Question

HBR: UPS and HP: Value Creation Through Supply Chain Partnerships

1. Total cost structures that promote relational flexibility and the development of cross- functional process capabilities; and,
2. Trust and risk-sharing that promotes collaboration and the sharing of gains and losses.

Answer 1

1. Total cost structures that promote relational flexibility and the development of cross- functional process capabilities; and,

Microsoft launched the Xbox on November 15, 2001 which led the company on a learning experience they wouldn’t soon forget. After being beat to the market by Sony even though the Xbox had better technology, Microsoft carefully planned ahead for the next generation consoles. Securing a place in the market was a key strategy since it allowed Microsoft to better communicate, produce, and plan with its suppliers as well as improve upon past inefficiencies. Due to the original Xbox’s “large controller” and “poor appearance” (9) there were many consumers that turned away including a huge piece of the market, Japan. Consumers in Japan criticized the appearance and controller leaving Xbox’s market share in Japan at “less than 1 percent” which was dramatically less than its share worldwide. In addition to designing a “small, elegant machine” (9) and improved controllers Microsoft added an online feature.

Linking the world together was a key improvement and changed the gaming world, but in order for it to be most effective, Xbox 360’s had to be globally supplied without months separating geographic expansion like previous video game launches. Microsoft looked at these potential benefits and decided to launch globally. In turn other benefits could be obtained including economies of scale in production from all of its suppliers, the ability to meet the extremely high predicted demand, and most importantly an earlier entrance into the market than the PS3, which was predicted to use significantly better technology including higher resolution and Blu-ray capabilities. This was familiar to Microsoft as it was the exact opposite of what occurred years before with the launch of the original Xbox.

The global launch was also performed later in the year around holiday season, which was prime consumer purchasing season promising even more sales. On the other hand however, a global launch also meant that Microsoft was subjecting itself to risks. Launching early meant that Microsoft was relying on its manufacturer Flextronics and its Doumen, China manufacturing plant, which was creating all of the Xbox 360’s to operate efficiently, effectively, and without significant error. If a disaster occurred and the plant shut down Microsoft would be left with angry customers and lost sales. Along with this, one of the core reasons for launch was the online capabilities, but in order for this feature to be worth it there needed to be strong internet penetration across the globe including third world countries. After weighing these options Microsoft launched globally and found huge success as a result, leaving its competitor Sony and the PS3 about a year behind in launch.

Trust and risk-sharing that promotes collaboration and the sharing of gains and losses.

            When planning production of its new video-game system, the Xbox 360, Microsoft sought the services of three Electronic Manufacturing Services (EMS) firms: Flextronics, Wistron Corp., and Celestica. Originally choosing to outsource production to Flextronics, Microsoft was able to sell 1.5 million Xbox consoles in the first two months of the release. With a unique industry park business model, Flextronics was an ideal choice of manufacturer and operated out of two plants; its Mexican plant supplied North America while its Hungarian plant supplied Europe. Although a single manufacturer sufficed for the Xbox, Microsoft deemed a more expansive system of manufacturers necessary for the release of the Xbox 360.

Soon after the release of the original Xbox, Microsoft brought on Wistron Corp., with production taking place in China to help infiltrate the Asian market. By adding a new manufacturer to the other side of the globe, Microsoft was able to take advantage of strategic geographic placement in penetrating markets. Preceding the release of the Xbox 360, the Canada-based EMS firm Celestica was added into the mix. In addition to safeguarding against the dangers of having a single manufacturer, outsourcing to these additional EMS firms expanded the pool for creative innovation and ideas.

There are, however, several downsides to outsourcing to a multi-manufacturer system. First, by outsourcing, one exposes his technological core competencies to potential theft, especially in countries such as China where intellectual property rights are not strictly enforced. Secondly, one could overestimate product demand and, if over-expanded, be stuck with idle facilities. Additionally, utilizing multiple manufacturers is simply more complicated. Organizing and coordinating three different facilities across the world can be difficult when attempting to accommodate ever-shifting global demand.

In order to avoid these concerns and efficiently coordinate its manufacturers, Microsoft needs to take several factors in consideration. By strategically selecting its EMS firms Microsoft can utilize the secondary benefits that these companies have to offer. Flextronics, for example, has expertise in providing engineering services, which can be used to address difficulties or opportunities at all of Microsoft’s offices. As well, Flextronics is a popular brand name; adding to the credibility of its products. The addition of Winstron Corp. provides a strategic geographic expansion and the firm offers many of the same services as Flextronics. Lastly, the addition of Celestica provided Microsoft with a firm with the tactical knowledge and manufacturing capabilities of the many parts required to produce an Xbox 360. Celestica’s North-American location also helps to create geographic diversity in production. This is especially important since Flextronics shifted all of its manufacturing capabilities to China.