Here are five of the most common unethical business practices that occur today in the free World based on what I have experienced in marketing of high tech products into military, space and the wireless industries based on my experience from over twenty-five years. There are more but they very often fall into one of these categories. The practices I’ve witnessed overseas along the Pac Rim may fall into these categories as well (including lavish gifts but this is not much of an issue in US, UK or Europe any longer), but depending on the overseas geography, the unscrupulous behavior that occurs between supplier reps (or locally hired employees) and customer would provide material for a spy thriller. So these foreign issues will not be discussed here.
1. Customers Inflate Quantities to Lower Cost.
Now does this really leave anyone surprised? Here’s how it works, they ask for detailed price breaks for various quantities and run the numbers up high. They most likely will provide marketing forecasts to support these requirements. After negotiating price on your quotation (see my article on “5 Tips to Successful Negotiation”) you finally breathe a sigh of relief that it is over and a PO is the next step. The PO comes in but the price is for the higher quantities (but lower cost). Now some of the more clever companies will have in their T&Cs (which is another story… whose T&Cs govern a legal issue, the supplier’s or the customer’s which you sign when you acknowledge the PO? Again this is another article.) they can cancel without penalty. Or maybe they have a line item that says you are to deliver according to their delivery schedule, but the delivery schedule provided is only for a much smaller quantity and the higher volumes are “TBD”. There is so much more to say on this as it is very popular – and even the giant OEMs play the game, so don’t be fooled that it only goes on with the garage shops.
2. Take Liberty and use a known Loop-Hole.
This is a good one that gets used. And especially by suppliers from low cost geographies into US markets. Even though many companies are very careful not to participate in this, there are those on occasion that watch their bottom line and take the risk. There are many issues that are done even legally to get around some of the government regulations such as ITAR that occur where the overseas supplier offers a good product but very low cost due to where they are manufactured. Quality becomes a real issue!
3. Suppliers Not Honest on Achievable Specs.
This is one of the most popular means to get business. The supplier promises to meet or slightly miss on the customer’s technical requirements to build a new product. The other suppliers provide honest achievable capabilities but are not able to meet all the customer specifications. The award goes to the supplier then (with slightly higher costs because “these hard specs are cost drivers” – a very typical and effective argument used by suppliers) who can meet all specs. After some time, the supplier requires spec relief on all the parameters that other suppliers “flagged” when quoting as too difficult to achieve. The customer has a tight time line and can not walk away, so relaxes the spec and most likely (these suppliers do not typically have very good performance) relaxes even more specs then they would like.
4. Suppliers Shipping Inferior Products.
As end of monthly booking/sales cycles approach, there is often pressure within the supplier’s management to get deliveries out to meet their projected sales. What happens in some cases is that product ships out the door where liberties in quality control or testing or even manufacturing were taken, so the product is effectively inferior. For example, if it is an integrated electronic sub-system, the supplier takes the risk to ship it knowing their standard warranty is 12 months. They hope it survives 12 months and then they will get paid to take it back after it fails and fix it.
5. Customer Mismanages Supplier Rating System.
Often in large OEMs, the left hand does not know about the right hand. I know this surprises you but the engineering team for this customer could be in New York, the manufacturing could be in south Texas and the purchasing agency could be in Portland, OR where the supplier rating system is maintained. People change jobs so there is no continuity in the purchasing department, manufacturing may request a delivery to help meet their delivery needs with the agreement to return on the first of month to the supplier to fix – but this looks like a failure return to purchasing. Yup, you got it, DING against the supplier. There are many, many examples of how this can happen and the customer most likely is not intending to hurt the supplier but does hurt due to mismanagement of all the groups involved. Of course a poor rating will hurt a supplier for future business opportunities.