A Real Option based Six Sigma project evaluation and selection model

Identification and selection of Six Sigma projects are one of the most frequently discussed issues in the Six Sigma literatures today. In this paper a two-stage methodology has been proposed 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 through a case study from petrochemical industry carried out during 2007. The study contributes to managerial practices by identifying a new way of valuing the Six Sigma projects through Real Option Analysis by considering various kinds of risks. Resource-constrained environment has been chosen to test the proposed approach of selection of project portfolio and the model is validated with a detailed discussion.

Research Highlights► We model the evaluation and selection of Six Sigma projects in a petrochemical industries which is implementing Six Sigma. ► We examine the effect of values and scheduling of the Six Sigma projects in light of risks and resources associated with implementation. ► Evaluation of Six Sigma projects based on real options provides flexibility in decision making. ► Portfolio approach of selection improves the value and minimises the risk of overall six sigma program.