Procurement Ethics: Challenges and Solutions

Yes, businesses main focus is to make profit 

So if you are in charge of a company, or running the procurement department and bringing cost-efficiency to your operations, that’s pretty much the end of it, right? 

Well, to be honest, the answer is no. 

Now more than ever, our world is in dire demand of ethical procedures. Of course, you’d be forgiven for thinking that ethics is an old-fashioned concept belonging to the halls of philosophy and has nothing to do with procurement.

Forgiven but inaccurate 

Ethical procurement is not only important for our planet, it’s also positive for your business. 

Ready to see how?

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What Is Procurement Ethics?

Let’s start with the basics: procurement ethics refers to the moral principles and standards that guide purchasing and sourcing activities. Consider it as the handbook that will help you to be sure that when you are selecting a supplier or signing a contract, you are following key values like fairness, integrity, and transparency 

Procurement ethics isn’t a one-size-fits-all concept. It covers a wide range of practices, including:

• Fair competition: Ensuring all suppliers have an equal opportunity to win contracts.
• Transparency: Providing honest, and open communication with suppliers and stakeholders.
• Avoiding conflicts of interest: Making decisions based solely on your company’s best interests, without personal gain.
• Environmental and social responsibility: Considering the impact of procurement decisions on the environment and society.

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What Makes Procurement Ethics Important?

Reputation management

What would be of your brand without its reputation? Pretty much nothing, right?

Ethical lapses can damage your company’s reputation, leading to lost business and diminished trust from not only your stakeholders but perhaps even more importantly, from your clients. 

Legal compliance

This is where we get serious, you’ll see depending on your industry, you could face more strict regulations than others, especially governing procurement practices. Staying ethical helps you avoid legal trouble and fines.

Supplier relationships

Believe it or not,  following ethical procurement practices is a great way to promote long-term mutually beneficial relationships with suppliers. The reason? It reduces risks and improves collaboration.

Employee Morale

A commitment to ethics creates a positive work environment where your employees feel proud of their contributions.

Now that we have seen the good, let’s pause and switch to the other side.

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Challenges in Ethical Procurement

Bribery and corruption

No, this is not the plot of a political thriller. It’s just how the world works sometimes. One of the most significant risks in procurement is bribery, where suppliers can offer gifts, favors, or money to secure contracts.

Solution:

It starts with implementing processes or codes of conduct for your team, this way they’ll know that’s absolutely prohibited to accept gifts or any other favors from suppliers. Regularly train your team on anti-bribery policies and establish a reporting system for unethical behavior.

Conflict of interest

You probably have heard about this one. Just imagine being tasked with choosing a supplier, only to realize you have a personal relationship with one of the bidders.  What’s the first thing that comes to mind? How can you feel confident that you are making the decision based on the criteria of the company and not on your feelings?

That’s a conflict of interest.

Solution:

The good thing is that this challenge doesn’t become a problem until it does. Disclose any potential conflicts to your supervisor or ethics committee. If necessary, remove yourself from the decision-making process to ensure impartiality.

Supplier misconduct

While this is a red flag, it also highlights the importance of adhering to ethical procurement standards. Because it wouldn’t be horrific to discover that one of your suppliers engages in unethical practices, such as using child labor or violating environmental regulations? 

Scary isn’t it? 

Solution:

You might not be able to control the actions of others but you certainly can carry out serious research before choosing a new supplier. Establish criteria for ethical sourcing and audit current suppliers so you can discover if everything is aligned with your standards.

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Poor transparency

Opaque procurement processes can lead to favoritism, unfair competition, and mistrust among stakeholders.

Solution:

Adopt transparent procurement practices, such as open tenders and clear evaluation criteria. Communicate openly with suppliers and stakeholders about the decision-making process.

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How to Integrate Ethics in Your Procurement?

Develop a code of ethics 

How can you know that something is wrong if you have no idea of what’s the definition of wrong to begin with? Your code of ethics is the backbone of ethical procurement. Well done it should outline the values and principles that guide your organization’s purchasing decisions.

