Company Background
Sanlu Group Company Ltd was found in 1956 and started out as a small dairy in Shijiazhuang, which was the capital city of Hebei province. Sanlu was one of the oldest brands which produced the baby formula in China. With the successful business developed, Sanlu had been a joint venture with Fonterra, which is the largest dairy company in New Zealand, in 2006. However, the fake milk issue of Sanlu was disclosed in 2008, so-called "Melamine-tainted milk crisis". China's central government suspended the sale of Sanlu milk, and the Sanlu Group finally declared bankruptcy in 2008.
Case Background
As many infant babies were reported to sicked after feeding baby formula produced by Sanlu Group, the Chinese government started to concern the issue and found that the melamine in Sanlu's milk powder. The tremendous issue brought to the high concern from society and also the world organisation. Not only the Sanlu Group, some related stakeholder, like framer and manufacture, was widely criticised by mass media.
How did the Sanlu milk crisis arise? Who should be deemed responsible for the crisis?
Dairy company-Sanlu Company, produced the disqualified baby formula at low cost in order to satisfy the demand of milk pounder. However, the demand for infant formula had been increasing dramatically. It is largely due to heavy advertising by the producer, who promote the convenience and nutritional value of their products. The breastfeeding was declining from 62% in 2000 to 38% in 2005 in the poor rural area.
After the scandal broke, the local government of Shijiazhuang hold back the information of the incident. Consumer keeps buying and feeding the fake baby formula, so more people suffer from this crisis.
Sanlu was one of the large-scale manufacturers of baby formula in China. They adopted multiple outsource strategy for the milk to produce the baby formula. So, they are responsible for managing the quality of different suppliers and also the milk. However, they offer a low price to purchase milk and they did not really concern about the quality of milk. They sell baby formula without quality assurance to the customer and lead to the baby crisis.
The farmer had no bargaining power to negotiate with manufacture so they are actually facing the cost pressure. In addition, most of the farmers were not familiar with the effects of using melamine as they were low educated. As the result, they stretching milk with water and adding melamine in order to raise the protein content level of milk and lower the production cost.
The government failed to response the crisis effectively. when the news of fake infant formula spreads across the internet, the government did not announce the report to the public and stop the sale of related products immediately. what they did was to report the news after the end of the Olympic event.
AQSIQ This function of this organisation is to inspect food’s quality and safety. The certification from AQSIQ should be the most confident indication for the customer. However, they don't have a good inspection procedure and checking system. The substandard milk can also pass the quality test thus, a lot of customers suffered in the unqualified and damaged foods and products.
Milk Station Some of the milk stations in China were operated without applying for a valid license so it is hard to supervise all milk stations. The environment of the workplace was a concern. Also, some milk stations might use poor infrastructure to operate so that milk products may not meet the acceptable standard.
Why do companies outsource? What are the pros and cons of outsourcing?
The demand for milk and dairy products is increasing sharply in China, and a lot of foreign companies join China’s dairy industry. To maintain the competitiveness of the industry, Sanlu outsources the milk production as the third party are specialised in this function, and Sanlu can ensure the sustainable supply of milk to satisfy the market, which help Sanlu reduce cost and boost the efficiency.
Advantages of outsourcing
1.Focus on core business
Sanlu can concentrate its core business on dairy product manufacturing and marketing after outsourcing the raw milk. This helps optimise resources utilisation and thus improve the operation’s efficiency.
2.Risk-sharing
Sanlu can shift certain responsibilities to the vendor when outsourcing. If there are any problems with the raw milk supply, Sanlu will not suffer a lot since it can easily switch to other outsourced vendors to run the business.
3.Cost-saving
Outsourcing can reduce operational costs, such as research and development cost, and labour costs, like employee wages and benefits. Moreover, there are many raw milk suppliers so their bargaining power is low, therefore, Sanlu can choose the vendor with higher quality at lower price.
Disadvantages of outsourcing
1.Loss control on quality
It's hard to ensure the quality of raw milk is standardised as Sanlu cannot monitor the process of supplying raw milk after turning the control of that function over to the outsourced vendor. Hence, the inconsistent in the quality of raw milk among all dairy farmers may affect the quality of Sanlu’s products.
