A Real Option based Six Sigma project evaluation and selection model

International Journal of Project Management, Volume 29, Issue 8, December 2011, Pages 1091-1102

A Real Option based Six Sigma project evaluation and selection model

R.K. Padhy (a), S. Sahu (a)

rkpadhy@iem.iitkgp.ernet.in

sahus@mech.iitkgp.ernet.in

a Department of Industrial Engineering and Management, Indian Institute of Technology, Kharagpur-721302, India

Abstract

Identification and selection of Six Sigma projects are one of the most frequently discussed issues in the Six Sigma literature.

Authors propose a two-stage methodology based on (i) Real Option Analysis for evaluating the value of the project to improve the managerial flexibility (ii) a zero–one integer linear programming model for selecting and scheduling an optimal project portfolio, based on the organization's objectives and constraints.

The methodology is illustrated with a case study from the petrochemical industry carried out during 2007. The study identifies a new way of valuing Six Sigma projects through Real Option Analysis by considering various kinds of risks. Resource-constrained environment is chosen to test the proposed approach of selection of project portfolio and the model is validated with a detailed discussion.

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