Author / Contributor
image for Michael Pritchard image for Michael Pritchard
Michael Pritchard Professor; Co-Director of The Ethics Center Western Michigan University More Posts
Parent Resource32
Conflicts within a Manufacturing Firm



Author(s) Michael Pritchard
Authoring Institution Center for the Study of Ethics in Society at Western Michigan University
Show More Show Less
Contributor(s) Michael Pritchard
Notes Case study originally published in “Teaching Engineering Ethics: A Case Study Approach” by Michael Pritchard. Center for the Study of Ethics in Society, Western Michigan University, 1992.
Share with EEL Yes
Authoring Institution (obsolete) Center for the Study of Ethics in Society, Western Michigan University
Rights For more information on permissions to use this material please see:
Year 1992
Publisher National Academy of Engineering, Online Ethics Center
Sort By
  • Posted 11 years and 9 months ago


    Now that T&D's internal tool and die department can bid
    on new tooling by offering a price to produce it internally,
    they will have to abide by the procedures established by the
    Purchasing Department so the integrity of the bidding and
    contract award process is not compromised. They should be
    placed on the approved bidder list, receive a copy of the
    approved tooling part prints and specifications, and the sealed
    bid envelope in which to respond with their quote. The
    department head of the internal tool and die is totally out of
    order when he asks the Purchasing Department for the prices
    obtained from the outside vendors before he submits his quote.
    With this inside information, he can become the low bidder.

    Purchasing should refuse the internal tool and die
    department request as unethical--give him a set of the prints
    and specifications, the sealed bid envelope, the bid closing
    date, and tell him to submit quote. After contact award, he can
    review the source selection evaluations and bids in the same
    manner as the other bidders.


    Well, T&D's Purchasing Department shares the quotes with
    T&D's tool and die department head. T&D's outside
    vendors complain that T&D has acted in bad faith. They're
    right! By being able to see the competing bids, the tool and
    die department head had inside information. If I was an outside
    supplier to T&D Manufacturing, I would decline to bid any
    of the jobs under these ground rules.


    The logic of the tool and die department head in trying to
    persuade the Purchasing Department that it is making a mistake
    in not providing him the quotes of the other vendors in advance
    is ludicrous. If he thinks he can be competitive with the
    outside vendors, let him submit a bid like everyone else.

    An interesting point here is the bid rate that internal tool
    and die uses in preparing their quotations. If their direct
    labor rate and material costs are not properly burdened,
    they'll use only the base rates and inherently underbid anyone.
    Management should have the cost accounting department prepare
    appropriate burdens for the internal tool and die to apply to
    their base labor rates and material costs so their bids are
    truly competitive with those of the outside vendors. If this is
    not done, the outside vendors will have another complaint in
    that T&D is only obtaining pro-forma outside bids and
    awarding the contract to internal tool and die on the basis of
    unrealistically low pricing.

  • Posted 11 years and 9 months ago

    Before getting too carried away about justice, fairness and
    "level playing fields" it is helpful to recognize some basic
    facts about the situation surrounding this Tool and Die case.
    First and foremost, Tool and Die is a for-profit company with
    several clear missions: it must deliver a profit to its owners
    or stockholders, it must justify the salaries it pays to its
    employees and mangers, it must deliver a competitive quality
    product and it must maintain professional standards in all of
    its operations. It is not in business just to support the
    outside vendors, although it clearly must maintain productive
    symbiotic relationships with those vendors.

    If the internal tool and die department at T&D can
    produce the tooling designed by T&D at a price competitive
    with the cost of using outside vendors, then it would be
    foolish for T&D not to take advantage of that opportunity
    to save money. The question is how to do that while being fair
    enough to maintain continued open channels of communications
    with the outside vendors which will probably continue to be
    needed at some level.

