Murphy Warehouse Company.

Pesch, Michael J. ; Murphy, Richard, Jr. ; Ahmad, Sohel 等

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 has a difficulty level of three or four, appropriate for junior and senior level students. 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?

INSTRUCTORS' NOTES

RECOMMENDATIONS FOR TEACHING APPROACHES

The case can be used as part of a course module on sustainability in supply chain management. While other textbook and article readings can be used in conjunction with the case, the case can also be used as a stand-alone introduction of sustainability in business decision making. The case contains a detailed background on the evolution of sustainability and its rise in importance to executives in both small and large businesses. It also describes the agencies that provide guidance on best practices, establish and communicate standards for sustainability, and grant certifications for sustainability achievement. These agencies include the U.S. Green Building Council (USGBC), the Leadership in Energy and Environmental Design (LEED), and the International Organization for Standardization (ISO) 14000 series for environmental norms.

The case instructor should have the students read the case outside of class and prepare answers to the discussion questions contained in this note. At the beginning of the class session, the instructor might consider having the students discuss their answers in small groups with fellow students. The instructor might open the class discussion with the question, "Who is Richard Murphy?" This is a great launching point for discussing the case issues. The question fosters discussion of issues such as the culture and business goals of the Murphy Warehouse Company, Richard Murphy's priorities as the CEO, the relevance of his training as a landscape architect, his appreciation for the long-term nature of his business, and the need to project his company as an attractive business partner for companies who include sustainability in their selection criteria.

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 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, painting the ceilings white, and installing HAT heating units 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.

DISCUSSION QUESTIONS

1. What are the payback periods for the a) lawn-to-prairie conversion project, b) the dock blankets, c) the T-8 lighting systems, and d) the stormwater project?

Answer:

a) The prairie conversion project payback is calculated as the per acre prairie installation cost ($6,575), divided by the difference between the annual per acre cost of lawn maintenance ($5,167.06) and the per acre cost of prairie maintenance ($707).

$6,575 prairie installation cost ($5,167.06 lawn maintenance--$707 prairie maintenance) = 1.47 years payback

b) The dock blankets were paid back "within a few months" in heating bill savings.

c) The T-8 lighting fixtures were paid back in "14-16 months."

d) The stormwater project payback is the installation cost divided by the annual savings from avoiding municipal stormwater fees.

$580,000 installation cost $68,000 annual stormwater fees = 8.53 years

2. Calculate the Net Present Value (NPV) 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 would be $730,630. Subtracting the up-front capital requirements of $458,200 provides a Net Present Value of $272,431.

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 eventually will pay for itself. Also, these fees are likely to rise over time if the project is not implemented (in the NPV calculation, stormwater fees are assumed to increase at a 5% annual rate).

* The stormwater storage system is a long-lived asset that will produce positive cash flows over a 15 year period, without requiring additional fixed or variable costs to operate.

Cons:

* The payback period of 8.53 years is longer than the 3-4 years that is generally considered acceptable in conventional financial analysis for projects.

* The $580,000 estimate might have to be revised upward if complications with soil, utilities, etc. are encountered during construction.

* The costs of disruptions to normal operations during the construction period (overtime and other costs) are over and above the $580,000 estimate.

Non-Financial Factors

Pros:

* MWC is family-owned and doesn't have to be concerned with outside investors who might want to stick to conventional financial analyses that have shorter payback time horizons for project approvals.

* MWC has a long-term orientation and is closely tied to the community in which it has operated for over 100 years. MWC wants to do the right thing for the community.

* Investing in sustainable projects is a good way to solicit new business and promote the company to the public. In fact, major corporations may soon look for and require service providers to maintain sustainability certifications in order to help them achieve their sustainability goals.

* Researching, planning, and implementing sustainable projects provide significant learning opportunities that will benefit MWC in the long term.

Cons:

* The $580,000 is a significant investment and there are opportunity costs of not using these monies for other worthy projects that benefit the company (e.g. construction of new facilities and purchase of additional equipment).

4. How do sustainability projects fit with the goals of supply chain management strategy in any company?

Answer:

As noted in the case, sustainability projects offer significant opportunities on both the cost side in energy savings and on the revenue side in attracting and keeping business partners who seek relationships that promote environmentally responsible business practices. Supply chain management strategy focuses on the overall performance of all players in the supply chain in serving the end customer. Since customers are increasingly requiring environmentally responsible behavior from providers of products and services, companies can ill-afford to ignore environmental imperatives.

There is convincing evidence that sustainability is a strategic theme that is being adopted by a wide variety of companies and industries. For example, Golicic, et al. (2010) identified 44 Fortune 500 companies that addressed in some fashion transportation emissions in their supply chains. These companies were classified into three categories of involvement: establishing a foundation, changing internal company practices, and impacting supply chain practices.

At the "establishing a foundation" level, a company takes steps to acknowledge the impact of its transportation policies and practices on emissions. In this level, companies develop goals for limiting transportation's impact (e.g., FedEx Corporation has set a goal to improve overall fuel efficiency of its commercial vehicle fleet 20% by 2020), use metrics to measure the impact (e.g., Office Depot Inc. measures its fuel usage and associated greenhouse gas emission improvements), and forms partnerships with other organizations that can help achieve their goals (e.g., partnerships with the U.S. Environmental Protection Agency's SmartWay program).

Twenty-eight companies showed their involvement beyond the foundation level by initiating changes in the internal company practices. These include, educating personnel to reduce their transport related carbon footprint (e.g., establishing employee commuter programs) and using more energy efficient vehicles (e.g., Johnson & Johnson is using a large number of hybrid vehicles in its corporate fleet; Office Depot is replacing oversized diesel delivery trucks by the lighter more efficient cargo vans; Freight carrier CSX Corporation is upgrading its fleet with more efficient clean air locomotives).

Twenty-two Fortune 500 companies in the Gulicic study have entered the third level where companies use technologies and operational tactics in ways that aggressively minimize greenhouse gas emissions from freight management in their supply chains. For example, Tyson Foods Inc. remotely monitors engine diagnostic information and reduces truck idle time; Lowe's strives to switch loads to more environmentally friendly modes from road transport to rail when possible; FPL Group Inc. uses alternative fuels such as soybean diesel, to reduce pollution, and United Parcel Service Inc. uses software to optimize delivery route to minimize distance traveled per delivery.

5. 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 that the company can use to map its sustainability goals. The certification processes provide structure that the company can use to make sustainability part of its culture of continuous improvement.

EPILOGUE

MWC went ahead with the stormwater retention project. The project went smoothly and did not encounter significant unexpected costs. 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.

REFERENCE

Golicic, S. L., Boerstler, C. N. and Ellram, L. M. (2010), "Greening Transportation in the Supply Chain", MIT Sloan Management Review, Vol. 51 Issue 2, pp. 47-55.

Michael J. Pesch, St. Cloud State University

Richard Murphy Jr., Murphy Warehouse Company

Sohel Ahmad, St. Cloud State University