DIFFICULT MORAL QUESTIONS

Question 136: Should a business pay a higher price out of loyalty to a good supplier?

One of our new products required an electronic subassembly that we could not engineer and produce in house. I identified possible suppliers, gave them our specifications, and ordered, not from the one that bid lowest, but from the one that seemed most likely to meet our requirements fully and deliver on time. That supplier gave us excellent service, including extra help with integrating the subassembly into our product design.

The product sold well, and we are now getting ready for a second and much larger production run. The pressure is on to minimize costs. There are two ways to go on that subassembly. One would be to reorder from our original supplier; the other, to order from a supplier with no engineering department and lower overhead. My department head decided to ask the original supplier and several of its low-overhead competitors for bids, which are now in. The lowest acceptable bid is just under three percent lower than the original supplier’s.

Changing suppliers would involve no legal problem, since the design of the subassembly is legally ours. I am confident the low-bidding supplier will satisfactorily duplicate the subassembly and deliver on schedule, so that getting the better price need not sacrifice quality or risk production delays. But the saving works out to less than one-tenth of one percent of the wholesale price of this product, and our projected profit margin on it is over six percent.

Under these conditions, I wonder how fair it is to switch after having used our original supplier’s service. My department head and I disagree. He sees no problem, pointing out that if suppliers wanted to, they could either recover the full costs of their engineering service on the initial order or patent and license their designs. Furthermore, he says similar things are done all the time. People go to a store that stocks cameras or computers to check out the goods, then buy from a mail-order house; they go to a large dealership to look at new cars and get a price, then order from a small dealer willing to meet the price; they shop retailers that provide good displays and buying advice, identify the wholesaler of the product they want, and purchase directly.

Analysis:

This question concerns the duty of loyalty and calls for application of the Golden Rule. Suppliers should be considered cooperators in a business, especially if they provide special service. Fairness requires loyalty toward cooperators, and, though the demands of loyalty are limited, in this case changing suppliers seems unfair. Moreover, the industry’s common good requires suppliers that offer full service, and participants in the industry should do their share in serving its common good; so, the questioner’s company has some responsibility to support its full-service supplier. The argument by analogy proposed by the questioner’s department head is not sound.

The reply could be along the following lines:

I think you are right in being concerned about the fairness of switching suppliers. I lean toward your side in your disagreement with your department head.

In the first place, any business should count its suppliers among the cooperators in the enterprise, along with investors, employees, and customers. Even purchasing a standard component, and selecting a supplier strictly on the basis of price and guaranteed delivery, involves some cooperation with the supplier and establishes a relationship, albeit minimal. Purchasing a custom designed component from a supplier whose special skills and commitment are important to ensure good quality involves more cooperation and establishes a more significant relationship.

The supplier to whom you gave your initial order for the subassembly cooperated with you by providing excellent service, including extra help in integrating the subassembly into your product design. No doubt, that contributed to the product’s success. Moreover, you surely realized that the supplier was motivated by a hope for additional orders if the product succeeded, and you profited by taking advantage of that hope. Trusting you to respond in kind to its good will, the supplier did not patent the subassembly. So, while buying from another supplier would not violate the law or any written agreement, it would violate the relationship you established by accepting the supplier’s cooperation, and that relationship is intrinsically valuable. Then too, while switching to another supplier would realize small short-run savings, maintaining your relationship with the original supplier may be good business in the long run, since that supplier probably will continue to try hard to fulfill its commitments and meet your needs when extra effort is required. Therefore, I think you should be loyal to your original supplier.

The demands of such loyalty, of course, are limited, as are the demands of loyalty toward good employees, who sometimes must be laid off when business is poor. In both cases, you cannot ignore the legitimate interests of investors, customers, and other participants in the business. It might well be fair to change suppliers if necessary to maintain the product’s profitability or if the price differential were not so small. What you have told me, however, seems to indicate that properly applying the Golden Rule will make clear the unfairness of changing suppliers.

Someone might object that the supposed value of a company’s relationship with its suppliers is intangible, and should not be allowed to influence purchasing decisions, which ought to be based solely on calculable factors such as price. Otherwise, the objector might argue, personal feelings of friendship inevitably will influence purchasing decisions, resulting in increased costs, so that either the product’s price will have to be raised or owners will be deprived of part of the profit to which they are entitled or both. The answer is that, while personal relationships should not be allowed to influence purchasing decisions contrary to the company’s true interests, good business relationships with suppliers, as with employees and customers, pertain to the company’s good. Moreover, while owners are entitled to a fair profit, they are not deprived of it when profit is reduced by treating suppliers, employees, and customers fairly.

Another consideration also argues against changing suppliers in this case. The alternative supplier, whose overhead is lower, is, as it were, taking advantage of the lack of structures to protect the common good in your industry. If no supplier could have provided the full service you needed, you could not have launched your product, and the same is true of others trying to launch new products. So, as a community of businesses, your industry needs suppliers providing full service. Since the cost of sustaining them must be met and should be met fairly, you have some responsibility to sustain your full-service supplier. Besides, failing to meet such responsibilities is likely to harm the entire industry in the long run.

Your department head might object that other companies are not doing their share to sustain full-service suppliers. But the unfairness of others does not cancel out one’s duties as a participant in an industry, unless it so undermines the conditions essential for the industry’s well-being that fulfilling one’s responsibilities becomes pointless.

The argument by analogy proposed by your department head is unsound, since there are ethically significant differences between his examples and switching suppliers. The most obvious is that the shoppers in his examples need not have established a relationship by previous transactions with the merchants whose services they use. Another important difference is that shoppers generally do not establish a relationship with vendors similar to yours with your initial supplier.

In a market economy, vendors expect potential buyers to shop around. Many businesses, therefore, offer free information about the availability and prices of their goods and services, display goods, and welcome anyone who wishes to inspect them. Retailers, of course, intend only to help potential customers, but they foresee and accept that others will take advantage of their promotional services. Moreover, even though they intend to buy elsewhere, shoppers examining items displayed by a full-service store or large dealership offer the retailer an opportunity to persuade them to change their purchasing strategy or, at least, to remember helpful salespeople, recommend the store or dealership to other potential customers, or buy from it another time. In some cases, too, distributors and retailers help one another in promoting a certain brand of product, so that all retailers of the product benefit by providing good sales service to the public. Therefore, using services offered to shoppers hardly is unfair unless it imposes significant burdens—for example, by asking for a “sample” of something one has no interest in buying, carelessly damaging displays and demonstrator products, or wasting the time of the sales staff and impeding sales to others, which, in many cases, is unfair both to the salesperson and other shoppers.

Someone might say your department head’s view differs from the one articulated here not in morality but only in effectiveness—the department head’s view is simply shortsighted, while maintaining relationships with good suppliers is good business that will pay off in the long term. Indeed, it may pay off, but there is no guarantee it will, and the only compelling grounds for rejecting the department head’s view concern fairness, not profits. That consideration of fairness, however, may not seem to be a matter of morality, since it does not turn on any hard-edged norm of the sort that excludes stealing and promise breaking. Still, between individuals, less hard-edged duties, such as gratitude for gifts and loyalty to friends, certainly also are moral responsibilities. These have their analogues in relationships even among nations, and certainly also in those between businesses and their suppliers.