Company backgrounds:
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. Theirinfant 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.
Supply chain of Sanlu:
Case background:
Sanlu outsourced its milk station and production so as to specialized on mass production. Yet, due to the poor supply chain managment and loose regulations of governments, some unscupulous farmers dilute the milk by adding water and melamine. Thus, leading to the tainted milk incidence. The incident will be discussed in-depth as follows.
Q1. How did the crisis arise and who should take up the responsibility ?
Diary Farmers
Farmers had the least bargaining power. They were underpaid, they increase profit by stretching milk with water and add melamine. Moreover, They have little knowledge on producing high quality milk products.
Manufacturer-Sanlu
Sanlu outsourced its milk stations and diary farmers. Yet, it failed to adopt a proper monitoring system, leading to the occurence of milk powder incident. Sanlu did not examine the milk quality and its source from third party carefully and then passed it to the downstream. Moreover, after the occurence of the incident, Sanlu tried to cover the issue and continued its production results in a large number of victims.
Government
The government adopted a self-regulation systems for the companies.Exemptions of quality tests were given to companies which have passed the test thrice in a row. The loose inspection encouraged the farmers to cheat. Moreover, the governmetn set a capped market price for the milk products. To lower the costm the farmers had no choice but to cheat. Also, it covered up public news until the Olympics. What is more, the government is not doing well to educate the mothers about breastfeeding.
Milk stations
There is no no unified supervision system and specific agency in charge of supervision.Because of the unfair payment to the farmers, it encouraged the farmers to cheat so as to increase profits. What is more, those milk stations oftern lack government licenses and they did not have formal contracts with farmers which would lead to the difficulity to assure quality.
Distributor
As Sanlu’s largest foreign partner, Fonterra should have the responsibility of inspecting Sanlu's products carefully before putting on shelves to customers. Once they had found out the problematic products, they should have raised out and halted the production line immediately.
Retailers
Retailers have the responsibiities to keep track of the outlets and the melamine issues. Once found the tainted milk powder, they should take the products off the shelves instead of deceiving the customers.
Consumers (parents):
Consumers should not only look for the price, they should pay attention to the nutrition labels and do research before making purchase of milk power. They could also breast feed the infant babies instead of drinking milk powders.
As a whole, Sanlu should take up the major responsibility for the crisis. As the largest milk powder companies, its poor management such as loopholes in the inspections of the outsourced milk, and the inethical business practice such as trying to cover up the issues led to the occurence of milk powder incidents.
Q2 Why did Sanlu Outsource? What are the advantages and disadvantage?
Due to the keen competitions of foreign companies, in order to stand out in the diary market, Sanlu decided to set up its milk station and outsourced its milk production in 1980s. These third partes are more specialized in milk production. Sanlu hopes to reduce cost and boost the productivity via outsourcing while Sanlu can specialize on marketing.
Advantages of outsourcing:
Cost saving:
It can help save time and save operational cost so as to maximize profit. Outsourcing reduces overhead costs that usually come with running back-end operations. A company's cash-flow can be streamlined. There can be significant cost savings when a business function is outsourced. Employee compensation costs, office space expenses and other costs associated with providing a work space or manufacturing setup are eliminated and free up resources for other purposes.
Specialization:
Sanlu can focus on marketing while the milk station and farmers can focus on produciton and of milk and sourcing of raw materials. Morever, Sanlu can put more attention to research and development. It can facilitate the efficiency and productivity.
Risk diversification
Sanlu can shift its risk of production to the other level of supply chain. Outsourcing certain components of your business process helps the organization to shift certain responsibilities to the outsourced vendor. Since the outsourced vendor is a specialist, they plan your risk-mitigating factors better
Disdvantages of outsourcing:
Lack of control
Over outsourced parties’ activities. For example, milk collection centre may be poorly managed. It would be hard to standardize/may affect product quality, thus, increasing the risk of affecting brand image
Intransparent information flow
Because of the intransparent information flow, company may not have first hand info over the working condition of the outsourced parties/some outsource parties may hide their cost of operations while signing contract
Occurance of conflicts
Conflicts may occured as company and outsourced parties have different operating objectives .For example, one may concern more on product quality while another party may focus on cost reduction.
Q3: What is the role of ethics in supply-chain management?
Ethics are the basic concepts and fundamental principles of decent human conduct which includes study of universal values such as human or natural rights, obedience to the law, morality, concern for the health and safety, environment and sustainability.
Along the vertical supply chain in the case, different role of ethics should be played in different levels as follows:
Farmer
Farmer should be honest and should not cheat by diluting their milk in order to gain more profit. They should also be ethical and law-abiding by not adding Melamine into the milk.
Milk station
The milk station should have set a standard to control the quality and safety of the delivered milk. Besides, they should have contractual agreements with both upstream milk suppliers (farmer) and downstream manufacturers (Sanlu) so as to ensure product safety and quality and suppliers’ economic security.
Manufacturer (Sanlu)
Sanlu should not have shared the financial burden with upstream suppliers (farmers) and exploited their welfare. Fair trade could has been actively promoted to help farmers achieve better trading condition and have a fair bargaining power. If farmers have been paid reasonable price or have a power of bargaining, they need not dilute their milk and add in Melamine to earn more.
Sanlu should not only have emphasized on cost but the product quality and safety. They could have share the knowledge with farmers and even to milk center, so the two upstream parties could have known Sanlu’s ethical expectation and could help ensure products meeting standard. Moreover, Sanlu should have more direct connection with the milk center in order to closely supervise and guarantee the processes of collecting and producing were ethical or not. Even if scandal arises, Sanlu should not have covered the problem or block its widespread on internet which greatly increase the seriousness of the scandal, letting more victims suffer.
