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Aalto University, Department of Industrial Engineering and Management, Otaniementie 17, 02150 Espoo, Finland
IE Business School, Calle de Mara de Molina 12-5, 28006 Madrid, Spain
a r t i c l e i n f o
a b s t r a c t
Article history:
Received 9 September 2008
Accepted 20 August 2011
Available online 26 August 2011
The ability to produce goods according to customers specications may be an important competitive
advantage, but it exposes manufacturers to the risk of customers requesting changes in their
specications during the fulllment of their orders. Manufacturers often accept these change orders
in the name of customer service despite the fact that they incur additional costs. This study uses
empirical data and activity-based costing to explore the real values and the accrual mechanisms of
change orders costs. The results show that the total costs are considerable, but the analyses also reveal
opportunities for cost savings through the categorization of change orders, time fencing techniques, and
improvements in information processing.
& 2011 Elsevier B.V. All rights reserved.
Keywords:
Customization
Uncertainty
Activity-based costing
1. Introduction
Responsiveness to customers varying requirements has become
a crucial source of competitive advantage for many modern
manufacturing companies (Fisher, 1997; Wong et al., 2006). Due
to increased demand for customized products, manufacturers have
developed tools and practices to accommodate customers unique
requirements into their product offerings (Forza and Salvador,
2002). While this kind of responsiveness enables manufacturers
to charge premium prices, it also exposes them to new kinds of
uncertainties. A particularly difcult challenge is coping with
customers who request changes in specications during the
fulllment of their orders (Partanen and Haapasalo, 2004). Such
requests are understandable because customer requirements may
vary over time, and there is always some lead time in which
changes can occur when products are made or assembled to order.
The question of whether to accept mid-process changes in order
specications poses a dilemma for many make-to-order (MTO)
manufacturers. Most companies consider it to be an important part
of their customer service and a natural extension of their pursuit of
responsiveness (Danese and Romano, 2004). However, change
orders are known to incur costs that are very hard to estimate in
advance, and in most cases, it is difcult to charge the customers
for these costs (Riley et al., 2005). Although this dilemma has been
acknowledged in the literature, to the best of our knowledge, none
n
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2. Literature review
2.1. Responsiveness as an ability to adopt change orders
The concept of responsiveness has a number of different meanings in the literature of manufacturing management. In addition
to the capability of satisfying varying customer requirements
(Fisher, 1997; Wong et al., 2006), the concept has also been
dened as the speed of fullling customized orders (McCutcheon
et al., 1994; Salvador and Forza, 2004). It has also been viewed in
more general terms as the overall capability to seize business
opportunities (Kritchanchai and MacCarthy, 1999) and has been
discussed in more specic terms as the ability to swiftly conrm
the specications and delivery dates of customers orders
(Pibernik, 2005). Yet another stream of research has focused on
dening the different constituents of responsiveness (Holweg,
2005; Reichhart and Holweg, 2007). While all of the varying
perspectives have their merits, in this study, responsiveness will
be considered as the capability to satisfy wide-ranging and
frequently changing customer requirements. The acid test of that
kind of responsiveness is the ability to adopt customers change
requests that occur after the initial entry of their orders.
2.2. Importance of adopting change orders
Most MTO manufacturers consider change orders to be an
inherent part of their business. Manufacturers typically sympathize with the fact that the conditions in customers own
environments may change during the time that is needed to
fulll the orders (Danese and Romano, 2004). This is especially
the case in the manufacturing of capital goods. For example, in
the production of construction materials, the turbulent conditions
of construction sites translate to frequent changes in customers
plans and schedules (OBrien, 1997). Such changes often necessitate modications to the technical specications and the delivery
dates of the manufacturers products (Vrijhoef and Koskela, 2000).
The difculty in preventing change orders from occurring
arises from the fact that it is often hard to determine whether
the changes result from customers behavior or from the manufacturer itself. Manufacturers usually acknowledge the difculty
of eliciting customers real needs at the time of the initial order
entry (Huffman and Kahn, 1998). Miscommunications or mistakes
occurring at that point may result in a need for modication at
some later phase in the order fulllment process (Hegde et al.,
2005). It is normally preferable to execute such modications
than to deliver products that are not suitable for the customers
intended use. Furthermore, many of the customer-originated
changes are quite similar to the ordinary engineering change
orders, which the manufacturers face anyway (Tavcar and
Duhovnik, 2005).
