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Case Questions, EBUSS

Spring 2011

Answer the following questions in relation to Xbox case: Lee, Hau; Hoyt David W. and Holloway, Chuck, Evolution of the Xbox Supply Chain

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Who are the various stakeholders for Xbox that formed the Microsoft ecosystem while developing the supply chain business strategy for Xbox? What were the challenges faced by Xbox when it first launched Xbox? How did this compare to the launch of Xbox 360? Did they consider any changes in the supply chain?

Essay: Xbox Stakeholders Microsofts Xbox project was started by a group of gamers in 1999 so thatthey can also develop a gaming console which threatened the performance of the home PC market. The Xbox project consisted of both internal and external stakeholderswho hadeither a direct or indirect stake in the project. These stakeholders include the Microsoft employees (i.e., Xbox project team, Microsoft executives), shareholders, suppliers (e.g., Intel, Nvidia), contract manufacturers (i.e., Flextronics, Wistron Corp, Celestica), game developers, designers (i.e, Astro Studios), distributors,broadband providers, retailers and customers. The stakeholders of the Xbox project can be visualized in terms of their position inMicrosofts extended supply chain, shown inFigure 1.0 below.
&RPPHQW>0$@yPC game market yCompetitors yBroadband suppliers

Figure 1.0 Microsofts Xbox supply chain

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cti s.Microsoft also took into account the location of manufacturing facilities in their selection of contract manufacturers to allow to take into account the logistics of to shipping products quickly to the U and uropean markets and decided to find plants in Mexico and ungary. Logistics is the time-related positioning or resource, or the strategic management of the total supply chain. The supply chain is a sequence of events intended to satisfy a customer: It can include procurement, manufacture, distributi on, and waste disposal, together with associated transport, storage and information technology (Chaffey, 2002). Microsoft s box had over one thousand components and forty-five 45 of which were critical components that was only available from a single supplier. he box also required several parts with high technical performance requirements e.g., processing speed, graphics resolution, memory requirement and internet access . he high dependence on Microsoft s suppliers made it necessary to integrate the information exchange with its key suppliers. hus, Microsoft decided to require co-investments from its suppliers and electronics manufacturing services MS) to improve the coordination among the various groups. his suggests that Microsoft recogni ed the need for using technology to improve the flow of information and
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&RPPHQW   yOver components 45 critical only available from single suppliers) p.4 case

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Tactics.Microsoft lacked the competencyin building hardwareneither did it have exposure to designing and manufacturing hardware that can be used as a game console nor did it have any experience with the game console market. ence, Microsoft decided to form strategic partnerships with preferred contract manufacturers who can deliver the products for thembecause theydid not have the time to deal with unproven vendors and risky designs.
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&RPPHQW  y yOther features of box built to compete against Sony S2 p.5 case) oAllowed box to play V o

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i ati al sis. Mi s ft i t s i t i s l t s i st st tit s i l st lis ts s s l st ti i t G . is titi l s tt i siti i t l t t t ff f t st t l t isti ts i t t t l i s f tl i t st lis t s l si t t. Moreover, holiday season to allow Mi rosoft recogni ed t t it s critical to launch in ti e for the 2 them to have a resence in the market lace efore they ecame up against the next-generation product . hus, Microsoft s early challenges came at a price of high production ramp up costs, where they needed to produce , consoles in a week in order to launch the new ox in time for the hristmas. O j tiv . he short-term objectives of developingthe original box was primarily aimed at entering the gaming console market, learning from the experience and paving way for the next generation of products.
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trategy. Microsoft adapted a push supply chain strategy using an extended supply chain. hey developed their products based on existing game consoles with added features, most of which were built to compete against o ny 2. n addition to a having features similar to other gaming consoles available in the market, the box had other features such as allowing box to play V s, and a built-in modem which in 2 2 was used to launch box live.
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adapted some form of technology to manage the relationship with various intermediaries. Control. While the case did not provide enough data to see how Microsoft measured the outcome, it can be inferred from the changes they made to the launch box that they did some reviews internally so that they can make the necessary changes. Unfortunately, Microsoft had very little time to learn to how to manage the supply networks -[t]he coordination of all supply activities of an organi ation from its suppliers and partners to its customers haffey, 2 2, p. 5). While they adopted a push approach to supply chain management, which is typically suggests that the production processes are aimed at cost and efficiency, Microsoft was up against significant challenges that made it difficult to be cost effective. n the end, Microsoft s investment in the box is higher than the expected sale price of the product -- i.e., the costs for producing the box hardware were estimated to be at $45 , when retail price for the box was only at $2 . . rofitability was therefore dependent on driving the costs down for the box console and sales from selling games.
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Di erences etween Original X ox and X ox 360 and


