Tainted-Baby-Milk Scandal in China
By AUSTIN RAMZY AND LIN
YANG
Tuesday, Sept. 16, 2008
China’s food safety officials have once again come under intense
scrutiny this week as the number of infants sickened by a batch of tainted milk
powder expands daily. On September 17, Chinese Health Ministry authorities
announced that over 6200 babies had fallen ill, many developing kidney stones,
from drinking milk made from toxic powder. At least three have
died, and more than 50 remain in serious condition. Officials have said
the number of victims could climb, the China Daily reported.
Company Background
Sanlu Group CO., Ltd. (SJZSGCZ) was a state-owned Chinese dairy
products company based in Xinhua District, Shijiazhuang, the capital city of Hebei.
It produced one of the oldest and most popular brands of infant formula in
China. New Zealand’s Fonterra owns 43% of Sanlu.
In September 2008, it was involved in an adulterated powdered milk
scandal, affecting some 294,000 Chinese infants and killing six. Their infant
formula had been tainted with melamine, which can cause kidney stones and other
complications. It received a bankruptcy order from Shijiazhuang Court on 24
December 2008, and several of its top managers were sentenced to long prison terms.
1a) How did the
Sanlu milk crisis arise?
Firstly, it is because of large demand of milk products.
Due to increasing income, western diet and government promotion on regular
dairy habits, milk products are highly demanded from the market. In addition to
lacking education and promotion on breast-feeding from the government, the
mothers prefer milk power instead.
Secondly, parents easily believe the company’s claim on
product quality. The company always exaggerate the function and nutrition
value of its product in the advertisement or on the packages. However, parents
do not have enough knowledge to distinguish real from imitation, so they just
easily believe in what the company said and they do not tend to trace for
evidence to the company’s claims.
Thirdly, the ethics aspect. As reported from the
newspaper and according to the local farmers, adding melamine to the milk to increase
nutrition value is an open secret within the industry, however no one try to
stop this situation. Moreover, Sanlu hide the incident and complaints by
corruption, therefore causing the delay in exposing the crisis and increasing
patient in this case.
Finally, poor supervision system and price pressure from the
government and the manufacturer. Because of the price pressure, farmers are
exploited so they would like to revenge by adding chemicals to their products,
or they would like to use unethical method to increase the nutrition value of
the milk so that they can sold for a higher price and increase their income. In
addition, the poor supervision system from the government and company is
another reason leading to the crisis.
AQSIQ - It Introduced an inspection-exemption policy which the inspection free label mislead consumer with high quality.
Local government & authority - Due to corruption, the local government and authority hide the news and allow companies to keep selling problematic product.
Dairy farmers - They are small individuals with very low bargaining power, ther are lacking knowledge on producing safe& high quality milk. Due to the price pressure, they cheat the company by diluting the milk with water & adding melamine.
Milk Stations - Milk stations often run without governmental license. There is no formal contracts with farmers, no standard to assure milk quality as the milk comes from many farmers and no guidelines to farmers. Moreover, the station always adopting low-cost strategy to exploit local farmers. Which it is unethical to farmers, and they are the one who help covering up the fact of adding melamine to milk.
Chinese chemical companies - The Chinese chemical selling melamine scrap to farmers, and promote the “advantages” of it to persuade farmers to buy and added in to milk.
Protein sellers & Manufacturers - The protein sellers and manufacturer mixed melamine scrap into the protein substitutes to fool the farmers and the company, make them not aware of adding harmful chemical to its milk product.
Sanlu - Sanlu cut the price paid to dairy farmers, make them cheat back the company and unscrupulously adding melamine to increase income. Also, it only perform simple quality check with low standard, so that problematic products can still pass the check and sell in the market. In addition, Sanlu is the one who corrupt the local government and authorities to hide the news, also ignored the complaint email from customers. Which directly leading to a delay in alerting the public to the contamination.
Fonterra - As a partner of Sanlu, Fonterra actually sits in the management board with 40% share but ignore the operation issues and the abnormal low price of milk.
