To get optimal Lean Six Sigma (LSS-Project) project results, an organization must be able to ensure that the selected theme project is by the needs of the organization, the project is run by a team with adequate abilities and competencies, and is supported by the right tools.
Organizational goals for carrying out improvement projects are very diverse, as well as in the selection of tools. However, all the projects undertaken have the same goal, namely the project’s success.
So what must be done to make our project successful? First is that we must understand the variable factors that are critical to the successful implementation of the project.
In a six sigma lean improvement initiative (LSS-Project), these factors are known as “success factors”, which are very important to identify before starting a project. Following are the 4 critical success factors in the implementation of LSS projects (known as 4-Right):
- Right Project
- Right Team
- Right Tools
- Right Result
The four factors above have an equally important role; we will show how they can be the determinant of the fate of your project, one by one in particular. We will start with the first determining factor, namely the right project.
What is Project Selection
Project Selection is a process for selecting projects where the priority of each project idea will be assessed from various perspectives.
The project is limited to suggestions and ideas to fix problems or improve performance at this stage.
This process will also filter quality projects, namely projects that can have a big impact, a high level of success, and use efforts that are still within reach of the Organization. The action, in this case, is time and cost.
When we have many interesting and challenging projects, it is not certain that all of these projects are important and a priority for the company.
This is where project selection is needed to help project leaders increase their confidence in deciding on a project so that it is right for execution.
1. Benefits Measurement Methods
Benefit Measurement is a crucial aspect of project selection, as it helps organizations to evaluate the potential return on investment of a project.
The technique is based on the present value of estimated cash inflows and outflows, which are calculated and compared to other projects to make a decision. The methods used in Benefit Measurement include:
- Cost-Benefit Analysis: This method compares the costs and benefits of a project over a specific period of time, and calculates the net benefit or net present value.
- Return on Investment (ROI): This method measures the return on investment by calculating the ratio of net benefit to investment.
- Internal Rate of Return (IRR): This method calculates the rate at which the net present value of a project’s cash flows is equal to zero.
- Benefit-Cost Ratio (BCR): This method compares the ratio of benefits to costs and is used to evaluate the economic viability of a project.
Each of these methods has its own advantages and limitations, and organizations should choose the method that best suits their specific needs and goals.
Through the use of these benefit measurement techniques, organizations can make informed decisions about which projects to pursue and which to avoid, ultimately leading to greater project success and overall business success.
2. Benefits/Cost Ratio
The Benefit-Cost Ratio (BCR) is a method of evaluating the economic viability of a project by comparing the ratio of benefits to costs.
The BCR is calculated by dividing the present value of the benefits of a project by the present value of the costs. Projects with a higher BCR are considered more attractive, as they offer a greater return on investment.
This method is particularly useful for projects that have a clear quantifiable benefit and cost, it can be used to compare different projects and make a decision about which one to pursue.
It’s a simple, easy to use method, and it can also be used to compare different project scenarios, such as different costs or benefits that may occur.
3. Economic Model
EVA, or Economic Value Added, is a performance metric that measures the value creation of an organization by calculating the return on capital. It is calculated by subtracting the cost of capital from the net profit, after accounting for taxes and capital expenditures.
When a project manager is faced with multiple projects to choose from, the project with the highest Economic Value Added is typically selected.
The EVA is expressed in monetary terms, rather than as a percentage, making it easy to compare the potential value of different projects.
This method is particularly useful for organizations that focus on maximizing shareholder value, as it helps to identify projects that are likely to generate the highest return on investment.
4. Scoring Project In Project Management
The scoring model in project management is a systematic and objective technique for selecting a project.
It involves creating a list of relevant criteria that are used to evaluate potential projects, and then assigning weights to each criterion based on its relative importance and priority.
These weights are then used to calculate a score for each project, and the project with the highest score is chosen for implementation.
This method is effective in ensuring that all relevant factors are considered in the project selection process, and allows for a fair and unbiased comparison of different projects.
It also allows for easy tracking of project progress and success by comparing actual results against the initial scoring model.
5. Scoring Model
The scoring model in project management is a systematic and objective technique for selecting a project.
It involves creating a list of relevant criteria that are used to evaluate potential projects, and then assigning weights to each criterion based on its relative importance and priority.
These weights are then used to calculate a score for each project, and the project with the highest score is chosen for implementation.
This method is effective in ensuring that all relevant factors are considered in the project selection process, and allows for a fair and unbiased comparison of different projects.
It also allows for easy tracking of project progress and success by comparing actual results against the initial scoring model.
6. Payback Period
The Payback Period is a method of evaluating the feasibility of a project by determining the amount of time it takes for the returns on an investment to recoup the initial cost.
It is calculated by dividing the total cash flow by the average per period cash flow. This method is commonly used for project selection as it is simple to calculate and understand.
When using the Payback Period method, projects with the shortest payback period are usually preferred as the organization can recoup the original investment faster.
However, it has some limitations such as it does not take into account the time value of money, it only focuses on liquidity and not profitability, and it doesn’t consider risks involved in the project.
7. Net Present Value
Net Present Value (NPV) is a financial metric used to evaluate the profitability of a project by comparing the present value of cash inflow to the present value of cash outflow.
It is calculated by subtracting the present value of cash outflow from the present value of cash inflow. When selecting a project, the one with the highest NPV is generally preferred.
NPV is considered an advantage over Payback Period method as it takes into account the future value of money.
However, it also has some limitations such as the lack of a widely accepted method for determining the discount rate used in the present value calculation, and it does not provide an overall picture of the profit or loss that an organization can expect from a particular project.
To learn more about NPV and how to use it as a tool for filtering projects, you can read more about calculating opportunity costs for projects.