Retailer
Though retailer did not have much direct contact with the uppermost level of the chain, retailers should also have the responsibility of assuring products in their stores are safe for customers to consume. If they have adopted a regular spot check system on their products sold on their shelves, they might have found out the fake-protein milk powder and stop spreading those problematic products to public.
Customer
Customers should have the right to speak or respond to any products that they satisfy or do not satisfy on. They should not be bribed for the food safety scandal and even need to spread the news on different social media channels so that the others could have learned about it and stop consuming.
Apart from the vertical supply chain, government should also take the role of monitoring companies’ obedience of laws and regulations. Inspection-exemption should not be given to any company so that they could not escape from the repeated examinations and always keep their products above safety level.
On the competition perspective, price war between competitors should be avoided. For farmers and manufacturers, price war will lead to degrading of product quality so as to gain more profit. Besides, for the price war among retailers, this results in customers buying the cheapest products while ignoring the quality. Regarding this, companies should set reasonable price of the products. Moreover, as long as the manufacturers typically focus on remaining their market share but not customer satisfaction. Therefore, they should also stress about product quality.
Lastly, on the environmental perspective, sustainability is essential. All the stakeholders should have awareness on maintaining sustainability which is to meet the current needs without compromising the future generation’s lives. Therefore, high quality and standard of products should be emphasized.
Q4: What can be done to restore consumer confidence in Chinese dairy products?
In the wake of Sanlu crisis, customers’ confidence in Chinese dairy products declines to such an astounding degree that reputation of Chinese dairy products could hardly bounces back in the near future. Anyway, actions has to be done, under any circumstance, to make Chinese dairy products revive once again as the past did. The following section specifies to-do things various stakeholders are urged to carry out in different time frames, namely short-term and long-term ones.
Immediate measures: In order not to lose trust from consumers, remedial action should be done by the different stakeholders regarding the fake milk crisis. First, authorities and companies that are involved should hold press conference to explain details and their follow-up actions towards the public with sincere apologies. Besides, the affected customers should enjoy compensation from the manufacturers. Manufacturers should also collect all suspected products from the market, set up hotline to assist with the affected customers and any inquires, . As a result, these could show that the willingness of companies to deal with the crisis and gain back trust from the public.
Short-term measures:
For government, the food and beverage watchdog in China is required to level up tests on milk, infant powder, yogurt and other dairy products, strengthening quality inspection of dairy products in the aim of assuring the public that production of Chinese dairy products have been revolutionised and therefore regaining customers’ trust.
As well as setting a higher threshold against dairy products, certified melamine-free labels on dairy products released by the authorised food safety bureau are also needed to be rolled out. The label consists of not only the nutrition information, but also a proclamation that details the bunch of tests or requirements this kind of dairy products has gone through and met, respectively. One critical point to note is that there is no allowance for granting dairy companies any forms of national inspection exemptions.
Long-term measures
From the perspective of dairy companies , they can possess greater control over quality of milk and enjoy economies of scale from vertical acquisition if they set up their own dairy farms ,instead of sourcing milk from small scattered milk farmers with limited skills and awareness of food safety, which further escalates the standard of milk farming and production practice.
In a sense of education, government ,a party highly capable of exerting rights of spreading news at its disposal, should put much more effort on altering the way Chinese customers treat Chinese dairy products and on diverting the public’s reliance on dairy products from foreign sources to domestic sources, by widely promoting how the quality and safety of dairy products is picking up after the lesson of tainted milk crisis. Keep everything regarding milk production transparent and access by the public so as to build customers’ trust.
Reflection
In Sanlu case, we learned to identify the role and reasons behind the milk crisis among both government and business entities. Balancing the interest and morale, it is a challenge to businessman. However, people holding this theory claim that enterprises will suffer from losses if they conform to morality and immorality will benefit them. In Sanlu’s case, even if there are other measures in that condition, the total utility produced by adding melamine isn’t the greatest one. Therefore, what Sanlu did is immoral. When evaluating Sanlu Milk Incident, not only consumers’ sufferings caused by it, but also its chain effect on dairy enterprises and food industry should be taken into consideration. For example, products of relevant enterprises fall into poor market, stock prices are on the decline, corporate image is damaged seriously and the whole society falls into a state of psychological panic.
Talking about the rationale behind outsourcing, there are limitations and benefits of it, therefore the company need to consider what business value that they want to bring out. For example, outsourcing can let the company focus more on their core business but the quality need to be concerned.
Last but not least, we learned how to rebuild the confidence between the consumers, through standard setting, supervision enforcement, vertical integration, corporate social responsibility. Moreover, crisis- management strategy is also important to a company to retrieve the situation and minimize the loss.
Reference:
Business Dictionary.com. (n.d.). Ethics definition. Retrieved on 21 January, 2016, from http://www.businessdictionary.com/definition/ethics.html#ixzz3ycFq5EAW
CriEnglish.com. (2008). Consumer confidence starts to restore over milk products in China. Retrieved on 21 January, 2016, from http://english.cri.cn/4026/2008/10/04/1721s411469.htm
Fair Trade International. (2011). What is Fairtrade? Retrieved on 21 January, 2016, from http://www.fairtrade.net/about-fairtrade/what-is-fairtrade.html
Lu, J.Y. & Tao, Z.G.. (2013). Sanlu's Melamine-Tainted Milk Crisis in China. Asia Case Research Centre. Retrieved on 21 January, 2016.
Wikipedia. (2016). Sanlu Group. Retrieved on 21 January, 2016, from https://en.wikipedia.org/wiki/Sanlu_Group
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