    Now, before we can consider the questions raised in version
    I of this case, it would seem appropriate to consider a
    different kind of competitive bidding than what has been used
    prior to T&D's internal tool and die department getting
    into the act. Previously, each outside vendor was undoubtedly
    asked for a single dollar price bid on each request for
    proposals. This dollar value is not really directly comparable
    to what the internal tool and die department will be bidding.
    The outside vendors' bids will include all direct costs,
    indirect costs (like heat, electricity, cleaning services, etc)
    and profit. The inside department bids will include just the
    first two items. That is what must be somehow compared. The
    equivalent of profit on the internal department bids is the
    moneys made available to the internal department (or others)
    for bonuses, other rewards for productivity and growth (i.e.,
    profit reinvested in expansion or increased stock

    To compare internal and external direct and indirect costs
    it would seem appropriate to prepare a new bidding format that
    indeed levels the playing field. Further it would not be
    appropriate to share the external bids with the internal
    department until all of the bids are in. Only then are all the
    T&D players acting as faithful agents and trustees of the
    T&D company. The appearance of fairness must be maintained
    in order to keep the vendors bidding. Any suspicion of bid
    rigging by the internal tool and die department must be

    According to this analysis of the situation the response
    here to the 4 questions in part I of the case would be a
    combination of 3 and 4. In response to part II of the case, the
    analysis surely would support not using selection #1 in part I.
    If fair comparisons are not made between internal and external
    vendors in this case, there is also the danger of doing damage
    to the morale in other departments at T&D. Other department
    heads could argue that with rigged bidding, the internal tool
    and tie department has an unfair advantage over other T&D
    departments in showing increased productivity and looking good
    to upper management.

    Regarding the internal tool and die department head's
    reasoning in part III of the case, it certainly sounds
    convincing and it is obviously true that all the departments
    must work together to maximize company profit. But that does
    not mean that purchasing should be a party to drying up the
    availability to T&D of outside vendors when they are
    needed. By sharing each set of bids with the internal tool and
    die department head after that bid is awarded, the opportunity
    is obviously provided for the internal department to be more
    competitive the next time around if it has not won the previous
    bidding competition.

    The internal tool and die department head can certainly
    learn from comparing his previous losing bid to the winning
    external vendor's bid just exactly how his department can be
    more economical in determining future bids. This will
    eventually translate into increased profit for T&D in the
    long run and also maintain good relations with the outside
    vendors for as long as they are needed.

    The key for this process to work is a carefully spelled out
    bidding procedure that allows apples to be compared with apples
    and clearly identifies the cost of labor, materials, direct
    overhead and indirect overhead. The last item is the most
    difficult to pin down equitably and accurately. Also, isn't the
    new procedure intended to gauge whether vendor's estimates are
    fair? If internal department doesn't blind bid, they will tend
    to try to always undercut bid and perhaps submit unrealistic

    The federal government has a long standing discussion going
    on with industry and academia regarding this indirect overhead
    determination. In fact the subject has recently been front page
    news in regard to Stanford University and the resignation of
    the University President over audited misuse of the indirect
    overhead moneys paid Stanford by the federal government. This
    fact is mentioned only to indicate that T&D will have its
    work cut out to develop a fair and accurate comparison between
    internal and external vendors.

  • Posted 11 years and 9 months ago

    This case describes a situation which, in one form or
    another, is familiar to many purchasing managers. The engineer
    most likely to be involved would be the person who would head
    the internal tool and die department. In the past there was no
    possibility of T&D Manufacturing competing with outside
    vendors in meeting its tool supply needs. The company
    maintained only a tool maintenance unit rather than a
    manufacturing unit. We do not know why T&D Manufacturing
    changed company practice to authorize the tool and die
    department to go into supply as well. Possibly the company
    thought there could be a saving on the cost of tools or in
    maintenance costs. Perhaps the head of the tool and die
    department is a very ambitious person who wants to build up
    that part of the company and was successful in getting upper
    management to go along.