Retailer - Retailers in China do not control product standard and blindly put products on shelf. As a retailer, it should be responsible for all products it sold, as it is another check point to make sure product quality. Moreover, just like Sanlu, the retailer refused to handle complaint from the customers and try to avoid responsibility.
Customer (i.e. the parents) – The parents only focus on price when buying things, when they see a low price milk products with strong claims on high nutrition value, they will buy and not thinking the facts behind. This also reflects the fact that they blindly believe in advertising. Lastly, parents rely heavily in baby milk powder but not considering breast-feeding at all.
Click on the video to see: How does outsourcing work?
What is outsourcing?
Outsourcing is an arrangement in which one company provides services
for another company that could also be or usually have been provided in-house.
Outsourcing is a trend that is becoming more common in information technology
and other industries for services that have usually been regarded as intrinsic
to managing a business. In some cases, the entire information management of a
company is outsourced, including planning and business analysis as well as the
installation, management, and servicing of the network and workstations.
Outsourcing can range from the large contract in which a company like IBM
manages IT services for a company like Xerox to the practice of hiring
contractors and temporary office workers on an individual basis.
2a) Why do
companies outsource?
Pricing - Outsourcing can help
saving cost by using resources of the third party (i.e. the farmers), also it
can increase competition between farmers as they companies will choose their
supplier at the best price.
Expertise - Outsourced Farmers are professionals at what they
do, which help Sanlu to save effort to educate the staff on how to farm or
hiring relative expertise to manage the supply. And outsourcing makes the
company being able to choose the best option available.
Focus - By outsourcing, companies can have a higher
flexibility of changing their company focus. For example like Sanlu, it can
gain edge on Core Business: Dairy-product manufacturing / Marketing / Dairy
research & development / Diversify milk-powder products to suit different age
groups.
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2b) What are the pros and cons of outsourcing?
Pros - There are certain pros of outsourcing, including shared
risk between the company and supplier, having expertise on diary farming
therefore getting better quality of milk, increase flexibility so that it
freeing up internal resources that could be used for other purposes base on
different business focus. Moreover, outsourcing achieve cost-reduction, and
probably get faster completion of Work.
Cons - Although there are some pros of outsourcing, the
following cons and risks are not neglect-able, and those are the main causes
for this crisis:
Firstly, it is difficult to control product qualities as it is controlled by suppliers but not the company itself. Secondly, there maybe conflicts between stakeholders as the supplier and company may have their own way and thinking on how to produce the products. Thirdly, having security issues as secret formula of milk or important document may leak out to other companies. Lastly, having risks of affecting brand image by third party (e.g. milk station without licenses)
-------------------------------------------------------------------------------------------------------------------------------------Firstly, it is difficult to control product qualities as it is controlled by suppliers but not the company itself. Secondly, there maybe conflicts between stakeholders as the supplier and company may have their own way and thinking on how to produce the products. Thirdly, having security issues as secret formula of milk or important document may leak out to other companies. Lastly, having risks of affecting brand image by third party (e.g. milk station without licenses)
3) What is the role of ethics in supply chain
management?
Before talking about the role of ethics in supply
chain management, let’s define what ethics is first and why do we need ethics. From
the dictionary, ethics is a set of principles of right conduct or a theory or a
system of moral values. We may generalizes the word ethics is the moral principles
that govern a person’s behavior or the conducting of an activity. In all
industry, ethics play a very important role because every stakeholder wants to
work with a completely ethical supply chain to prevent the ethical scandal which
is one of the biggest business risks. From the Melamine crisis, unethical
behaviors were conducted easily as the role of ethics is weak and the article
mentioned “Damage is great, and protective measures should be adopted at every
stage” and it shows the serious consequence of lack of ethics in the stages of supply
chain.
