Laxtec, Inc., is a subsidiary of a Texas-based company that manufactures surveillance cameras. Laxtec’s main function is to manufacture the motor and arm that rotates the cameras. Lactic is located in Greater Bay Area, China. Most of its staff are recruited in Hong Kong.

Laxtec, Inc. has no individual ethical regulations, nor does it have an ethics team within the organization. Laxtec’s parent company, however, has an ethics staff within corporate headquarters in US that deals with questions of ethics for its employees. The corporate headquarters does not take an active part in exercising ethics requirements in its subsidiaries due to staff limitations.

Situation
Laxtec has been directed by its parent company to manufacture a new arm that will rotate 360 degrees instead of the present 180 degrees.

Since Laxtec is operating near full capacity and cannot extend its resources to design and manufacture the special motor and control unit needed for the 360-degree specification, it has decided to subcontract this project.

Knowing that there were only a few companies that would be able to design and manufacture the arm, Peter Fung, President of Laxtec, instructed Larry, Director of Procurement, to inform the bidders that there are many companies bidding for the contract. This would ensure that the bids received were competitive.

One out-of-town bid from Taiwan and three local bids were received. Mr. Fung called Larry into his office to discuss them. Larry told Mr. Fung that the out-of-town bid from a Taiwan company ‘Aster Company’ appeared to be the most favorable. But Mr. Fung told Larry to discard it because he wanted to subcontract the motor within the area to enhance business and social relationships with the Greater Bay Region. Out-of-town contracting would only cause friction among the workers. The out-of-town bids, explained Mr. Fung, were simply to obtain pricing information.

Larry looked over the remaining bids and explained that Prextel was the next best choice, then Gardon Inc., and lastly Tomos Corporation. Larry was familiar with the Tomos Corporation and told Mr. Fung that it had been involved in questionable business activities and was being investigated by the local authorities.

Mr. Fung looked sternly at Larry when he heard the Prextel bid was the best and told Larry to discard it. Mr. Fung’s ex-wife was the Director of the Research and Design team at Prextel and relations between the two were difficult, to say the least.


Finally, Mr. Fung agreed to award the bid to Gordon Inc. Mr. Fung told Larry to negotiate the specifics with Gordon. Mr. Fung also told Larry to delay notifying the other bidders of the award until two weeks after production had started with Gordon. In this way, it would not be necessary to listen to the other suppliers ‘beg’ for more consideration.

Negotiations between Gordon and Laxtec were finalized, and production started. A problem arose within the second week, however, when Laxtec’s quality representative noticed that the materials being used were not of the quality standard stated in the contract.

Larry immediately called a meeting with Gordon, Inc. During the meeting it became apparent that there was a lack of honesty in the development of Gordon’s bid. Further, Gordon’s attempt to use substandard materials was an attempt to increase profit. Larry realized that Laxtec could not rely on Gordon, Inc. He stated that he would cancel the contract based on fraud. Gordon, wishing to avoid any litigation and bad publicity, agreed and passively backed out.

Luckily, at Mr. Fung’s direction, Larry had not notified the other bidders of the award to Gordon. Larry met with Mr. Fung again and recommended that Prextel be awarded the contract. Mr. Fung refused and ordered Larry to meet with Tomos and negotiate a contract.

The Dilemma
Larry called Mr. Chung, the President of Tomos, for a meeting the next day. Chung knows that if Laxtec wanted him to negotiate a contract, it must be in desperate need of someone. Accordingly, Chung told Larry that a donation to the Tomos Pension Fund would make things much smoother in the negotiations. Larry brushed the comment aside and finalized the meeting time. Larry told Mr. Fung about the Pension Fund. Mr. Fung simply shrugged his shoulders and told Larry to pay Mr. Chung since it was essential to have Tomos accept the contract.

Larry was unsure of what to do. In his last two jobs, he had refused to participate in similar activities and was fired on both occasions. That was when he was single. Now Larry had a house and two children to support.

Question 1
Is it ethical to:

(a) Tell suppliers that there are many bidders?

(b) Delay telling unsuccessful suppliers of an award?

(c) Void a contract based on dishonesty?

(d) Allow companies to bid even though they would not be considered for the contract?

(e) Refuse to award based on personal relationships?

Question 2

Successful negotiation relies heavily on planning in the preparation. As a Procurement Director, you are preparing your negotiation with a large supplier, Tomos, who has a strong market position and charged you outrageous prices for his products.

(a)	Express your view of this assertion by explaining how you prepare for the negotiation to get the best out of the dealings with Tomos.	(32 marks)
(b)	Buyers may adopt Kraljic Purchasing Portfolio Matrix in negotiation. Summarize the characteristics of the four types of products mentioned in the Matrix.	(8 marks)

Question 3
Purchasing ethics are concerned with how the purchasing activity behaves with suppliers and other internal activities. You are the senior management in the procurement of Laxtec. You identify that the company is engaged in purchasing malpractice, such as favoritism in inviting suppliers to bid and appointing the supplier, unauthorized disclosure of bid information, delay in informing unsuccessful suppliers and etc. Being the Director of Procurement in Laxtec, you are responsible to propose 10 actions to prevent the recurrence of this malpractice.