Case Study-Sanlu

Company Background

Sanlu was a state-owned Chinese dairy products company based in Xinhua District, Shijiazhuang.It produced one of the oldest and most popular brands of infant formula in China.And New Zealand's Fonterra owned 43% of Sanlu.

Due to the Sanlu crisis,it received a bankruptcy order from Shijiazhuang Court on 24 December 2008, and several of its top managers were sentenced to long prison terms.

Sanlu Crisis refer its infant formula had been contaminated with the toxic chemical melamine. Melamine, a chemical used to produce plastics and fertilizer, can appear to heighten the protein levels of milk so that the milk is erroneously iden- tified as a higher grade and yields a higher price. The dangerous effect to health is infants and young children will become sick or even die from kidney failure. The melamine scare also resulted in many countries recalling and banning goods using milk products from China

 How did Sanlu milk crisis arise?

There are reasons leading initial rise of Sanlu in China

• Breastfeeding was declining in China
• Emphasizes on using infant forumla
• Very intensifies inter-regional competition among the industry

Most importanyly. Sanlu took advantages of low price

 

First complaint about milk adulteration: Dec 2007

A consumer posted in the internet community about package dated post 17^th Dec and reported to be a fake  (Power of Internet)

                           

The crisis came into light in Sept 2008 when the company did not respond to the Chinese government on the alteration of milk and its effects which killed 3 babies

 

The Chinese government was alerted by the New Zealand prime minster as Fonterra group, a New Zealand milk company and joint ventured with Sanlu for mutual benefits

Sanlu made a public apology on 15^th Sept

Who is responsible?
1. Sanlu:
   Neglect the harmful results of adding chemicals into milk powder
   Want to maximize their profit & decrease their cost
   Top management: not ensuring a visibility in supply chain
     Also hide the problem to government

2. Suppliers:
 produce & supply milk powder with chemicals(melamine)

3. Government:
Should regulate the quality control as compulsory
The internal food crisis was discovered by a foreign country

 Why do companies outsource?

• Sanlu can concentrate on its core activities(dairy R&D) which has competitive edge
• Non-core activities aren’t the company’s competitive edge
• require management effort and continuous investment to keep them operating
• Avoid taxes, governmnet regulation, labour cost, etc.

Pros of outsourcing

§  Milk Station (Outsourced vendors) are specialized on the raw milk production

§  To reduce the costs and the dependence on non-core activities

  Enjoy economies of scale by reducing labour cost

                    Sanlu has > 30 production plants and > 10,000 employees

§  The risk of the raw milk production can be shared with the outsourced vendors

Cost of raw milk production can be reduced, including labour and operating cost

Cons of outsourcing

• Risk of losing controls of quality and unable to have the first hand information
• Hidden costs and legal problems
• Losing management over the raw milk production , for example : leak of formula of milk

What is the role of ethics in supply-chain management?
We divide it into different aspects.

Economic responsibilities:	Supply high quality products and services
Legal responsibilities:	Obey laws and regulations
Ethical responsibilities:	Conduct business in a way that is morally consistent with the beliefs of society

Vertical integration: Suppliers >Farmers

• Offering acceptably price to the farmers in order to prevent causing cost pressure
• Share the knowledge with the farmers and management method to milk centre
• Clearly clarify the company ethical expectation with the suppliers and distributors
• Hiring consulting companies to monitor the supply chain process

Channel Management

§  Direct and indirect connection to Supply Chain

§  More direct connection with milk center

   >Supervise the whole process of collecting the raw materials whether conduct is ethical or not

§  Ensure high visibility in Supply Chain

>Sanlu covers the problems at the beginning which increase the seriousness of the scandal

Competition in the industry

Because Sanlu grows too aggressive causing the shortage milk and lower the quality,the crisis was discovered.

For creating a stronger corporate culture, Sanlu should recruit talented individuals with high moral standard to assure quality control.

Society expectation

Sanlu should distinguish the expected ethical values between business operations and society (clear about the customers’ expectation)

What can be done to restore confidence in Chinese dairy products?

1.      Corporate Social Responsibillity

>Increase visibility between trading parties –Tracing System
(Through labeling and database)

>Establish received feedback and recall defected products channels

>Encourage the customers to set up Customer Council

>Release the annual report and compliant improvement time to time

2. Advertising

>Cooperation with other dairy companies through experience sharing

>Milk Station Open Day/ Exhibition for public

>Emphasize the importance of fair trading

3.Supervision and management

> Set up real time database by enhancement of information updating

>Grading system to the diary products based on different criteria

>Strictly standardize the regulations to dairy products

> Termination of bad record suppliers

4.Select raw materials from foreign suppliers

  >Choose some famous foreign suppliers with good reputation( using Natural materials ) and publicise it

>Invite foreign expertise to monitor the manufacturing process  


Reference:
https://hbr.org/product/sanlu-s-melamine-tainted-milk-crisis-in-china/an/HKU837-PDF-ENG
http://www.chinabusinessreview.com/ethical-supply-chain-management/