Tainted Milk Crisis In ChinaSanlu’s Melamine

Salient Events of the Case• Sanlu (formerly Shijiazhuang Dairy Co.) was established in 1956 in Shijiazhuang, the

capital city of Hebei Province in China• It produced dairy products and was the first company to launch infant formula• It was one of the most successful companies in its sector and a market leader in

powdered milk category• On 12 Sept. 2008, the Chinese government ordered Sanlu to halt production because

its powdered infant formula was found to contain melamine, a nitrogen rich chemical, indigestion of which could cause Kidney stones

• The National Inspection Agency discovered that milk products from 21 other dairy companies tested positive for melamine

• On 24 Dec 2008, Sanlu filed for bankruptcy with a net debt of US$160 million

1. Reasons for the crisis

• Lack of quality control measures by the State Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”)

• The introduction of inspection-exemption policy in 2000 meant Qualified companies could get away with substandard quality controls

• Government’s failure to stop the illegal production of Melamine after the ban of its use in food products

• Sanlu’s ignorance of customer complaints and lack of quality control mechanism • The Chinese Dairy Association’s failure to instill a sense of social responsibility and self-

regulation within its stakeholders• Breach of moral conduct by the local government of Hebei province and Sanlu’s Shijiazhuang

officials, for not reporting the matter to the higher authorities

2. As to what happened in SANLU, Is it a normal business risk or do you think some covenants of Governance, Ethics, and sustainable development were breached. If so, what are they?

• Sanlu’s case was normal business risk, but its implications breached covenants of Governance, Ethics and Sustainable development. • The primary objective of Sanlu was to produce dairy products for the people of China and

create value for its stakeholders i.e. owners, farmers, dairy owners, customer and the local community. Fonterra had to bear the losses from the scandal along with everyone attached to the Chinese Dairy Industry

• Ethical principals like Courage, Self-control, Generosity, Magnificence, High-mindedness, Gentleness, Friendliness, Truthfulness and Modesty were breached by Sanlu, and it became the reason for its downfall as the company filed for bankruptcy.

3. Is good governance an issue one needs to consider before a crisis happens or is it also relevant for post crisis management?

• Good governance should be at the heart of the organization and imbibed in its culture.

• It helps organizations to stay away from crisis in the first place. However it is equally relevant post crisis too.

• In the case of Sanlu, rather than alerting everyone and sorting out the issue as soon as possible, the company decided to seek help from local government to cover up the issue and even go down to the level of buying out critics.

4. If yes (for Q.3), what could have been done to make the company’s interest and image?• The company should have firstly dealt with the complaint of Mr. Wang Yuanping. An

enquiry rather than a cover up would have helped the company to unearth the scandal earlier.

• After the scandal broke out, they should have enforced a blanket recall of all their products from the market. Instead they continued to sell defected products and made US$6.9 million from the sales.

• Because of their delay in taking action, the Chinese community had to suffer a lot. Their decision to bribe Baidu was totally unethical and immoral.

5. On the larger issue of consumer confidence, what should be done to improve the image for Chinese dairy products in general and SANLU in particular?

• Consumer confidence takes years to build and it can go down within a matter of days. It happened with Sanlu and the other Chinese dairy products after the scandal broke out. • The Chinese government should impose strict regulation in the Food sector to

prevent further scandals• Chinese Dairy Association should advertise the best practices in dairy production and

reward organizations who follow it• They should create awareness among consumers to report events however small it

may seem. They should be advised to buy from only trusted brands

6. On the issue of supply chain management, as it outsources, what SANLU should have done to protect the customer and its own interests?

• Mandatory quality control systems should have been in place for all the suppliers of milk to Sanlu

• A secondary check on the quality of milk should have been enforced and those who don’t qualify should be barred from the suppliers list

• Continuously monitor the quality of end products and samples from batches should have been sent to the lab for testing

• Create a comprehensive reward and punishment mechanism within the supply chain for procurement of milk

• Manage production adequately to avoid shortages and thereby the temptation to buy milk from untrusted partners

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