Include:

• Commitment to fairness and transparency
• Guidelines for avoiding conflicts of interest
• Policies on gifts, hospitality, and bribery
• Environmental and social responsibility standards

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A the end of the day, what your code of ethics includes will be up to you and the requirements of your company, however, make sure the document is accessible to all employees and suppliers, and don’t forget to provide training, this way everyone understands their responsibilities.

Review your sourcing policies 

This is where you might find the majority of issues, we don’t need to tell you how you should check for factors beyond pricing, like quality and delivery times. But do you ever stop to think about the social and environmental impact?  How can you be fully safe from being linked with suppliers whose work violates ESG regulations?

Consider the following procedures:

• Establish sourcing criteria focused on sustainability 
• Monitoring and auditing processes
• Collaboration with suppliers to improve ethical standards

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Accountability

You might be the owner of the company or the person responsible for the procurement department, but you can’t be everywhere all the time. That’s why you work with other people. 

It’s your staff who are face to face with potential risks to your ethical goals. Encourage employees to take ownership of their decisions and hold themselves accountable for ethical behavior.

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Trends in Procurement Ethics

Sustainability and circular economy

Be honest, wouldn’t this world be better if we lived under the principle of giving back? Back to our society, to the planet, to our lives? Well, that’s what a circular economy is all about. Sustainability, on the other hand, is focused on helping us to find mechanisms so we and the planet can coexist in a more healthy environment. 

Now, you might be wondering, how any of this is related to procurement,

The truth is that companies are increasingly adopting circular economy principles intending to reduce waste and maximize resource efficiency.

Prioritize suppliers that share your commitment to sustainability. Look for opportunities to recycle, reuse, and reduce waste in your procurement processes.

Technology

Yes, we are 100% sure this isn’t a surprise for you, after all, technology is transforming procurement. Suddenly it’s easier to track and manage ethical practices. The more we advance as a modern society, the more options we have to try and see how we can contribute to a more positive future. From blockchain for supply chain transparency to AI for supplier evaluation, the possibilities are endless.

If you are unsure where to start, a good place to begin is to invest in procurement software that provides visibility into supplier performance, contract compliance, and ethical standards. Use data analytics to identify risks and opportunities for improvement.

Diversity and inclusion

Another no-brainer here 

But besides its obvious importance, there’s also a hidden profit for your business,  think about it, diverse suppliers bring unique perspectives, innovation, and resilience to your supply chain, something that can be tremendously beneficial in the face of supply chain challenges. 

Develop a supplier diversity program that encourages partnerships with minority-owned, women-owned, and small businesses. Set diversity targets and track your progress over time.

Building an Ethical Procurement Culture

As we have seen so far, there are many practices that your company can follow in order to be a truly ethical business. 

But there’s something else to consider. 

You need to actually make it work from within 

Here’s how:

Communication

Make ethics a priority in your internal and external communications. Share success stories that highlight the impact of ethical procurement on your company and stakeholders.

Training:

Nothing good comes without a bit of effort as ethical challenges evolve, so should your team’s knowledge. Offer regular training on procurement ethics, industry regulations, and emerging trends.

Measure ethical performance:

If you can measure it, you can learn from it and, if necessary, fix it.  Establish key performance indicators for ethical procurement, this way you will know what’s going on in your procurement efforts. 

The Future of Procurement Ethics

What does the future hold for procurement ethics? While no one can predict the future with certainty, one thing is pretty much evident, ethics will continue to play a significant role in procurement.

As you move forward, consider these future directions:

Emphasis on Environmental, Social, and Governance practices: Here’s the thing investors and customers will increasingly evaluate organizations based on their ESG performance. So if you want to keep attracting money, you should bring your attention to the values that are making people talk right now. 

Increased collaboration: Working on sustainability or creating a fairer society it’s not an easy task, this is why you’ll see companies ready to work more closely with suppliers, industry groups, and NGOs to address ethical challenges and drive positive change.

Evolving regulations:  Remember how we mentioned legal compliance at the beginning? Stay ahead of regulatory changes that impact procurement ethics, from anti-corruption laws to sustainability requirements.

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