Using the Six Sigma DMAIC Method to Improve Procurement: A Case Study

When a management reserve occurs due to a design change in a company's outsourcing project, the additional cost is customarily only 2% to 10% of the original contract amount. If the management reserve exceeds the original contract amount by 20% to 50%, it reveals the imprudence of running the outsourcing project. Based on the company's policy requirements, an outsourcing project must finish the tender process by following the timeline of every work stage determined by the characteristics and environment of the project. This research studied the factors causing management reserve in an outsourcing project of the case company using the Six Sigma define, measure, analyze, improve, and control (DMAIC) method. The root cause was the lack of defining the specific responsibility in charge of unit, leading to insufficient communication between demand and executive departments as well as between project engineering and procurement departments in the preceding process. The preceding process must have a specific management procedure by redefining each unit's responsibility to avoid frequent design changes later. In addition, the procurement department estimated the reserve prices by analyzing the supplier's quotes using quantitative cost analysis. In the ultimate efficiency evaluation, this study verified that the improved procurement cases dramatically reduced circumstances of design change and management reserve and met the case company's due date.

Automated summary

This study examines the factors causing management reserve in an outsourcing project and proposes solutions using the Six Sigma method. The root cause is the lack of clearly defined responsibility units, leading to insufficient communication and the need for improvement in the procurement department.