2.Hidden cost
There is some hidden cost occurring while outsourcing, such as time cost and legal cost, because Sanlu may need a lot of time spent on negotiation about the contract.
3.Conflict of objectives
The objective of Sanlu and third party may not be the same. For example, Sanlu cares about the quality of the product but the third party aims to lower the cost.
What is the role of ethics in supply-chain management?
Different stakeholders in the supply chain are taking their own roles of ethics, they can be analysed from the supply chain, competition and environment perspective.
From supply chain and channel perspective, farmers, milk stations and the manufacturer Sanlu should take customers' food safety as a major concern. Every stage of the supply chain should take the responsibility to ensure the quality of both raw material and product. Regulations and guidelines should be followed strictly. Also, they need to consider the balance of interest for all the parties. They should not pass all of the pricing pressure to anyone on the supply chain to maintain the stability of product quality and sustainability of the supply chain.
From the competition perspective, competitors should avoid vicious price wars. Competitors should not allow having an open secret of adding melamine in the industry. Besides, competitors should not tolerate bribery actions in industry but they should actively report to the government. Setting a universal code of ethic in the industry is necessary. Each manufacturer in the industry should understand that value-adding is the ultimate way to create value such as developing new low-cost dairy products. Moreover, when considering the source of procurement, the price should not be the only important factor to avoid the neglect of quality factor. Signing contracts with quality suppliers are encouraged. The responsibility to choose product other than price also belongs to the consumers.
From environment perspective, the company should understand there is a limited supply of natural resources, especially those industries relying on natural resources in production. No over-fishing in the fishing industry is an example to ensure the sustainability. Besides, there are international laws prohibiting the use of chemicals and the reduction of pollutants emission. Some companies like CLP which has polluted the environment a lot during oil production would carry out tree planting activities as compensation. In conclusion, companies should try to lower the damage caused to the environment during production activities so as to maintain the sustainability of the environment.
What can be done to restore consumer confidence in Chinese dairy products?
After the Sanlu scandal, Chinese people are losing faith in domestic dairy products. Nearly half of China's infant milk powder supply, which totalled 560,000 tonnes of 2010, were taken up by foreign brands. To restore customers’ confidence in domestic dairy products, various stakeholders have to put effort into that. 1. Apply Proactive Accountability Approach
Accountability is the key to rebuilding consumer confidence in the industry following a food scandal. The Sanlu Group hiding the truth from the customer has led to the development of milk contamination crisis. To increase customer's’ confidence, the involved parties should accept their responsibilities proactively. The company should inform the public right after the confirming the contamination in order to minimise the number of the victim. Applying proactive accountability approach can show that the company is trustworthy and care about public interest.
2. Establish Fully Traceable Quality Control Mechanism
A fully traceable quality control mechanism can make it easier and more comprehensive in monitoring dairy products. Under this mechanism, every dairy product is required to have an electronic supervision code on it. The electronic supervision code will include the following information: name of the product, production enterprises, license number, production date, expiration date, logistic flow and other information. With such mechanism, the entire production process of the dairy product can be traced. If the dairy products are suspected of being tainted, the supervision code can make the product recall process works effectively and efficiently.
3. Investigating the causes behind Sanlu milk crisis and publishing the results
At the beginning stage of the outbreak of the Sanlu milk crisis, the government should initiate various contingency plans ranging from informing the public to conducting some sophisticated investigation for the incident.
Meanwhile, the government should be placed its attention on the unknown factors and identify how the milk products were contaminated. It is also recommended that a reliable laboratory should be sourced to ensure the integrity of the investigation.
With the results of the investigation, it is the government's responsibility to inform the victim and its citizens the truth with the best transparency. Any delay will only cause more harm to the situation. Lastly, they should uphold the right for the victim to appeal and the ability to bring the case to the court. The key to ensuring a fair and stable society is the rule of law and the citizen's judiciary right to understand how their babies been hurt.
However, the producer cannot make a high-profit margin even that the high demand for infant formula in the market. The main reason is that the Government in China capped the market price of infant formula so that the producer would lower the cost of producing infant formula to maximise profit. One of the methods for lowering the cost is to add melamine in infant formula. The melamine, a nitrogen-rich chemical that could cause kidney stone when consuming regularly in large doses, is cheap and contains protein so that the Substandard infant formula can pass the food quality test.