    Different practices exist among companies regarding the
    treatment of in-house suppliers of goods or services. In some
    cases, for instance, a company may see its own in-house
    supplier as being the supplier of first choice, and only if
    that supplier cannot take care of the need or can take care of
    the need only at a cost exceeding the open market would a call
    for outside bids go forth. In some cases heads of other
    departments in the company might be able to get an estimate
    from the in-house supply unit before checking informally on the
    price range for external supply. In the case before us, T&D
    Manufacturing seems to have kept a rather formal approach to
    the matter of tooling supply. Specifications are sent to at
    least three approved outside vendors, and confidential bids are
    received by the purchasing department. We are led to think that
    the in-house supply unit operates by these same rules, so it
    would use its own set of specifications and submit a price.
    Such an arrangement puts the in-house tool and die department
    in direct competition with the outside vendors. For the
    purchasing department to forward to the tool and die department
    the outside quotes and allow it a week to produce its own price
    and delivery date would certainly give the in-house supplier a
    competitive edge. The outside vendors justifiably would
    conclude that the competition is not fair. Outside vendors
    would be understandably reluctant to offer bids in the future
    on similar tooling requests if they thought it unlikely that
    their bids would have a fair chance. As a result, T&D
    Manufacturing may lose the services of some outside vendors who
    otherwise would do a quality job. There might also be legal

    Let us suppose the purchasing department head tells the
    internal tool and die department head that he cannot give him
    the outside quotes before receiving his own internal bid but
    that he will let him know the outside quotes after the job is
    awarded. If T&D Manufacturing were a public institution,
    such as a university, legally required to maintain publicly
    accessible records for its financial dealings, all bids would
    eventually become public and accessible not only to a unit
    within the institution but also to the outside vendors. In the
    case of a private organization, which would include a private
    university, it is a matter of policy whether to release
    information on the unsuccessful bidders. Perhaps the company
    policy would permit the purchasing head to inform the tool and
    die supply department head after the contract has been awarded.
    Perhaps it would be more limiting. In any event, the company
    policy should be communicated to the outside vendors so that,
    in making their bids, they know what will happen to the quotes
    after a contract decision is made. Bidders on jobs at public
    institutions know that their quotes are going to be publicly
    accessible. What happens to this information may affect their
    decisions to submit a price quotation.

    Two additional comments are in order having to do with the
    topic of marketplace competition. First, consider the tool and
    die department head's reactions in being denied information
    about the quotes by the vendors. He claims that failing to give
    him the quotes would be putting the company in competition with
    itself. This is a questionable interpretation of the situation.
    If the company were not from the beginning convinced that
    better quality at a lower price could be obtained through
    competition among vendors, its policy of asking for bids from
    various vendors would not seem to be justified at all. It is
    doing the company no harm if it obtains a part from an outside
    vendor at a lesser cost than it could produce the part itself.
    If there is a net saving, it is a new saving that benefits the
    company as a whole. At the same time, however, it is not the
    case that every unit in a company has precisely the same goals
    and objectives. For instance, the production unit in a
    manufacturing company may regard its objective to be maximizing
    its productive capability, whereas a warehousing and
    distribution unit may see its job as moving goods into the
    market as rapidly as possible without excessive use of
    warehouse space. A market downturn is likely to result in an
    inventory backup with lessened distribution. It would then be
    counterproductive for production to strive for maximum levels.
    The overall interests and objectives of the company, therefore,
    require that production slow down for a period. In a similar
    way it may not be beneficial for a company always to give its
    own supply unit the advantage in competition with outside