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ituation.When Microsoft launched box , gaming had already become a big part of the home entertainment and broadband access was substantially higher.Microsoft alsohad a better understanding of what games were needed in each country because they had already established a presence in the market.
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was no longer based on their desire O jective. Microsoft s decisions on developing the box to get into selling hardware and simply offering a gaming console, but more on their goal of increasing software sales. So, Microsoft developed the new system in such a way that can be a central part of home entertainment thereby incorporating other features such as internet access. trategy. n launching box , Microsoft planned a global launch, which no other company had done before, so that box can be made available in all major markets before Sony would have a chance to launch S3. mplementing a global strategy posed two large risks for Microsoft. o mitigate this risk, Microsoft also implemented some risk management techniques. Risk management is intended to identify potential risks in a range of situations and then take actions to minimi e risk haffey, 2 2, p. 5 ). t involves several stages which include the identification of risks, possible solutions, implementing the solutions that target high-impact risks and monitoring them for the future.
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irst, was related to the fact that the box required complementary products for it to be enjoyed and their biggest concern was whether there would be sufficient game titles available at the same time. hus, Microsoft lined up game developers who could develop new games. or this task, Microsoft had a better appreciation of game types needed in each country based on the original box experience, nonetheless ensuring that the games were ready had various timing issues. he unavailability of games in a particular country would mean a decrease of sales of consoles and would have a significant impact on the profitability of Microsoft. Second, Microsoft faced the risk of success where the supply of gaming consoles would not be sufficient to keep up with demand. oreseeable, this can manifest itself in different ways but both negatively impacting their ability to acquire new customers. his suggests that Microsoft
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recogni ed the implication of complementary products to allow them to take advantage of the network effects. or Microsoft, the worse case scenario is for Microsoft to miss customer expectations and put them at risk for losing their customers. Another scenario is if their demand calculations were off and end up with an over/under supply of gaming consoles in one area. Tactics. As soon as the original box was launched, Microsoft started working on the next generation of box and required the new model to have high definition capability, high storage capacity and access to the internet. Unlike the earlier launch of the box, where Microsoft delivered a superior product whose features that came at the expense of cost, Microsoft included cost considerations as part of their new strategy. his time, Microsoft also wanted to take advantage of the timing, pricing and exploiting the relationships with complementary product. ctions. Microsoft made three changes in its supply chain management to drive down costs: ) change the location of its manufacturing facilities; 2) increase the number of MS suppliers; and 3) chip contracting.
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irst, when launching the original box, Microsoft decided to select manufacturing facilities that were geographically near the customers in order to quickly deliver the products to facilitate fast product introduction. owever, in launching box 360, Microsoft decided to take advantage of a less expensive option by switching the facility location from Mexico and ungary to hina. While this meant an increased risk in fulfilling orders in time for a global launch, the firm was able to leverage lower labor rates from a place where the infrastructure was already available for electronic manufacturing. Second, by permitting multiple MS suppliers,Microsoft was able to ensure that they had enough manufacturers who would be able to fulfill the orders. his also provided the ability to negotiate as compared with being dependent on a single supplier at box launch. his helped Microsoft manage the supplier vender lock-in that they had originally and arrest the possible increase in switching costs such as search costs, speciali ed suppliers, contractual commitment Shapiro & 8). Varian, hird, Microsoft decided that it was best to take ownership of the design of the chip which was previously owned and designed by vidia and ntel) and source its parts from the supply chain. his disintermediation strategy in their supply chain made it possible for Microsoft to be in a better position to control costs over the product s lifetime. Moreover, this strategy is consistent with what is usually referred to as an outside-in outsourcing activity so that they can build up skills internally and manage this area. Microsoft was also able to compress the design cycle by engaging in concurrent design development activities which included a closer link between and manufacturing, continuous testing and iterative redesign. his was a change from Microsoft s original box strategy which had significant system and supplier level lock-in effects for Microsoft because vidia and ntel owned and designed the chips.While the dual sourcing strategy minimi ed the risks of lock-in at the supplier level, they were still locked-in at the system level where Microsoft had to contend with any enhancements or changes in the design of the chips. V technologies that was available in the market, while Sony being a Microsoft also used hardware company) decided to bet on lu-Ray to allow it to establish it as the new V standard for high-definition. n hindsight, Microsoft s decision provided them a one-year head start in third
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generation consoles because Sonys lu-Ray decision caused a significant delay in Sonys S3 launch. y betting on lu-Ray, Sony was betting on standards change to increase their competitive advantage. Control. As discussed previously, the case did not provide enough data to see how Microsoft measured control. Japanese utomakers upply Chain tructures

