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THE CHINESE UNIVERSITY OF HONGKONG
Sanlu’s Melamine Tainted Milk Crisis in China
Jasvin Bhasin 10/21/2011
Student ID: s1155006888 Email ID: [email protected]
The following document analyses the answers to three very important questions regarding the the tainted milk crisis in China.
1. What are the major causes of this crisis?
Answer:
The tainted milk crisis in China is perhaps one of the most disastrous
scandals to occur in the history of Chinese dairy industry. In
September of 2008, the infant formula powders produced by Sanlu
group, China’s biggest milk powder manufacturer and 21 other dairy
companies was found to contain melamine- the ingestion of which
could cause kidney stones. This sent shock waves across country
affecting thousands of infants and young children and leading to
casualties.
Many factors can be considered as contributory to this crisis:
1. Low Supply High Demand: China’s dairy and milk production had
slowed down due to surging inflation and increased cost of production
but the national consumption remained high due to China’s growing
income per capita and increased desire for western diet. To take
advantage of this flourishing business industry some infant formula
producers made and sold low quality milk products for personal gains.
Hence, a high demand low supply situation led to dairy companies
becoming dishonest in their activities to save costs make more profits
by using cheap alternatives for milk production.
2. Improper Operation Model: Most of China’s dairy farming was
operated on a small scale and less structural basis. Small dairy farm
complexes functioned like a trust company in very scattered set ups
with no central control and no unified supervision over the actions of
the farm owners or independent milk stations. This led dairy
companies to rely on the raw milk provided by multiple and scattered
milk sources. There was no central organization that could vouch for
quality of this milk.
3. Seller’s Market: Initially, the dairy companies had been selective
with milk collection stations that were eager to sell. However, after
2005 when more and more dairy industry players appeared in the
market it converted the dairy industry to a seller’s market with more
buyers than sellers. Operating without any formal policy or contract,
milk dealers sold their milk to companies that offered them the
highest bid. During peak operational period, desperate dairy
companies paid for milk source regardless of quality. However, during
off peak season farmers had to accept whatever price the companies
offered. Also, individual farmers were exploited via delayed payments
since they did not have collective bargaining power. Also, all the cost
pressure generated by the dairy companies who reduced prices to
compete effectively was transferred on the head of the farmers. Hence,
the farmers were no longer making money due to rise of inflation in
the country and rising cost of dairy feed. All these situations led to the
farmers trying to use cheaper alternatives to increase production and
at least break even.
4. Lack of Knowledge and Quality Control: Small scale rural
farmers had little knowledge about milk safety awareness. Since
payment to the milk farmers was based not just on milk volume but
also on the protein content the milk suppliers resorted to artificial
means like adding nitrogen rich urea. The traditional approach of
measuring milk’s crude protein level could be tricked by mixing non-
protein nitrogen rich compounds such as melamine but it was still
very widely adopted in China.
5. Quality Inspection Exemption: The Chinese government gave
Sanlu group a check-exemption since it was considered to have a good
product quality record, had a large market share and had standards
equivalent to and beyond national and international levels. Hence,
Sanlu was allowed to print the national inspection labels on their
products signifying a quality assurance to customers despite no tests
having been actually performed. This was quite a risky proposition
given the fact that there was no way to check if Sanlu had actually
performed any real testing at their end.
6. Ignoring Early Complaints: The complaints regarding
contaminated formula first appeared in 2007 but Sanlu ignored the
seriousness of the situation and let the problem boil further. If Sanlu
had taken more responsible actions when the news first surfaced may
be the crisis could have been controlled more effectively. Also, in 2008
there was a big delay by Sanlu in notifying the public and concerned
government authorities about the contamination situation.
2. How should the crisis be handled and how product recall
strategies influence company in terms of corporate social
legitimacy, customer response and company’s competitiveness?
Answer:
The disaster of the Sanlu tainted milk crisis in China generated an
irreversible health hazard, caused casualties and shut down one of
the most popular companies in China.
Looking back at the crisis one can make a few suggestions about what
could have been done to handle the crisis in a better way.
1. Acknowledge Early Complaints: Sanlu ignored the early
complaints when they were made in the year 2007 and did its best
to do maximum damage control to its company name at that time.
It resorted to acts of bribery to remove any trace of the existence of
this This was not right, since an effective realization of the
seriousness of the situation at this time could have saved many
more lives.
