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Supply manager Joe Smith was considering the purchase of 1,000 desktop PCs for his organization. The life cycle was three (3) years and the…

Supply manager Joe Smith was considering the purchase of 1,000 desktop PCs for his organization. The life cycle was three (3) years and the organization’s cost of capital was 12%. He calculated the TCO for one of the purchase options as follows:

Cost Elements

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Cost Measures

Purchase Price:

• Equipment

Supplier quote: $1200 per PC

• Software License A

Supplier quote: $300 per PC

• Software License B

Supplier quote: $100 per PC

• Software License C

Supplier quote: $50 per PC

Acquisition Cost:

• Sourcing

2 FTE @ $85K and $170K per year for 2 months

• Administration

1 PO @ $150, 12 invoices @ $40 each

Usage Costs:

• Installation

$700 per PC (PC move, install, network)

• Equipment Support

$120 per month per PC — supplier quote

• Network Support

$100 per month — supplier quote

• Warranty

$120 per PC for a 3-year warranty

• Opportunity Cost – Lost Productivity

Downtime 15 hours per PC per year @ $30 per hour

End of Life:

• Salvage Value

$36 per PC

FTE stands for a “full time equivalent” employee, PO stands for “purchase order”

1. Determine the total cost of ownership of this contract for three (3) years.

2. How would you approach this supplier about reducing the total cost of ownership for computers over the life of this contract? (Negotiation strategy)

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