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MURPHY WAREHOUSE COMPANY: Sustainable Logistics
Teaching Notes
CASE DESCRIPTION
The primary subject matter of this case concerns how sustainable business practices and
increased profitability can go hand in hand. Making decisions that are both environmentally
responsible and advantageous to the business often requires the assessment of a variety of
tangible and intangible factors and the reconsideration of traditional decision making guidelines.
Richard Murphy Jr., the CEO of Murphy Warehouse Company, has spent a great deal of time
analyzing sustainable ways to conserve resources, reduce costs, improve the well-being of his
employees, and promote his company as an environmentally responsible logistics provider.
Murphy also realizes that the benefits of sustainable projects must be weighed against the costs
and payback periods of these investments. The case is designed to be taught in a one-hour class
period, with two hours of outside preparation by students.
CASE SYNOPSIS
Imagine that you are Richard Murphy Jr., the CEO of Murphy Warehouse Company, a
family-run company that began over 100 years ago. You feel the weight of responsibility to
maintain the financial viability of the company that is now in its fourth generation of family
ownership. One of your biggest challenges is to understand how the company should adapt to a
changing business environment while conserving the company’s financial resources and
protecting the core business model that has sustained it for so long.
One major force in the current business environment is the sustainability movement,
which focuses on the responsible use of natural resources. If you are Richard Murphy, you are
trying to find the opportunities to adopt sustainable practices that also make financial sense to
Murphy Warehouse Company. While you have successfully implemented several sustainable
projects in your company, you are now faced with deciding to invest over a half million dollars
in a stormwater project that presents an unusually long payback period. It is a complicated
decision that involves high expense, multiple tangible and intangible variables, and a fair amount
of risk that something might go wrong. What do you do?
CASE OVERVIEW
This case is focused on a real company, Murphy Warehouse Company, and its CEO,
Richard Murphy Jr. The facts and statistics communicated in the case are real, and the data were
collected from interviews with Richard Murphy and the documents, financial figures, and
information that he provided.
Murphy Warehouse Company is a family-run company that began over 100 years ago.
As CEO, Richard Murphy understands the weight of responsibility he has to maintain the
financial viability of the company that is now in its fourth generation of family ownership. One
of Murphy’s biggest challenges is to understand how the company should adapt to a changing
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business environment, while conserving the company’s financial resources and protecting the
core business model that has sustained it for so long.
A major force in the current business environment is sustainable (green) practices, which
focuses on the responsible use of natural resources. The case depicts Richard Murphy trying to
find new opportunities to adopt sustainable practices that also make financial sense to MWC.
Murphy has successfully implemented several sustainable projects that financially benefit the
company, but now he must decide whether to invest over a half million dollars in a stormwater
project that presents an unusually long payback period. It is a complicated decision that involves
high expense, multiple tangible and intangible variables, and a fair amount of risk that something
might go wrong.
One of the main goals of the case is to move away from the mindset that green practices
are primarily for businesses who are willing to sacrifice sound financial decision making models
to pursue ethical and moral imperatives to “do the right thing” for society and the environment.
The case strives to show how sustainable practices can be part of running a business that can tout
its environmental achievements while maximizing long-term profits.
The case provides financial details on the conversion of lawn to prairie so the students
can calculate a payback period that shows this project made financial sense (further discussion in
case questions below). The lawn to prairie conversion also introduces several intangible and less
quantifiable important benefits, including the reduction in the urban heat island effect, the
attractive natural buffers between MWC and adjacent properties, and the attraction of wildlife to
the area. Murphy has also gained a great deal of positive publicity for his prairie conversion
project by sharing his experience at professional society meetings, local universities, and print
media publications.
Other projects at MWC that are described in the case provide further evidence that
sustainable investments and profitability can go hand in hand. The purchase of dock blankets,
the upgrade in the lighting systems, and painting the ceilings white should be identified in the
class discussion as examples where green initiatives and disciplined financial decision making
can be complementary.
The decision point of the case, where Murphy is evaluating the feasibility of the
stormwater project, challenges the students to put together the lessons of the case and make a
decision. The instructor should ask the students to evaluate the pros and cons of the stormwater
project, considering both tangible and intangible factors. The payback period should be
calculated, using the numbers provided in the case. The students should discuss whether the
significantly longer payback period can be justified (compared to traditional business practice
and to previous projects at MWC).
Finally, the instructor should demonstrate to the class that sustainability is part of the
“continuous improvement” management philosophy. The case demonstrates this by mentioning
Richard Murphy’s explorations of new energy technologies in solar, wind, and geothermal. He
seeks partnerships with local utilities and researches government incentive programs that
enhance the financial returns for businesses that adopt green practices. Making sustainability
part of on-going company culture and management practice is promoted by the USGBC, LEED,
and ISO 14000 organizations, as described in the case. The case also mentions several times that
sustainability practice is a necessary part of being a player in the competitive marketplace in
terms of attracting clients and building positive public relations.