2. Pro-active reporting: Sanlu delayed the reporting of this incident
to the government authorities and the public which was not the
most ethical way to proceed with such a serious situation. If Sanlu
had pro-actively notified everyone of the situation before hand it
could have saved a bit of dignity for itself. In this case the news
came out to the public when Sanlu’s foreign partner Fonterra
communicated the news to its government.
3. Honesty in Actions: It was noticed that Sanlu tried to gain help
from local government to manage the media and to create a good
environment for the recall of the company’s products and tried to
buy out critics by offering money to internet search engines such
as Baidu when the situation occurred. If Sanlu showed more
responsibility and had honestly shared this news with the central
government on high priority the situation could have been
controlled a bit better.
4. Better Control on Supply Chain: In relation to the Sanlu case,
the state investigators did not recover melamine purchase records
at Sanlu and found no evidence to suggest the company had
actually added the chemical to its formula during production.
Hence, if Sanlu had handled its supply chain better via a
centralized quality control over all its suppliers then this crisis
could have been prevented.
Product Recalls are major problems to supply chain management in
China. A product recall is a request to return to the maker a batch or
an entire production run of a product, usually due to the discovery of
quality and safety issues. The recall is an effort to limit liability for
corporate negligence (which can cause costly legal penalties) and to
improve or avoid damage to publicity. A product recall definitely has
an impact on corporate social legitimacy, customer response and
company’s competitiveness as discussed below:
1. Corporate social legitimacy: From an ethical standpoint product
recalls if done in a pro-active way are indicative of a good social
responsibility on the part of the company. A company has to bear
the brunt of loss made on recalled goods, has to suffer negative
publicity and possible brand image damage during a product
recall.
2. Customer response: Following product recall the customer
response to the products of the company is usually negative. The
customers become more doubtful of the safety of the company
products. This is in sync with normal human psychology where the
concept of “Once bitten twice shy” comes into place. A customer
might start looking for alternatives to replace the original company
products.
3. Company’s competitiveness: Product recalls definitely create
challenge for the company. Many a times it is observed that the
company’s stock price crashes post a product recall and as a result
its competitors gain significant competitive edge. Also, when
customers are wary of the company post a product recall they look
for alternatives in the competitor products and this can cause the
company to lose customer base.
3. What advice would you give to companies in this industry in
terms of how to design and manage their supply chains to avoid
future crisis such as this?
Answer:
A close look at the Sanlu Melamine Tainted Milk crisis indicates that
the biggest loophole that caused this disaster was the supply chain
structure that the company had in place.
The supply chain structure in place before the crisis is illustrated
below:
It can be observed that Sanlu did not have direct control over the
workings and activities of the cattle farmers who provided the raw
milk to the scattered independent milk stations/dealers.
These milk dealers transferred the cost pressure of price reduction to
the heads of cattle farmers forcing them to resort to dangerous cost
saving measures such as adding melamine and other nitrogen rich
materials to sell more milk since the volume of milk was not the only
criteria to make sales any more and more emphasis was laid on the
protein content of the milk.
Also, lack of a central supervisory agency to monitor the workings of
the different chunks of the supply chain would have resulted in better
management of quality aspects.
My suggestions to control such crisis are as follows:
1. Iron out the “Middle Man”: It is observed that the presence of
middle man in most supply chains can result in ambiguity of
information flow and hence it is important to make sure that the
middle man does not become the most powerful deciding authority
in the supply chain. In the Sanlu case the independent milk
dealers/stations were supplying adulterated milk to Sanlu for
years without its knowledge.
2. Central Quality Supervisory Agency: There should be a central
quality supervisory agency which manages the testing and quality
aspects of products passing at every stage. The central agency
should have multiple branches at different points in the supply
chain to manage quality at every checkpoint.
3. Balancing out Cost Pressure: The supply chain should be so
designed that the cost pressures from the price reductions are not
really borne by one part of the supply chain and are evened out
effectively to avoid excess pressure on any one division.
4. Uniform Plan of Action: In a supply chain where multiple parties
are involved it is essential to have a common plan of action with
defined rules and strict measures in place. In case of Sanlu all
constituent parties were following their own course of action
without any coherence with a common goal.
5. Better Management: It is very important to coordinate all process
flows in a supply chain effectively. Management is responsible for
overseeing that the process decisions made at every stage are
ethical, legal and risk-free. The management needs to keep a keen
eye on the workings of various divisions to yield benefits in the long
run and reduce scope of error.
The proposed supply chain model design is as follows: