits. These practices support environmental and social responsibility, make the company attractive to consumers and talent, promote diverse supply chains, protect local communities, and support economic growth. Too often, ethics and laws are viewed as restrictions rather than opportunities to benefit the business and society in general. Ethical sourcing and adherence to procurement laws and regulations are integral to building a fair, transparent, and responsible supply chain, benefitting all stakeholders.