One particularly good motivation to accept change orders is
given in a study by Hendricks and Singhal (2003). Its results show
that if disagreements about the contents of customers orders hit
the news, then the market values of publicly traded manufacturing companies will immediately drop by about 13%. Moreover,
this plunge in the share value is accompanied with a considerable
reduction of sales (Hendricks and Singhal, 2005). Hence, it is often
the safest choice to try to accommodate customers change
requests as soon as they are received.
2.3. Costs of adopting change orders
While the importance of adopting change orders appears to be
widely acknowledged, the costs of the modications have seldom
been studied in detail. In the classic model of the hidden factory,
the change transactions are counted as non-value-adding
421
3. Research questions
Due to the paucity of research on the costs of change orders,
we designed an empirical inquiry to shed light on how the costs
of change orders are composed and how they behave over time.
This objective is served by seeking answers to the following
research questions:
RQ1: What are the critical factors that determine the costs of
change orders?
RQ2: How does each critical factor inuence the costs of
change orders?
RQ3: What are the annual total costs of being responsive to
customers change orders?
RQ4: How the costs of change orders could be reduced without
deteriorating the responsiveness perceived by the customers?
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423
for how much the costs could approximately be. On the basis of
their experience, the workshop participants conrmed that the
results were realistic. In the third workshop, we presented the
ndings to the executives of the company. This workshop focused
on the policy changes based on the results.
6. Results
6.1. RQ1: determinants of change orders costs
The determinants of the change orders costs were identied in
the rst step of the analysis. All detailed results and absolute costs
are omitted from this article due to their condentiality. However, the most important ndings can be discussed in general
terms and elaborated with values that are relative to the standard
costs of the products. As for the drivers of the change orders
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Description
Impactn
Colorexterior
Colorinterior
Itemadded
Itemremoved
Delivery
dateearlier
Delivery datelater
Dimensionsheight
Dimensionslength
Refrigerant
Controls
W&S
W&S
S
S
S
S
W&S
W&S
W&S
W&S
n
W: work content (materials, technical specications, and work instructions);
S: production schedules.
J. Uskonen, A. Tenhi
al
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425
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Table 2
Total costs of change orders in 2006.
Type of changea
Number of
changes
Share of all
changes (%)
Total
Share of all
cost (eur) costs (%)
Colorexterior
33
Colorinterior
71
Item(s)added
106
Item(s)removed
177
Delivery
48
dateearlier
Delivery Datelater 1160
Dimensionsheight
8
Dimensionslength
35
Refrigerant
58
2
4
6
10
3
5893
13004
38913
1806
25138
3
6
17
o1
11
68
o1
2
3
80442
11531
53949
600
35
5
23
o1
Total
100
231276
100
1696
a
Data were not available about the change orders for the automatic controllers.
J. Uskonen, A. Tenhi
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7. Discussion
This article reports a preliminary exploration to the costs of
change orders. The results are not suggested to apply as such to
other organizations. Instead, they serve as an example of how the
relative costs of change orders are composed and how they behave
in one mid-size machinery manufacturing company. The results
also demonstrate that the ABC methodology can be successfully
used to decompose the costs of change orders so that their
practical implications can be better understood and managed. In
the following sections, we will summarize the most important
ndings as propositions that can be tested in further studies.
7.1. Determinants of change order costs
First of all, the ndings indicate that the costs of change orders
can be large enough to deserve managerial attention. By identifying the most critical determinants of change orders costs,
companies can improve their nancial performance. The assessment of the determinants can be done on the basis of the three
factors that were identied in this study: the time of the change,
the type of the change, and the product that is being changed. In
the following, we formulate propositions to summarize the effect
of each of them.
Proposition 1a. The costs of change orders are nonlinearly
associated with the timing of when the production planners
receive them: the costs are generally the higher the later the
change orders are received, but due to the reduced need for
coordination activities, the costs begin to reduce for postponements when the delivery date draws closer.
This proposition emphasizes the importance of discretion by
the sales personnel and production planners who are the rst
people to deal with the change orders received from the customers. When a change order is received very late, the coordination
costs of executing it may exceed the costs of nishing a product
that is not needed as early as originally expected. Of course, one
must have conducted the kind of analysis presented in this paper
in order to make the right decisions on when to execute and when
not to execute the change.
Proposition 1b. The costs of change orders are related to the type
of the change so that the costs are generally the higher the more
resources are involved in the execution of the change.