    The second point concerns a much larger question of values.
    It is the question of whether marketplace competition is always
    beneficial. While this question can be raised in a number of
    contexts, within the last couple of decades it has come up with
    regard to certain professions in the United States.
    Traditionally, physicians, lawyers, engineers, and architects
    have been opposed to the public advertising of prices for their
    services or being involved in competitive bidding for their
    services. Many felt that the practice reduced professional
    activity to crass materialism. Some claimed that the decision
    to employ a professional ought to be made more on the
    professional's record of quality than on considerations of
    price. Earlier versions of the professional codes for the
    American Institute of Architects, the National Society of
    Professional Engineers, and the American Society of Civil
    Engineers contained sections which prohibited persons in those
    professions from engaging in competitive bidding for
    professional services. The United States Department of Justice
    charged these societies with being in violation of the Sherman
    Antitrust Act's prohibition against unreasonable restraint of
    trade insofar as they had forbidden their members to engage in
    competitive bidding. The ASCE and AIA both signed consent
    decrees whereby they changed their policies and professional
    codes to permit the possibility of members engaging in
    competitive bidding. The National Society of Professional
    Engineers, however, fought the matter through the courts.
    Finally, in 1978, the Supreme Court of the United States issued
    its decision against the NSPE and ordered the Society to revise
    its professional code, manuals, and other literature which had
    forbidden or discouraged competitive bidding. The NSPE had
    argued before the Court that there are some situations in which
    competition is not for the public good and had claimed that
    engineering design was one of these situations. Among other
    things, the NSPE argued that to put design services on a
    competitive basis would give an impetus toward mediocrity and
    toward lessened ingenuity and creativity in design work. A firm
    could more cheaply do design work if it used stock approaches
    to situations and problems rather than if it attempted to
    address its clients' needs in more creative and possibly
    beneficial ways. The Supreme Court did not reject this argument
    per se; however, the Court considered it irrelevant to the
    decision in the case. According to the Supreme Court, Congress,
    in passing the Sherman Antitrust Act in 1890 and in subsequent
    legislation, had already decided that a policy of open
    competition in the marketplace was the beneficial policy for
    the country. In the Court's view, as long as Congress did not
    overstep its constitutional bounds, the Court had no authority
    to challenge Congress' conclusion on this matter.

  • Posted 11 years and 9 months ago

    The first issue in this case is one of fairness. The
    internal tool and die department at T&D Manufacturing has
    asked for information about the outside bids before their own
    quote is submitted. This gives them an obvious advantage over
    the other vendors. There can be little serious question that
    this practice would be unfair to the outside vendors. This
    practice must be kept secret, or many of the other vendors will
    probably not bid on the project.

    The question is whether this unfairness and deception is
    justified by the loyalty which Purchasing might be expected to
    show to the "home team." Thus the fundamental moral issue is a
    conflict between the obligations of fairness and truthfulness
    on the one hand and loyalty to one's own company on the other.
    There is no question but that both obligations have validity.
    The question is what should be done when they conflict.

    Sometimes the appeal to loyalty is justified. The appeal to
    loyalty is often understood as justifying an obligation to
    something (call it X) simply because it is our X. Now we do
    have special obligations to our parents or our children because
    they are our parents or our children. But there are limits to
    the appeal to loyalty. While the appeal to loyalty may justify
    providing for our child's college education rather than our
    neighbor's child's education, simply because he is our child,
    it would not justify helping our child to cheat on tests,
    simply because he is our child.

    One way to see the limits of the appeal to loyalty is to
    consider the implications of the principle of universalization,
    which holds that a to be morally permissible, an action must be
    one capable of being performed by everyone. One of the versions
    of this principle is the Golden Rule. We can ask whether we
    would be willing for the internal tool and die department to
    give our bid to Purchasing if we were one of the vendors. Using
    still another version of the principle of universalization, we
    could ask whether it would benefit people generally if
    supposedly secret bids were revealed to inside bidders. For
    example, would such a practice promote the tendency of the
    capitalist system to provide the best goods at the cheapest
    price? It is obvious that it would be difficult to justify the
    violation of the canons of fairness and truthfulness by either
    version of the principle of universalization.

    The conflict of obligation in this case could be dealt with
    by modifying one or both of the obligations by means of a
    compromise. For example, the inside tool and die department
    could be allowed to compete on the same basis as outside
    vendors. This would partially satisfy the demands of the
    internal department without being unfair to outside vendors.
    Or, the inside tool and die department could be informed of the
    amount of the outside bids, and the outside vendors could be
    told about the practice.

