CASE FOR ANALYSIS 6.

Hot Topics in the Supply Chain: The Problem of the Middleman and
a Milk Crisis in China

One of the concerns of supply chain managers is what goes on in the tier two and tier three levels of
the supply chain. It is this unseen area of the supply chain where companies can lose control of the quality of
the products they are manufacturing and selling. The melamine milk crisis described next is an example of
what can go wrong when the unseen tiers of the supply chain operate in an unethical manner.
BACKGROUND
Melamine is used in the making of plastics and laminates, hardly a product one would expect to find
in milk. And yet, in parts of China, it was used in a powdered form to boost the protein levels of milk. Adding
the artificial protein supplement was a common practice among dairy middlemen who first watered down the
milk to extend its volume. The higher protein content enabled middlemen to command higher prices on the
dairy market (Long et al. 2010). However, melamine is toxic when consumed and can cause kidney stones
and renal failure (Pickert 2008).
The now defunct Sanlu Group was a dairy company that was both state owned and a joint venture.
The New Zealand–based company, Fonterra Cooperative Group Ltd, owned 43% of the Sanlu (DeLaurentis
2009). Sanlu was one of several companies that had been aggressive in meeting the growing demand for
infant formula in the Chinese market. However, in May 2008, company general manager Tian Wenhau found
out that it was purchasing melamine-laced milk for use in its baby formula (Chinaview 2009). This breach in
the supply chain was caused by middlemen who were watering down milk supplies and then adding melamine
as an artificial protein booster. See Figure 6.3 for a description of the supply chain.
As the melamine-laced milk moved into the supply chain, illnesses began to be reported. As early as
December 2007, the Sanlu Group received complaints about its baby milk formula, but the cause of the
problems had not yet been determined (DeLaurentis 2009). The extent of the melamine-laced milk supply
crisis eventually caused 300,000 illnesses and six fatalities (Chemical Week 2009). Within international supply
chains, the melamine scandal resulted in a ban on Chinese-made milk products in Japan, Malaysia,
Bangladesh, Tanzania, Gabon, and the 27-nation European Union (Long et al. 2010).
COMPANY RESPONSE
When there is a breach in the supply chain, a company needs to act swiftly to address the problem. In
the case of Sanlu however, the response was slow and ambiguous. Even though Sanlu was aware of the
melamine presence in its milk supply in May, it continued to produce and distribute the infant formula for
several months after the discovery (DeLaurentis 2009).
Several reasons for the slow response have been offered and these should be noted, not only for
their significance to this case but also as a reference guide for all companies sourcing products from China.
First, saving face is a cultural norm in China that manifests itself by seeking to not put the blame for a problem
directly on any one entity (Ye and Pang 2011). Instead, ways are found to not publicly communicate the full
extent of the crisis (Yu and Wen 2003) so that the reputation of the company and its management can be
maintained. The Sanlu Group did communicate it had met all government standards for quality and inspections
with its products. In addition, it reminded its stakeholders that it had a good reputation and a strong track
record and if anything, perhaps its products, had been mislabeled (Ye and Pang 2011). In other words, it
sought to protect its reputation.
A second factor should also be acknowledged. The 2008 Summer Olympics was being held in Beijing
from August 8 to 24. Sanlu formally announced to the public on September 11 that melamine was in its milk
supply. Some speculate that announcing a food scare before the Olympics would have been damaging to the
country and the games itself (Liu 2008). A further irony was that Sanlu was both a joint venture and a state-
owned company. Quality inspectors who monitor food safety reside with the government, as does the
ownership of Sanlu. Such a situation creates a conflict of interest as inspectors and the dairy work for the
same entity (DeLaurentis 2009).

QUESTIONS FOR DISCUSSION

1. The impact of this crisis was felt mainly in the Chinese supply chain. However, what implications (give 2)
does this case have for companies sourcing its products from China? (10 points)
2. What is the relationship between cultural and ethical considerations? In other words, can a decision be
ethical in one culture but unethical in another? Provide your own examples. (10 points)