Another example is Toyota, a company that is recogni ed worldwide for adopting lean management principles in its supply chain. Toyota has various stakeholders that contribute to the success of the supply chain namely: omestic Suppliers; Overseas suppliers; arts enters; Toyota lants; istributors; Kyohans; ealers; Repair Shops; arts Jobbers; ustomers. O T C nalysis of Toyota

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To better appreciate how supply chain strategies differ, we can also adopt the SOSTAC model to explain Toyotas strategy. ituation nalysis.Toyota is an established car manufacturer that has been in existence since 37.Toyota offers a full range of models from mini-vehicles to trucks. Toyota believes that their long-term success is based on loyal customers.Toyota manages using the Toyota Way, which is underpinned by two pillars, continuous improvement and respect for people. Toyota believes that the Toyota Way should be used in interactions because they believe that their success is not

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he Japanese auto manufacturers are more likely to engage in vertical disintegration and outsourcing of processes to a network of suppliers. or example, in the case of onda, they engage in strategic alliances with first tier suppliers whom they are said to have a strong close relationship through shared history hoi & ong, 2002, p. 478). hey are said to have approximately 400 core suppliers and a number of indirect suppliers which all contribute to the production of 400,000 units of Accord models each year hoi & ong, 2002). Another example is Acura, where the structure of their network is very complex with 76 entities in the supply network i.e., first-tier, 20, second-tier, 28 third-tier, 7 fourth-tier, fifth-tier, and six-tier) to produce their Acura /TL center console alone hoi & ong, 2002).

&RPPHQW  Quality must be measured by the interaction between three participants, as shown in ig. : ) the product itself 2) the user and how he uses the product, how he installs it, how he takes care of it example: customer permitted dirt to fall in roller bearing), what he was led as by advertising) to expect; 3) instructions for use, training of customer and training of repairman, service provided for repair, availability of parts. The top vertex of the triangle does not by itself determine quality. 77

he disintermediation strategy that Microsoft took gives some insight to classic make or buy arguments that companies make in determining where to source their supplies. n contrast to Microsofts decision to do things themselves, Japanese automakers apparently assume that quality, delivery, inventories, and related costs can be better governed by the purchasing department in a buy situation, than by making it yourself. eming, 82, p. 47). owever, for them to control the quality they require invariably have demanding expectations from their suppliers. he expectations include: ) exceptional quality requirements; 2) reliable just-in-time deliver; 3) exact quantities no over- or under-runs; and 4) continuously improving productivity resulting in long-term cost reductions eming, 82, p. 48). n return for the high investments on the part of their suppliers, they have production contracts that are usually longterm as long as six years), and may include requirements for product design and testing. or the Japanese automakers, they have arms around relationship where they embrace the lock-in effects with their suppliers instead of arms-lengthtransactions which rely on the spot-market.

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Case Questions, EBUSS


created by individual efforts but rather as a team.

Spring 2011

Ob ecti e.Toyotas supply chain objective is to establish strong links to its customers, dealers and channels. Strategy.Toyota created an efficient network so that it can deliver excellent service to its customers. Their close interrelationship between various parts of the chain suggests that they engage in a pull strategy and their supply chain can be viewed in terms of Figure .0 below.

Figure .0 Toyotas supply chain

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Toyota developed its own Toyota Production System where they introduced various manufacturing techni ues such as Just In Time, aizen (continuous improvement).Toyota makes strategic alliance with its partners and puts an emphasis on long term relationships. Toyotas manufacturing processes is also developed so that each plant serves a local market and at least another market across the world. While this tactic can be seen as a logistical decision, it is also driven by various risk considerations. It is driven by a financial consideration so that it can hedge exchange rate risks and shift production when exchange rates increase (Chopra Sodhi, 00 , p. 3 ). It is also driven by capacity considerations so that idle capacity is mitigated by ensuring that more than one market are supported by the plants to deal with demand fluctuations(Chopra Sodhi, 00 ). Action. Toyota ensures that both the upstream and downstream supply chains are highly efficient networks.For its upstream supply chain, Toyota not only engages in activities that ensure that information flows across its suppliers, but also engages in various activities geared toward promoting a shared network identity among its suppliers. More specifically, Toyota created network level processes to ensure that they share a social community, network norms and knowledge (Dyer Nobeoka, 000, p. 3 ). To implement this, Toyota has established various

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supplier associations kyohokai) since 43 so that they can have ) information exchange between member companies and Toyota, 2) mutual development and training among member companies, and 3) sociali ing events(Dyer & obeoka, 2000). or its downstream supply chain, Toyota is dependent on its dealers to distribute new and used vehicles, as well as servicing for its profitability. Toyota manages its dealers with three principles: (1)Independence of dealers as outside investors; (2) Winning jointly; (3) ncouraging competition among channels. This approach encourages their dealers to make independent decisions and be proactive in making improvements. Toyota help the dealersmake decisions toward investing in areas necessary to improve so that they can be both successful.