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DISCUSSION QUESTIONS
1. What are the payback periods for the lawn-to-prairie conversion project, the dock blankets, the
T-9 lighting fixtures, and the stormwater project?
Answer:
a) The prairie conversion project payback is calculated as the per acre prairie installation
b) The dock blankets were paid back “within a few months” in heating bill savings.
Note: This calculation neglects the 5% annual increase in savings, special types of
depreciation, and the time value of money. These are corrected in the next calculation of
NPV.
2. Calculate the Net Present Value of the stormwater project, given the financial information in
the case.
Answer:
Using the assumptions stated in the case, the total discounted cash flow over 15 years is
$619,323. Subtracting the up-front capital requirements of $458,200 provides a Net
Present Value of $161,123. Since the NPV is positive, the investment more than pays off
after taxes at a 15% discount rate.
3. Evaluate the pros and cons of the stormwater project on both financial and non-financial
factors and make a recommendation on what Richard Murphy should decide.
Answer:
Financial Factors
Pros:
• The annual savings on stormwater fees are permanent and certain, so the project
Discounted Cash Flow Analysis
year
1 2 3 4 5 6 7
Cash flow 68,000$ 71,400$ 74,970$ 78,719$ 82,654$ 86,787$ 91,127$
Depreciation 77,331 67,022 58,086 50,341 43,629 37,812 32,770
Book Value 502,669 435,646 377,560 327,219 283,590 245,778 213,008
tax savings 32,479 28,149 24,396 21,143 18,324 15,881 13,764
Net cash flow after taxes 100,479$ 99,549$ 99,366$ 99,862$ 100,979$ 102,668$ 104,890$
15% discount rate 0.87 0.756 0.658 0.572 0.497 0.432 0.376
discounted cash flow @15% 87,417$ 75,259$ 65,383$ 57,121$ 50,186$ 44,353$ 39,439$
Present Value of cash flow @ 15% 619,323$
8 9 10 11 12 13 14 15
95,683$ 100,467$ 105,490$ 110,765$ 116,303$ 122,118$ 128,224$ 134,635$
28,401 24,614 21,332 18,488 16,023 13,887 12,035 10,430
184,607 159,993 138,660 120,172 104,149 90,263 78,228 67,797
11,928 10,338 8,960 7,765 6,730 5,832 5,055 4,381
107,611$ 110,805$ 114,450$ 118,530$ 123,033$ 127,951$ 133,279$ 139,016$
0.327 0.284 0.247 0.215 0.187 0.163 0.141 0.123
35,189$ 31,469$ 28,269$ 25,484$ 23,007$ 20,856$ 18,792$ 17,099$
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4. What are the advantages of pursuing LEED, Energy Star, and ISO 14000 certifications?
Answer:
Environmental certifications are a way to objectively demonstrate to customers
and the public that the company has achieved noteworthy accomplishments in
sustainability. The guidelines and standards of certification processes also serve as tools
requiring environmentally responsible behavior from providers of products and services,
companies can ill-afford to ignore environmental imperatives.
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UPDATE
MWC went ahead with the stormwater retention project. The project went smoothly and
did not encounter significant unexpected costs. MWC became the largest landowner in
Minneapolis that does not pay a storm water fee. The neighbors’ main comment was how pretty
it was to drive by the warehouse site.
In the case, Richard Murphy Jr. is considering installing solar cell technology on the
roofs of MWC’s warehouses, as well as possibilities for wind turbines that have low profiles and
are also roof-mountable. Murphy considers it essential that MWC never stop learning and
experimenting with new ways to use sustainable projects to both strengthen MWC’s competitive
position while doing the “right thing” for the environment. Since the case was written, the
following projects have been completed, all with favorable paybacks.
· MWC installed solar power on 5 facilities and opened 2014 as the 5th largest solar energy
producer in MN.
· In 2012 MWC purchased a 350,000 sq. ft. 1980’s built warehouse in Eagan and besides
solar, they lighted the entire building, inside & out, with LED lighting. In 2013 this building was
the largest LED lighted warehouse / industrial building in the upper Midwest. All fixtures are on
motion sensors and for the exterior lights they run at 20% until a driver or stranger shows up and
trips the motion beam causing lights to go to 100%. This was a first for the industry.
· In 2014 MWC installed a solar system that fed a battery array that provided 17+ hours of
back-up power for their corporate computer systems in case of an emergency.
· Beginning in 2013 MWC issued an annual Corporate Sustainability Report (CSR). In 2014
they raised the bar and became a GRI (Global Reporting Initiative) certified CSR. This is a
major accomplishment which many of the “big” companies have yet to achieve. MWC is a
small-medium sized entity and becoming GRI Certified is rare.
· MWC also has 4 – LEED Gold and Energy Star Certified facilities and has 2 of the first 4
warehouses in the U.S. recertified under the new LEED Gold standards in 2015.