Now, we should look into the roles of ethics
in supply chain management. First of all, from the vertical supply chain and
channel perspective, the dairy farmers have low bargaining power and they should
not add melamine to reduce their costs. Sanlu adopted the low price strategy and
the company is not ethical because of the price ceiling imposed. The company
only focuses on reducing the cost to earn more profits and ignores the profits
of stakeholders in other stages of the supply chain. If the ethics is emphasized,
there will be a balance of the benefits of different stakeholders in supply
chain. Food safety standards should also be monitored. This gives a higher
transparency to stakeholders in different stages and makes it easier to manage.
From the competition perspective, ethics restricts
the stakeholders to misbehave to achieve a certain goal. In Sanlu case, the
company sacrificing the quality for cost leadership. Yet, affecting the
customers or putting their health at risk is not acceptable. Strengthen ethics
in the supply chain helps to avoid the company misbehaving because of the
competition.
In addition, from the environment perspective,
ethics always plays a significant role. The stakeholders will be forbidden for using
chemicals, especially for the food and agriculture industries. For example,
dairy farmers would not add melamine if the ethics in the supply chain is
strong. It is to secure the production is not harmful to the environment. It is
also common for controlling the emission of pollutants to strike the balance
between environment and economics. Lastly, the most important is to make the
industry being sustainable. It is to ensure the industry can further develop in
long term.
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4) What can be done to restore consumer
confidence in Chinese dairy products?
To restore consumer confidence in Chinese dairy
products, different stakeholders must take immediate actions and also implement
long term strategies:
Sanlu
The immediate action should be taken by
Sanlu are apologize for the incident in the press conference and through mass
communication. The suspected and contaminated products should be recalled to
ensure less people being affected by stop spreading the contaminated products and
medical compensation should be provided to the victims to comfort them.
Internally, the staffs involved in the crisis should be dismissed to prevent them
bring out the crisis again in the future and immediately stop the operation of
farms and milk station.
In long term, the company should hire
expertise from overseas to help run that sector professionally and prevent the
incident happen again. Moreover, Sanlu should have some promotion on
emphasizing on business ethics to rebuild the company image. The products are
tagged with food labels with sources to give consumers more confidence by providing
them more information. They can also fair trade to show that they care about
the ethics which the dairy farmers and workers in milk station are not
deprived.
Chinese Government
The short term action need to be taken by government
should frequently update on situation to the public. It is to inform the
citizens about the progress of solving the crisis. Government can also provide
checking counters for free at least for a year, to allow concerned individuals
to run a product scan.
In long term, to prevent similar crisis
break out again, Chinese government needs to set strict rules and regulations. This
is to maintain the dairy products in China at a high quality level and to eliminate
those companies providing low quality dairy products. Some ad-hoc community visits
can also be carried out for the officers to check the environment and the
production process which make sure no contaminated or low quality products are
produced. Government should set up a union of the dairy product industry for supervising
purpose.
Third-Party
Third parties should also be involved. For social
media, the exposure of Chinese dairy product news on social media need to
include both positive and negative aspects and being objective. Medical sector
should encourage both private and public clinics to stress the importance on
consuming dairy products and educate the parents about how to choose the dairy
products. Parents should not choose the dairy products because of the price
only.
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!! Reflection !!
Outsourcing is beneficial to companies if a strongly reliable
supplier is chosen. If the the supplier cheats the company like the farmers in
this case, the product quality will be terrible and the brand image will be
badly affected. However, the company itself cannot avoid responsibility of
letting the crisis happened. To solve this problem, I suggest companies may
consider using vertical integrated supply chain. To include all
production and selling stages in the supply chain by the company itself can
help quality assurance of products, like Esquel, the multi-national textile
manufacturing company, choose to apply vertical integrated supply chain to
ensure the quality of its every products and customized the production of
special design of it products.
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Reference
https://www.youtube.com/watch?v=c9M99_BQXkg
https://www.youtube.com/watch?time_continue=52&v=fHMYaf4yjBg
https://www.flatworldsolutions.com/articles/top-ten-reasons-to-outsource.php
https://en.wikipedia.org/wiki/Sanlu_Group
http://content.time.com/time/world/article/0,8599,1841535,00.html
http://searchcio.techtarget.com/definition/outsourcing
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