This proposition relates the ndings to the literature on
process modularity. In essence, one corollary of the proposition
is that the more modular the production processes are the less
costly it is to execute changes to the technical specications and
features of the products. That is because in a modular process,
individual featureswhich are potential subjects for change
ordersare added to products in their entirety in specic parts
of the process (e.g., Pine, 1993; Baldwin and Clark, 2000; Tu et al.,
2004). This effectively reduces the amount of resources that are
inuenced by the change orders in comparison to non-modular
processes where individual features may be worked on in many
different parts of the process.
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Often only the time of receiving the initial change request from
the customer is xed, and it is up to the manufacturers own
processes how much time is spent before a change order is issued
to the production planners. The process of administering change
orders can be sped up by recognizing potential modications
early and by facilitating a awless and fast information channel to
ensure swift and reliable messaging between the front-end
personnel who receive the change orders and the production
planners who execute them. This leads to the following
proposition:
Proposition 3. The faster is the processing of change orders the
lower are the total costs of change orders.
This proposition complements the work of Trentin and Forza
(2010), who have discussed a similar effect on delivery performance. Moreover, our results quantify the value of swift information processing. Specically, our simulations with the ABC model
showed that, on average, one wasted day in the administration of
a change order increases its costs by approximately 10%. Therefore, the cost of slowness can be calculated for information
ows just as it can be calculated for slow-moving materials.
Earlier studies have demonstrated that this analogy between
slow-moving information and slow-moving goods holds in mathematical models and laboratory settings (e.g., Chen, 1999; Croson
and Donohue, 2006). Our results demonstrate the phenomenon in
the real world. The ABC model of this paper serves as an example
of how the costs of slow information can be calculated in practice.
7.4. Boundaries of generalizability
One way to assess the extent and the limits of the external
validity of results from a single-case study is to identify the
critical factors that made the results possible (Dubin, 1978). As a
part of the process of theoretical generalization (Yin, 2003), these
boundary conditions specify the domain within which the propositions are supposed to hold. We propose that in this study, the
boundary conditions are dened by the existence of the following
four factors: order-specic customer requirements, uncertainty
regarding the customer requirements, non-zero order fulllment
lead time, and the specialization of resources.
Without order-specic customer requirements there would
obviously be no change orders from customers. Although there
could be other kinds of modications, such as engineering change
orders, the propositions would not hold as such. For example,
when it comes to the engineering change orders, the speed of
processing is much less relevant than, for example, the timing of
the changes. However, it should be noted that this boundary
condition does not necessitate the products to be customized.
Instead, changes to the order-specic customer requirements can
be manifested merely as changes to the requested delivery dates.
Such changes can occur in a wide variety of business environments, and we suggest that our propositions will hold in those
environments. For example, it could be benecial for a company
to establish different frozen periods for postponements and
advancements of delivery dates. Alternatively, different frozen
periods could be applied to the changes in the day of the delivery
and the hour of the delivery.
Another boundary condition is that there should be some
uncertainty regarding the order-specic customer requirements.
This is not always the case. If a company makes tailor-made
shoes, for instance, the likelihood of the preferred size to change
during the order fulllment process is very low. This may also
apply to the color, style, and the delivery date of the product.
Meanwhile, in the operating environment of the studied company, both the specications and the delivery dates are highly
8. Conclusions
Many make-to-order manufacturers strive to be responsive to
customers changing requirements even when the requirements
are modied after the initial placement of the order. This study
demonstrated that the practice of accepting change orders may
incur signicant costs to manufacturing companies. However, the
results also showed that different kinds of changes may have very
different cost implications, and only a relatively small portion of
changes can make up the majority of change orders total costs.
Therefore, attention should be paid to the management of change
orders, and in order to do so, one should rst get an understanding of how the costs of change orders behave. The ABC
methodology described in this article provides a tool for carrying
out the necessary analyses.
The results from using the ABC model in the case company
showed that change orders can be categorized according to their
cost implications. Making such categorization may open opportunities for cost savings without jeopardizing the overall responsiveness of the company. Once the most costly changes have been
identied, management efforts can be focused on reducing them
or gaining control over them. The ways to mitigate the costs of
change orders include establishing separate frozen periods for
different kinds of modications and imposing additional charges
for the most costly changes.
J. Uskonen, A. Tenhi
al
a / Int. J. Production Economics 135 (2012) 420429
Acknowledgements
We thank the anonymous reviewers whose comments and
suggestions were very helpful and constructive. We are also
grateful to Eero Eloranta and Kari Tanskanen for their feedback
on the earlier drafts of the manuscript. We further gratefully
acknowledge the nancial support from Tekesthe Finnish Funding Agency for Technology and Innovation. Finally, we thank Arto
Koskelainen and the other employees of the case company who
made this research possible in the rst place.
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