Evolution of the Xbox Supply Chain

EVOLUTION OF THE XBOX SUPPLY CHAIN

April 2, 2007

Contents

Section 1: A Synopsis and interpretation of the Supply chain changes made between Xbox and Xbox 360

Section 2: Benefits and Risks of global launch of Xbox 360

Section 3: Benefits and Limitations of using EMS firms concentrated in China and an Analysis of the co-ordination efforts required

Section 4: References 21

Section 1: A Synopsis and interpretation of the Supply chain changes made between Xbox and Xbox 360 by Anand Kangala

In July 1999, Microsoft legitimized its expansion beyond its core competencies, to invade the gaming hardware market with Xbox and made its impression on the thrill and action seeking needs of the sophisticated video gamers. It aimed at providing a console that would enable the gamers to push the skills and risk-taking prowess to mesmerizing limits – much beyond what was then offered by its formidable champion players Sony and Nintendo. Two years later, with time-to-market clock ticking fast and loud, Microsoft had to ‘work’ its supply chain to line up and deliver large volumes of high quality products to the consumer market in time for the 2001 holiday season.

Gaining in popularity since its launch in 2001, the Home and Entertainment Division (HED) of Microsoft set its sights on developing the next-generation product – the Microsoft Xbox 360 video game and entertainment system. The HED had the dual objective of exceeding the functionality and performance of the predecessor, and put in action the lessons learned by streamlining supply chain processes to keep the manufacturing costs low and guarantee delivery for the 2005 holiday season. It also consciously sought to reverse tables on Sony by launching its new generation game console – Xbox 360 prior the launch of Sony’s PS3 consoles. The changes in the supply chain that enabled this and the motivation behind the change are discussed in the following sections.

Xbox 360

As Microsoft began the Xbox 360 project in late 2002, it started putting together a worldwide team. (It’s interesting to note that Sony announced the Cell project with IBM and Toshiba, before Microsoft’s planning began, and it didn’t start shipping until after Microsoft). In 2003, a strategic decision was made to launch Xbox 360 before Sony this time, which meant that the box would have to be ready to hit the shelves in the fall of 2005.

Looking outside of Intel and Nvidia

After scouring a number of vendors, it hired IBM, which put more than 400 chip designers to work at several of its sites to design the three-core microprocessor chip for Xbox 360. It also intended to achieve this by the end of 2004. IBM advancements in terms of integrating multiple processing cores on a single chip were a major source of inspiration for Microsoft. ATI Technologies was also signed on in 2003, to create the ‘unique’ graphics chip. ATI, which put 300 people to work on its chip, had a clever idea to couple the graphics chip with its own dedicated memory. “It was not a derivative of a PC graphics chip” said Rick Bergman, an ATI executive. Microsoft was more willing this time around to listen to its suppliers!

‘Own and Control’, rather and ‘Pay and depend’

Literally turning a leaf from its ‘lessons learned’ book, Microsoft intended to take control of its own destiny. Instead of having the chip makers make and sell chips, Microsoft got them to perform the chip designs.

Both IBM and ATI agreed to let Microsoft own the designs so that it could control the cost reduction schedule and get the chips made in any factory. Under this scenario, Microsoft paid only an engineering fee that was lucrative for both ATI and IBM, but did not have to pay high margins to ATI or IBM for making the chips. Instead it went directly to a contract chip manufacturers. The goal was to cut costs and control its destiny. After all, Microsoft lost $100 on each of the first Xbox machines sold, thanks to the hefty margins paid to Intel and Nvidia over chip pricing.

Making ‘it’ pretty – a collaborative outsourced effort “The mark of success is that the outsiders push the insiders to do their best and visa versa.”

As the chip vendors started working on the inside, others paid attention to the outside of the box. A lot of newcomers joined in to define the console, which of course had to be smaller than the version that the Japanese rejected. It narrowed down its choice to Astro