Sanlu Discussion Questions:
1. How did the Sanlu milk crisis arise? Who should be deemed responsible for the crisis?
2. Why do companies outsource? What are the pros and cons of outsourcing?
3. What is the role of ethics in supply-chain management?
4. What can be done to restore consumer confidence in Chinese dairy products?
5. Comment on Sanlu’s crisis management during the milk scandal.
SANLU’S MELAMINE-TAINTED MILK CRISIS IN CHINA
The milk crisis grieves us [the government] as much as it does the parents. We also feel guilty over this incident, which has exposed many problems along the milk supply chain […] Not only has the crisis revealed shortcomings in governmental supervision, it also reflects the lack of professional ethics and social responsibility among corporations […] The situation must be rectified immediately. Those irresponsible enterprises and implicated leaders must be penalised. Not a single one of them should get away with this!1
Wen Jiabao, prime minister of China
On 12 September 2008, the Chinese government ordered the nation’s biggest manufacturer of milk powder, Sanlu Group (“Sanlu”), to halt production because its powdered infant formula was found to contain melamine, a nitrogen-rich chemical, ingestion of which could cause kidney stones. The national inspection agency further discovered that milk products manufactured by 21 other diary companies tested positive for melamine. Sanlu was reported to have received its first complaint of illness as early as December 2007. However, news of the problem only surfaced nationwide after Sanlu’s New Zealand partner, Fonterra Cooperative Group (“Fonterra”), alerted the New Zealand government in September 2008.
Soon after the scandal broke, Sanlu apologised publicly for the incident and said that its milk suppliers had added melamine to the milk before selling it to them. However, the company failed to explain the delay in alerting the public to the contamination. The local government of Shijiazhuang, where Sanlu was headquartered, was also blamed for holding back the news from the central government.
By the end of September 2008, about 53,000 young children were found to have been sickened due to consumption of melamine-laced dairy products, and at least four babies had died from kidney failure. The melamine scare resulted in many countries recalling and banning goods using milk products from China. The milk crisis was soon regarded by the World Health Organisation (“WHO”) as one of the largest food-safety events in recent decades. While the Sanlu incident triggered widespread probes into the safety of food products made in China, it spotlighted the inadequacy of the entire dairy supply chain in China. The government and the industry had to take steps to restore confidence and ensure the quality of the Chinese dairy supply.
China’s Dairy Industry
Along with China’s growing per capita income and the people’s increasing desire for Western diets, demand for milk and dairy products in the country had been on the increase. Between 2000 and 2007, China’s dairy consumption had increased at an average rate of 23% each year.2 In 2007, over 35 million tons of milk was produced, which was a five-fold increase over a decade before [see Exhibit 1]. Euromonitor, a global industrial research firm, estimated the value of China’s dairy market at US$18 billion in 2007.3 Nevertheless, the per capita dairy consumption in China [see Exhibit 2] was still much lower than that of many other countries. By 2005, compared to the average per capita annual consumption of 268kg in Western countries, 64kg in Japan and 50.9kg in developing countries, Chinese only consumed 22kg of milk per capita annually.4 Over the years, the Chinese government had been promoting the health benefits of dairy consumption, with the hope that all Chinese, particularly children, would drink half a litre of milk every day.5
Dairy Consumption Patterns in China
Research showed that fluid dairy such as pasteurised milk and milk processed through ultra- high-temperature processing (“UHT”)6 were the most widely consumed dairy products in urban areas of China, whereas in the outlying areas where refrigeration and UHT milk were less affordable for the lower-income population, milk powder was consumed for convenience.7 Infant formula in particular had been increasing in popularity, largely due to heavy advertising by producers, who managed to convince many young Chinese parents of the nutritional value and quality of their products. As a result, breastfeeding was declining in China, with the percentage of poor rural women who breastfed reducing from 62% in 2000 to 38% in 2005. Wealthier families also often opted to use infant formula to fit their busy
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