Supplier Struggle

Rabbi Dr. Asher Meir

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 GM 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 GM's advantage.

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

  1. Seeking bids must be in good faith. Jewish law forbids asking a price from a merchant if there is no intent whatsoever to buy from him, since this is an unjustified imposition. If the only purpose of the quote is to use it to browbeat another supplier, or to benchmark another round of bargaining, then this is taking advantage of the supplier. (1)
  2. It's forbidden to mislead the bidders. Most tenders are one-time encounters; if the purchaser doesn't have a firm intention to take advantage of the most advantageous bid, he should inform the bidders at the beginning of the process. Otherwise, he risks misleading them. (In Jewish law, this would be known as geneivat da'at, literally "stealing confidence".) (2)
  3. It goes without saying that it's forbidden to create pressure using bids which are fictitious or fabricated (shill bids). Of course the same applies when selling -- it's wrong to squeeze a higher price by inventing a non-existent new buyer. Outright lying is never an acceptable business practice.
  4. Another practice which some have attributed to Lopez is tearing up existing supply contracts in order to negotiate a better price. This would be considered a bad-faith practice. After negotiations have been concluded, and certainly after a contract is signed, seeking a new and more advantageous agreement can be condoned only if a truly material change in conditions occurred in the meantime. If a company simply can not make thrive under the existing agreement they may be compelled to revise it, but otherwise this is exploitative. (3)

Beyond the ethical considerations, there are also many practical considerations. GM did attain short-term cost savings, but there were also long-term costs due to alienation of suppliers. In GM's case cost savings were so huge that they probably gained in the long term, but this won't be the case for any firm which adopts this confrontational attitude.

Suppliers can take their own steps to protect themselves against this phenomenon. Many sellers take care to inform buyers that quotes should be considered final. A consistent policy can help forestall pressure from determined negotiators, even if it results in the loss of a few sales. It is worth pointing out that many suppliers themselves ultimately benefited from GM's pressure, as they ended up with remarkable productivity improvements and cost savings.

There's nothing wrong with being a tenacious negotiator and trying to obtain the best price from sellers. But buyers need to remember that their business is ultimately dependent on having a reliable relationship with suppliers, and take care to always deal with good faith and an eye to mutually beneficial long-term relationships.

SOURCES: (1) Mishnah Bava Metzia 4:10. (2) Shulchan Arukh Choshen Mishpat 228. (3) Shulchan Arukh Choshen Mishpat 204.