Toyota embraced lean manufacturing techniques to keep costs down. ot only do they apply these principles in their manufacturing of cars, but they also apply this in other areas of their supply chain. or example, they use kyohans to allow their dealers to maintain a low level of parts supply. The use of an intermediary to have a central control of parts allows the network some flexibility so that parts do not sit idly at dealers at the same time allow Toyota to move the parts to dealers that need them. Kyohans can order supplies of stocks once a day, and supplies them to the dealers 3-4 times a day. In case the stock is unavailable, kyohans can put in an emergency stock request which can be fulfilled by a domestic distributor within half a day to a day or an international distributor in under 5 days. Toyota also promotes continuous improvement through a concept they refer to as kaizen. This process allows them to improve their operations through innovation, organi ational learning and standardi ation of processes. or example, a mandatory bi-annual inspections of cars for registration at the service facilities usually takes 2-3 hours. The length of time it took was largely dependent on skills and experiences of the service technician in charge of the inspection. After applying kaizen principles, Toyota was able to streamline and standardi e the inspection process so that inspections would only take 45 minutes. Control.Toyota conducts performance measurements at predetermined timeframes. or instance they do annual reviews wherein they apply some ranking and rating mechanism to evaluate their dealers. The dealers are measured in terms of sales volume of new and used cars, after-service sales service, customer satisfaction, number of showrooms, number of service centers, number of staff, and profitability. Discussion There are various approaches to managing the supply chain of a firm. The decision to adopt one over another is highly depended on the long-term strategic goals of the corporation. rom the Microsofts box case, we can see that sometimes firm make costly decisions in the process of launching a product to gain foothold in the market place. It is then ultimately up to the firm to learn form the process and as an organi ation learn from the experience and make the necessary changes. Microsoft adopted two distinct approaches in managing their supply chain based on their short- and long-term objectives. In the launching box, they were highly dependent on the expertise of their suppliers so that they can launch the box in time for the 2001 holiday sales. This enabled the firm to learn from their experience so that they can come up with a new strategy to launch the next generation gaming console. Microsofts disintermediation strategy appears to minimi e lock-in effects with suppliers so that they can take advantage of spot-markets and

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ultimately lower their costs. Interestingly, in the case of Toyota, they took a very different approach from Microsoft even when their objective was also to minimi e production costs. Instead of relying on spot-markets, they embraced lock-in and invested in long-term relationships with its suppliers. This approach allowed them to make continuous improvements across multiple suppliers by sharing knowledge and information among the upstream and downstream processes. The increased information flows across the network was made possible by the use of various e-supply and e-demand applications. rom the Toyota case, it can also be seen that a highly integrated supply chain that shares information, expertise across the firm can take advantage of minimi ed costs and profitability. It can also be gleaned from this case the importance of trust and respect because the members of the supply chain has access to critical information that can be detrimental to the other partners if opportunistic behavior arises.

Chaffey, D. (2002). E-business and E-commerce Management: Strategy, Implementation and Practice. ssex: earson ducation Limited. Choi, T. Y., & ong, Y. (2002). Unveiling the structure of supply networks: case studies in onda Acura, and Daimler Chrysler. Journal of Operations Management, 20, 469-493. Chopra, S., & Sodhi, M. S. (2004). Managing Risk To Avoid Supply-Chain reakdown. MIT Sloan Management Review(Fall 2004), 53-61. Deming, W. . (1982). Out of the crisis: Quality Productivity and Competitive Position. Cambridge: Cambridge University ress. Dyer, J. ., & obeoka, K. (2000). Creating and Manageing a igh- erformance Knowledge-Sharing etwork: The Toyota Case. Strategic Management Journal, 21, 345-367. Shapiro, C., & Varian, . (1998). etwork and positive feedback - ow to exploit etwork effects. In . . S. ress (Ed.), Information rules A strategic guide to the network economy. (pp. 1-56).

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