Xbox 360 Supply Chain Case Study

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Global Supply Chain Design

Case Study
Evolution of the Xbox Supply Chain

2012

Evolution of the Xbox Supply Chain

1.) What supply chain changes did Microsoft make between the Xbox and the Xbox 360? What was the motivation for these changes? When Microsoft first entered the market with the release of the Xbox in 2001 it was a newcomer in the console business. The company had neither an established brand presence in this area, nor did it have a developed base of games and gamers in the market, such as Sony. Therefore, the primary purpose of introducing the Xbox was to establish Microsoft in the market, to develop a brand presence, gain acceptance among gamers and to prepare the way for future products. Therefore, Microsoft’s strategy was to capture a market share by selling a technically superior console as well as a large number of video games in order to build up a broad base of Xbox gamers. So as to reach the mentioned goals Microsoft was focusing on short time-to-market, on reliable supply and on advanced technology and quality in order to assure a high level of product availability and customer satisfaction. This corporate and competitive strategy led Microsoft to develop the following supply chain processes and network to design, produce and distribute the initial Xbox: In considering potential manufacturers, the Xbox team first approached computer makers since the Xbox was basically a computer. Negotiations with Dell pointed out that the computer business model was unsuitable for producing game consoles for several reasons. Firstly, console makers usually lost money on each box, but made profits on selling games and software. Secondly, unlike computers, where performance typically increased, but prices stayed relatively constant, consoles maintained constant performance while costs decreased. To cope with these conditions Microsoft selected a contract manufacturer, Flextronics, to build the consoles. Although Flextronics recommended producing the Xbox in China in order to minimize costs Microsoft insisted on plants located close to the customers in order to assure quick supply replenishment and to prevent supply shortages. Therefore, Flextronics build the consoles in Mexico for the North American market and in Hungary for the European market. The Xbox had about 1,000 components, of which about 45 were critical, either because of cost or availability. The two most important components were the graphics chip and the microprocessor. The graphics chips were purchased from Nvidia at a relatively high cost, but with reliable supply and best performance. Intel was selected as supplier of microprocessors. The market leader was more expensive as its opponent AMD, but Intel had available capacity and there was no minimum purchase value required, as opposed to AMD. In sum, all these decisions displayed and reflected Microsoft’s strategy to focus on high product availability and service level rather than lowest possible cost. However, the problem Microsoft faced with this strategy is that it does not fit the characteristics of the product and market: The profitability of a company in the console business was on the one hand determined by the firm’s ability to reduce costs, and by game sales on the other. Microsoft devoted resources to game development by recruiting game developers to create Xbox games and buying some companies to make first party games, but by the time the Xbox was launched in the U.S., 19 games were available. Sony, however, was present in the market since 1994, and had an established pool of gamers and games. It dominated the market with its first and second generation console (PS1 and PS2) for years. Therefore, the company had 220 titles available for its Sony’s PS2.

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Evolution of the Xbox Supply Chain

This difference, combined with the fact, that the Xbox launch was lagging a year behind the PS2, resulted in insufficient game sales to cover the losses incurred by console...
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