April 24, 2023 | Procurement Strategy
Resolving conflicts in an amicable manner is a vital aspect of business operations. Functions that have mechanisms in place to deal effectively with conflicts are more efficient than others.
And when a business function has to regularly work with external stakeholders such as suppliers, there is a high possibility of conflict. These conflicts can impact the functioning of not just procurement but also other internal teams.
Also, if conflicts remain unaddressed or unresolved, they can flare up.
Like other business functions, procurement also needs a mechanism to resolve conflicts amicably. Negotiation and mediation are two strategies commonly used in procurement to settle conflicts.
In negotiation, the two parties at conflict try to reach a mutually beneficial arrangement by way of a compromise and bargain. The nature of this discussion is such that communication between the two parties often goes back and forth until they reach an agreement. Not surprisingly, procurement professionals are extremely skilled at persuasion, bargaining and discussions.
Once a vendor is shortlisted, procurement engages in negotiation before signing a contract. The objective here is to clearly state expectations while avoiding any rework or correction to the contract. Procurement can also undertake fresh negotiation at the time of renewing a contract with an existing supplier.
While price is a key discussion, there can be many other parameters. In fact, multiple terms and conditions can be discussed during a supplier negotiation. These can include price, payment terms, delivery schedules, quality standards, etc.
To succeed at negotiation, procurement teams must have a clear plan. They must understand how to secure favorable terms and conditions. They must also be familiar with the larger business priorities. This is important because it will help procurement align the discussion with business priorities.
For example, the business may be willing to pay a higher price for better quality raw material. In this case, procurement will focus more on quality standards during negotiation.
Mediation is used when the two parties continue to be in conflict after initial discussions. For example, the parties may have a dispute regarding the terms and conditions of the contract.
Unlike negotiation, mediation involves a third-party’s intervention. An independent third party, which is called a mediator, is invited to facilitate discussions and oversee dispute resolution.
The mediator meets the two conflicting parties jointly as well as separately to understand their key concerns and underlying interests. It then proposes a solution considering the best interests of both parties. However, there may be a deadlock if the proposed solution is not agreed by both parties. In such a case, the mediator may again have separate discussions and propose an alternative solution.
The choice of a mediator can also be vital. While it may be tempting for a business to choose an internal team for mediation, it’s best to opt for an independent third party. An external mediator can bring an objective perspective to the dispute. Additionally, they are likely to have more experience in mediation and conflict resolution. Further, as an external mediator is not biased toward any of the two parties, there is a high possibility of a resolution.
Under normal circumstances, procurement is not likely to use the mediation strategy. Instead of involving a third party, procurement may choose to initiate fresh talks with the supplier and re-engage in negotiations. Also, mediation can be time-consuming and costly.
Negotiation is a preferred strategy and used more frequently. Procurement professionals have to negotiate with suppliers often and are skilled at handling these discussions.
However, if all attempts at direct talks fail, they may ask a third party to mediate and settle disputes.