  • Posted 11 years and 9 months ago

    Is there in general anything ethically unfair about an
    internal unit of a company receiving information from other
    units of the same company, which information is not made
    available to outsiders? Put in this general form, surely our
    answer has to be no. A business, and particularly a private
    business with no legal public disclosure requirements, is free
    to organize itself internally and move information around in
    any (legal) way it sees fit. Equally, it can relate externally
    to people or other businesses in any legally sanctioned

    Secrecy in business is valuable, in that it is a prime
    factor in achieving a competitive edge in a company's dealings
    with others, and hence in improving the overall competitive
    health of an economy. But most kinds of 'external' secrecy
    would be a severe handicap to companies if they had to be
    practiced internally, and so would work against the interests
    of a capitalist society. Thus any ethical theory which
    generally supports capitalism is unlikely to defend internal
    secrecy requirements, whether in the name of fairness or for
    other reasons. If there were exceptions, they would have to be
    individually argued for.

    So in the present case, the burden of proof is on those who
    would claim that there is something ethically unfair about an
    internal unit receiving information (about competitive bids)
    not available to outsiders.

    Here's a more specific reason for thinking that internal
    sharing of information is morally legitimate in the present
    case. Suppose the situation were somewhat different at T&D
    Manufacturing, as follows. T&D has been internally
    producing the tools in question, with no outside help, but now
    would like to check whether it would be cheaper to 'outsource'
    the production, i.e., get external companies to produce the
    tools. So they request competitive bids from outsiders. In this
    case, the internal T&D tool and die department is central
    to current production and centrally involved in the new
    inquiries about relative costs for outsourcing, so it would be
    ridiculous to suggest that they should not be fully informed
    about the external bids received.

    This example suggests that the initial case seemed unfair
    because the internal department was not initially involved.
    Thus it might have appeared to belong in a group with the
    external companies which are also not directly involved in
    business decisions of T&D. However, as the example shows,
    the involvement or non-involvement of any internal unit can
    easily be changed by circumstance or company policy. Since
    these matters are so variable, they cannot justify
    situation-independent judgements about the unfairness of the
    relevant kind of information-sharing.

    If we accept that ethics does not require internal business
    secrecy, there might nevertheless be sound business reasons for
    restricting internal information-sharing in some cases. For
    example, it might be that as a matter of fact the most accurate
    method of estimating actual costs of production involves
    restriction of information about the costs of competitors. If
    so, business self-interest rather than ethics would dictate a
    'sealed bid' approach.

    Another example is provided in the case itself. If outside
    vendors are unhappy with a bidding situation in which an
    internal unit has an advantage, and if this affects their
    willingness to bid, then again prudent T&D officials might
    consider internal restriction of information so as to keep
    their suppliers happy. But here again it is the interests of
    their own company, rather than ethics, which is at work in
    their thinking.

  • Posted 11 years and 9 months ago

    [Michael Davis has modified the case somewhat in order to
    make it more a problem of engineering ethics than of business
    or purchasing ethics.]

    You have been put on the spot. You are an engineer in
    Purchasing. The head of your in-house shop has called to ask
    the prices obtained from outside suppliers bidding on a certain
    job. He wants those prices to help him prepare his own bid on
    the same job. What should you do?

    Such requests are likely to occur when a company begins to
    make its "inside supplier" more efficient by forcing it to
    compete with outside suppliers by making them compete with an
    insider. Unless a company has been careful to make clear to
    everyone involved what the point of the new practice is and how
    it is supposed to work, certain misunderstandings are
    inevitable. Insiders, for example, are likely to assume that
    they have an "inside track". Outsiders are likely to worry
    about that too.

