Supplier Relationships and the Trade Secrets Dilemma

BACKGROUND In recent years, the trend for purchasing to establish partnering arrangements that encourage close ties between purchasers and suppliers has taken some industries by storm. The partnering concept, while replete with benefits for purchaser and supplier alike, does raise a new issue which arises from the "open and sharing" arrangements inherent in the concept. One of these issues concerns the security for "trade secrets." Trade secrets are proprietary information about products, processes, research, and customer information that is not general knowledge, from which the owner derives an economic benefit. The trade-secrets issue stems from the fact that in a partnering relationship, suppliers receive more exposure to the internal operations of the purchasing firm, have improved access to the firm's processes, and generally have an increased level of intimacy with personnel in the purchasing organization. In some cases, purchasing firms provide in-house office space to representatives of selected suppliers.[1] As a result, purchasing managers are finding that they are "gatekeepers" of valuable information which flows to and through the purchasing department. It is the need to adequately protect this flow of information that presents a significant risk to the security of proprietary information and, in some cases, the competitive advantage of the firm. For example, General Motors' continuing effort to prosecute its former director of purchasing for allegedly disclosing valuable trade secrets to his current employer emphasizes the increasingly strategic role purchasing managers play in the success of many firms.[2] Purchasing professionals out of necessity have both access and insight into processes, products, and other vital information that may be construed as trade secrets. It is this valuable, secret information to which purchasing managers are privy that often means the difference between success and failure in a particular market. Purchasing managers are exposed to secret information in a variety of ways. Knowledge of the purchased materials going into a product or process gives purchasing managers insights into secret processes and materials content that are not available to the casual or even the determined observer who lacks the knowledge of the purchasing department. Perhaps as a sign of the times, there is another, more onerous path through which trade secrets may be leaked, divulged, or otherwise misappropriated. That path is through malicious misappropriation of proprietary information divulged in purchasing contracts and technology-exchange agreements with suppliers. The Japanese practice of keiretsu, ingrained in the TQM philosophy, encourages close ties between manufacturers and suppliers.[3] From a practical point of view, firms are thus encouraged to minimize the number of suppliers used for a given product or service. In practice, the reliance on only one supplier for a particular item is gaining popularity, since the benefits of such a "partnering" arrangement often outweigh the disadvantages. The ability to leverage financial resources and improvements to just-in-time production systems are seen as major benefits of effective partnering relationships.[4] Other benefits that may result from partnering relate to cost savings that can arise through product design improvements, productivity improvements, reduction of inventory levels, and the reduction of repetitious, time-consuming bidding procedures.[5] For example, improvements in Xerox's cycle time and in its overall performance have been reported as a result of its concurrent engineering/early supplier involvement program that is ingrained in its partnering philosophy.[6] In general, partnering offers and often delivers an improved, symbiotic relationship between the purchaser and the supplier. Still, inherent in such arrangements is the necessity for exchanging information that may be considered secret by one or both of the parties to the agreement. …