Microsoft – Outsourcing Xbox Production

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When Microsoft entered the gaming market with the Xbox, they had to decide whether to manufacture it themselves or outsource it. After studying their capabilities, they decided to outsource it to Flextronics, a Singapore-based contract manufacturer they had previously worked with on computer mice. The relationship between the two companies was advantageous and the cost and quality of Flextronics was good. Although there were risks involved in outsourcing, such as giving away key technological know-how, Microsoft and Flextronics had already established a business relationship. Flextronics had been pursuing an industrial park strategy to manage their supply chain, reduce costs and minimize supply disruptions. They also established a web-based information system with Microsoft to coordinate production schedules and minimize inventory, shortages and balancing demand with supply. Overall, outsourcing to Flextronics was cheaper and more efficient for Microsoft than manufacturing the Xbox themselves.

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Microsoft made a strategic decision when it chose to enter the video game market with the Xbox gaming console. Executives had to consider whether to manufacture the Xbox themselves or outsource the manufacturing. After conducting studies, it was determined that Microsoft lacked the necessary manufacturing and logistics capabilities, leading them to outsource the assembly and major logistics functions to Flextronics, a contract manufacturer based in Singapore.

Microsoft had previously contracted Flextronics for manufacturing computer mice, which resulted in a strong relationship between employees of both companies. This strategic alliance is advantageous to Microsoft. In addition, outsourcing to Flextronics offers cost savings and high-quality production. However, it is important to acknowledge the potential risks associated with outsourcing.

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For instance, Microsoft decided to take a gamble and share important technical knowledge with Flextronics regarding the Xbox. One of the risks involved in entering a strategic alliance is the obligation towards alliance partners. In this case, Microsoft and Flextronics already had an existing business relationship as Microsoft had hired Flextronics to produce computer mice. Manufacturing the Xbox themselves would not have been beneficial for Microsoft as they did not possess the necessary resources and expertise in logistics and mass-production.

Outsourcing the manufacturing to an established company in the market, like Flextronics, was a more cost-effective option. Flextronics was already recognized by Microsoft due to their previous partnerships. This strategic move by Microsoft allowed Flextronics, which had been implementing an industrial park strategy, to efficiently manage their supply chain, minimize the risks of supply disruptions, and ultimately reduce costs. As a result, Microsoft could benefit from lower prices for the Xbox. Through the creation of an industrial park, Flextronics gained full control over management in a centralized location, leading to reduced logistics and transportation expenses, as well as enabling the implementation of just-in-time inventory systems.

Co-location is important for preventing supply issues that can arise from disruptions in global supply chains, like the ones seen after September 11, 2001 and during the SARS epidemic in 2003. A web-based information system is a software tool that helps companies exchange and manage data. For Microsoft, establishing a robust web-based information system with Flextronics was crucial because it allows Microsoft to provide real-time updates on demand conditions. This enables Flextronics to optimize production schedules, reduce inventory levels, and align supply with demand more effectively.

Microsoft and Flextronics collaborate to develop a sophisticated web-based information system software. This software aims to closely coordinate production schedules among all stakeholders in the supply chain. The main goal is to minimize inventory, prevent shortages, and balance demand and supply effectively.


  1. BUS 250: International Business, 2009 Custom Edition, Charles W. L. Hill http://en. wikipedia. org/wiki/Web_information_system

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Microsoft – Outsourcing Xbox Production. (2018, Feb 01). Retrieved from

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