Monday, October 31, 2005

The ethics of bidding

Q. Recently a customer obtained a price quote, only to return a few days afterwards asking me to revise my quote to beat an even lower quote from a competitor. Is that ethical? How should I respond?

A. This game of playing suppliers off against each other is hardly new. The most famous exponent of this practice in recent generations was Jose Ignacio Lopez, purchasing czar for General Motors in the early 1990's. Lopez was famous -- or perhaps infamous -- for his multiple-round bidding process. GM would invite bids from a number of contractors, and then initiate further rounds of bidding on the basis of the lowest bids extant. Even after the bidding was done, Lopez would pressure suppliers for additional cost savings!

What were the results? On the down side, Lopez's policies alienated many long-term suppliers to GM, leading some to stop working with the company and others to adopt a more formal, arms-length relationship with the company in place of the previous cooperative relationship. On the other hand, he saved GE the astronomical sum of four billion dollars in only a year. Much of the saving resulted from actual improvements in production efficiency, rather than merely squeezing suppliers to GE's advantage.

Playing suppliers against each other in this way is not inherently unethical, but it does present many ethical challenges.

Applied and clear thought throughout, as is typical of the Jewish Ethicist (that is, this guy, not some archetypical Jewish ethicist).

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