Global Supply Chain Design
Evolution of the Xbox Supply Chain
Evolution of the Xbox Supply Chain
1 - Introduction
It was in 1999 when the initial proposal to Bill Gates was made to create a game console. Long before the legitimization of this project, Microsoft was not only encouraged by the gamer’s scene to enter this market, but the main driver was to secure shares in the console market. This was, to protect the home PC business, which they expected to be threatened by Sony’s ambitions of providing high-performance consoles for a low price. At that time, Sony was present on the market for already five years with its PS1, therefore having an existing customer basis, good market information and experience as well as a base of games. Especially the existing base of games was an essential advantage for Sony, as profit is mainly made through the games and not through selling consoles, which is usually a loss business. Within two years Microsoft managed to introduce the Xbox in November 2001 and was able to gain market share of 17 % already at the end of 2004 (Figure 1). This was the initial situation for Microsoft to introduce the 3rd-generation Xbox 360 in November 2005, which eventually happened to be one year prior to the launch of the PS3.
There are distinctive approaches regarding the supply chain design as well as the launch applied for the Xbox and the Xbox 360. This management summary is aiming at discussing these two approaches and its success factors in detail as well as the reasons for Microsoft to apply them. 2 - Supply chain changes between Xbox and Xbox 360 and the motivation behind these changes for Microsoft While designing the Xbox, the main goal of the Microsoft development team was to introduce a console with superior performance compared to the PS2 in order to gain market share. This would be achieved by a built in hard disk drive enabling online gaming and downloading of games. Furthermore, it would include a broadband Internet connection. When it came to the production of the Xbox and the selection of possible suppliers, Microsoft appointed Flextronics to build the console. An essential part for production was the graphics processor. As Microsoft was not experienced in this field, they decided to purchase the critical part from Nvidia, in order to achieve reliable deliveries as Nvidia had an excellent reputation for delivering on time. Another critical component for the Xbox was the microprocessor. Microsoft decided to also outsource the production of this part, in this case to Intel. Both outsourcing decisions show that Microsoft wanted to avoid problems with its Xbox as much as possible even though this would increase costs. Flextronics suggested producing the Xbox in a Chinese plant in order to minimize costs. However, this approach, which was also followed by Sony in the past, caused replenishment delays due to long lead times. Therefore, Microsoft and Flextronics decided to produce in Mexico for the North American market and in Hungary for the European market, in order to be close to the market and minimize replenishment problems. A positive outcome of this decision was low transportation costs. In Mexico and Hungary big industrial parks were created, where selected vendors were invited to locate their facilities, therefore improving information flows and reducing transportation costs. In summary, it can be said that Microsoft focused on short time-to-market, reliable supply and state-of-the-art technology and quality in order to assure a high product availability and customer satisfaction. This strategy was assumed to be necessary by Microsoft in order to build up a positive brand image so that market share could be taken away from Sony. However, when Sony reduced the price for its PS2 from $299 to $199, Microsoft was forced to also reduce the price to the same...
Please join StudyMode to read the full document