    Generally, competition between inside and outside suppliers
    will benefit the company only if the competition is fair. If
    the insider has an inside track, outsiders will not take the
    trouble to bid. Preparing a bid costs money. Would-be suppliers
    are not likely to spend their money on preparing a bid unless
    they have a good chance of getting the contract. Once it is
    clear that inside suppliers have the inside track, an outside
    supplier has only two options, to charge for preparing its bid
    or to decline to bid. The company will then have to pay the
    cost of the outside bid or see the outside competition
    disappear. Doing a favor for the shop head has a large hidden

    The head of the shop probably did not think of things this
    way. He probably thought of the situation as "us against them",
    where "us" is the company and "them" is the outsiders. It is
    "us" against "them". But "us" is only his shop. The rest of the
    company is the umpire. The old friendships, the hello in the
    hall, the same centrex, none of that matters anymore. You and
    the shop are no longer on the same team. The company has ceased
    to exist as a competitive unit. While every part has the same
    objective in one respect, maximizing return on investment for
    the owners, each part has a different objective in another.
    Each seeks to maximize return on what has been invested in it,
    whatever the effect on other parts of the company. The owners
    are supposed to benefit overall, even if some parts of the
    company suffer as a result. This is a coherent strategy.
    Whether it will work in a particular company is, of course,
    another matter.

    What then should you do? Probably the best thing would be to
    suggest a meeting of appropriate department heads to discuss
    bidding procedures. That would get you off the hook for now. It
    would allow the issue to be aired in a relatively friendly
    environment. And it would probably help everyone to understand
    better what the rules really are (or should be).

    One should certainly not begin with the assumption that the
    shop head is trying to obtain an unfair advantage. If, however,
    he declines to discuss his request with other department heads,
    you will have reason to believe that he knows he is doing
    something shady. You can then tell him to put his request in
    writing and you'll clear it with your boss. That should be the
    last you hear of it. You should probably also mention the
    incident to your superior, accompanying it with the suggestion
    that there may be a need for further training in Purchasing and
    elsewhere on the new relationship between department.

  • Posted 11 years and 9 months ago

    A modern corporation, particularly one with several
    manufacturing divisions and internal capabilities to produce
    parts and tools it needs to manufacture a finished product, is
    a very complex organization. A major corporation can literally
    be thought of as a series of individual companies bound
    together by the management of the corporation. It is healthy in
    such an organization for internal competition to occur in
    bidding to make tools, parts, dies, etc. for other portions of
    the company. In such competitive bidding, honest quotes can
    only be obtained if internal departments/divisions are treated
    exactly the same as outside sources also asked to quote.

    In Part I of this case, Purchasing should refuse to disclose
    outside quotes to the internal tool and die department.
    Disclosure of outside quotes violates the relationship a
    purchasing department should have with outside vendors and will
    give the internal tool and die department an unfair advantage.
    It will be impossible to get a fair and impartial quote from
    the internal tool and die department if they are provided the
    quotes from outside vendors. A truly competitive situation will
    provide the best situation for the company as a whole.

    In Part II, the outside vendors have a justifiable complaint
    when they discover they are competing with an internal tool and
    die department that has full access to their quotes. With this
    kind of information available the internal department will
    undoubtedly deliver a quote low enough to win the job but this
    in no way assures they will produce the best quality tools and
    dies for the price. An honestly derived bid from the internal
    tool and die department is actually a very good check on the
    accuracy and validity of bids acquired externally.

    In Part III, the tool and die department head has a definite
    misconception when he pleads that the "company should not
    compete with itself." Internal competition goes on in many
    major corporations and helps assure that they work effectively
    and efficiently to produce the best product at the best price.
    If the tool and die department has the goals and objectives of
    T&D in mind they will want tools and dies produced by the
    organization that will do it best, considering quality and
    price, whether than organization is outside the company or
    internal to the company.

    An internal department, propped by access to privileged
    information, can actually prove a detriment by "rigging" quotes
    to get internal business it would not get otherwise. Frequently
    the internal department will overrun the cost of producing the
    item on which it has bid and the overrun reduces company profit
    in final accounting.

Cite this page: "Conflicts within a Manufacturing Firm" Online Ethics Center for Engineering 6/15/1992 OEC Accessed: Wednesday, May 23, 2018 <>