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Corporate Policy And ProcedurePurchasing Agents – Trust but Verify
Creating a corporate policy and procedure manual is one of the most important steps a family-owned business can take in professionalizing their management system. One of the reasons this manual is important is that it helps to communicate the rules, expectations and values of the company to all the managers and employees. According to family business security expert Harold Copus, purchasing is a function that is susceptible to corruption – where temptation can overcome common sense. So, the corporate policy and procedure manual should include procurement policy and procedure. Case in point - A second generation family business, a manufacturing company in Birmingham, Alabama that was growing in sales but profits were declining. The owner of the business created a new position, a general manager, to help oversee the operation and to find out what could be done to improve profits. Knowing that reviewing purchasing contracts could produce some very quick savings, he contacted several regional vendors for products that were key components in their manufacturing operation. One vendor, someone he had met at a trade show, indicated that he could not sell his product to the company in question even though his quality and pricing was superior to his competitor. The vendor hinted that the purchasing manager was accepting under the table “gratuities” from favored suppliers. Reviewing the corporate policy and procedure manual was a very quick first step - it was virtually non-existent! The purchasing section was little more than a few notes on how to approve invoices before they were submitted to accounting. The general manager was new but he had been given authority to operate independently by the family who owned the business. He decided to use a private investigator recommended by the company’s attorney and contacted Harold Copus at the Family Business Institute in Atlanta. Copus conducted covert interviews with key managers and employees and they disclosed that if you ever needed tickets to a ball game or a concert, you could always call the purchasing manager and you would be taken care of with excellent seats and sometimes even a free meal. According to one manager, the purchasing agent was very good at “twisting the arm” of suppliers”! That was enough to cause danger signals to Copus – that there could be a problem with the purchasing manager. This was further confirmed when one engineer disclosed that a certain chemical used in a production process was at best inferior. It sometimes took several passes to achieve the same results as the product from a previous vendor. When he complained, he was told that the product was similar and cost less. Doing his own investigation, the cooperating employee discovered that because they had to make several passes through the coating line to achieve the same results, their actual costs had dramatically increased. In further interviews with the cooperating employee, he disclosed that his best friend was the next door neighbor of the purchasing agent. The friend had wondered how his neighbor could afford to be buying his wife and daughter new cars every year for the past three years. Further investigation revealed that the purchasing agent had taken several trips to Scotland, Italy and Germany and always brought back expensive gifts. The cars that his wife and daughter were driving were registered to a supplier! His college age son had a part-time job with another vendor that paid the son $30,000 a year! In the interview with the purchasing manager, he disclosed that from day one he started accepting gifts from vendors and estimated that over the past twenty years he had accepted close to a million dollars in gifts, trips, tickets, cars and cash. The lessons learned:
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