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What to Do About a Defective Product? Ethical Issues

Workplace Ethics Advice

I was recently contacted by a production manager with an ethical dilemma. She had just inspected a production run that was scheduled to ship out in two days. Much to her dismay, she found a defect in the internal operating systems of one batch of product (10% of the run). She didn’t know whether the problem existed with all batches. She reported her findings to the vice president of production. The VP met with the CFO and they decided the company could not delay shipment on the 90% until after the 9/30/2018 quarter because they would miss revenue projections for that quarter and year-to-year. They would withhold the 10% and rework it for shipment next quarter. She asked for my advice. I told her to consider the following.

Transaction-Related Financial Issues

  • Does the contract with the customer require 100% inspection before the product is shipped?
  • How will the company handle estimated sales returns if it records the revenue before the quarter-ended 9/30/2018?
  • Is the company driven by the desire to manage earnings rather than report revenues and earnings accurately and in accord with generally accepted accounting principles?
  • Is the company motivated by meeting or exceeding financial analysts’ projections?

Organizational Ethics Issues

  • Has the company done something similar before? If so, how did you handle it?
  • What is the company’s reputation for trustworthiness: in general, with this customer?
  • Does the company have a code of ethics? If so, how does it address what should be done when employees have questions about business transactions?
  • Does the company have an anonymous hotline where you can raise your concerns without fear of retaliation?
  • Do you believe the CEO approved the recording of revenue in the 9/30/2018 quarter?
  • Does the company have an independent board of directors?

Ethical Values at Stake  

  • Honesty requires that the customer be provided with full disclosure about the condition of the product. Omitting that information is a lie by omission and dishonest.
  • Trust is an issue in that the customer expects the company to abide by the agreement; expects it to be truthful about the condition of the product; and expects it to act in its best interests.
  • The company is a stakeholder because its reputation is on the line. It needs to act in a responsible manner.
  • If the customers discover the product wasn’t full inspected, they could bring a lawsuit against the company.

Alternatives

  • Do nothing. Just go with the flow. Be a ‘team player.’
  • Bring your concerns to higher-ups in the company -- i.e., CEO and/or board of directors
  • Seek out advice from a trusted adviser. Perhaps there is someone in the organization to provide an objective view – anonymous hotline, for example. Defect

Do nothing. The consequences of ignoring the defect and not inspecting the 90% could be severe if the customer takes legal action against the company. There can be legal costs and penalties imposed against the company. The company might forfeit revenue on the shipment. Reworking the 10% of the product at a later date might raise suspicions for the customer. Ignoring the problem doesn’t make it go away.

Bring your concerns to higher-ups. Going over the head of your supervisor to the CEO is risky. You may be retaliated against (i.e., demoted; reduction in pay; fired). However, a principled person would have the moral courage to act out of conviction that 100% of the product should be inspected. The (ethical) benefit of going over the head of your supervisor is you take an ethical stand; go on record as wanting to do the right thing. You might even suggest a possible solution, such as for the company to contact the customer and explain that the product needs to be 100% inspected and there will be a small delay in shipment. The customer might value that explanation as acting in its best interests. Perhaps part of the product can be inspected and those batches without any defects shipped by year-end. The only downside/cost of this alternative is not getting to record the full revenue by year-end. This is shortsighted because recording revenue this year that may have to be backed out next year because products with defects are returned simply shifts revenue between the years while creating uncertainties.

Seeking Advice

Seeking out advice is always a good idea. You may have not fully thought out the possible implications of taking one action versus another. Using the company hotline, if one exists, shows you’re willing to work within the system.

Decide on a Course of Action

Ethical behavior requires that you express your concerns to higher-ups in the organization. You want to go on record as being against the proposed shipment. Thus, it can’t come back to bite you later if it is determined that part/all of the 90% shipped also had defects. You did what you could to correct the matter. You had the best intentions in discussing the matter within the organization. You are the production manager and may have the most to lose if defects exist in the shipped product.

Final Words

While it is true there may be retaliation, it’s most important to stand up for what you believe and have the moral courage to do what is right regardless of the consequences. As a final test of your proposed solution, you might ask: Is this a company I want to work for; one that doesn’t value my opinion as the production manager? How would you feel if everyone in the organization and/or the community finds out about how you dealt with the situation? Would you feel secure in your decision?  How would you feel if a member of your family knew what you were about to do? Would you be proud to defend it?

In the end, the production manager was able to reach an agreement to inspect 60% of the product before the 9/30/2018 deadline by paying employees overtime to do so. There were some minor defects but at least they learned it wasn’t with 100% of the shipment. So, they were able to legitimately record 60% of the revenues while delaying the remaining 40% until the 12/31/2018 quarter.

If you have workplace ethics questions you’d like to ask, submit it through the online system or email me at: steve@ethicssage.com. All such questions are kept confidential.

Blog posted by Steven Mintz, aka Ethics Sage, on November 1, 2018. Visit Steve’s website and sign up for his newsletter. Follow him on Facebook and “Like” his page.

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