CASE ANALYSIS - SANLUS MELAMINE-TAINTED MILK CRISIS IN CHINA

Case Facts The case deals with the malpractices of milk adulteration with chemicals which are not only injurious to the health but also how such practices led to a setback for a company which was once listed as one of Chinas top 100 enterprise. y Sanlu Group was established in 1956 and started out as a small dairy. In 1983 it became the first enterprise in China to launch infant formula and then went on to become the largest producer of milk powder in China. On 12 September 2008, Sanlu Group admitted to contaminate milk powder with melamine, a nitrogen rich chemical which upon ingestion can cause kidney stones. An inspection of over 490 samples of infant milk powder was carried out from 109 brands in China. Among all the tested brands, Sanlu topped the rankings for contamination. Due to consumption of melamine contaminated milk more than 56,000 infants and young children had become sick and some had also died from kidney failure. This resulted in many countries recalling and banning goods using milk products from China causing them a global setback. The Sanlu incident has spotlighted the inadequacy of China's entire dairy supply chain and has forced the government and the industry to make a collective effort to restore consumer confidence in Chinese dairy products.

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Causes which led to such practices y y Low pricing strategy made Sanlu dominate the medium and lower end market. Many private milk collection centers were involved in the collection of milk from farmers. (http://english.sina.com/china/p/2008/0915/186428.html). And their only intention was profit maximization. Sanlu had very little control over these private players. Due to inflation, the profit margins started to diminish. As a result Sanlu had to cut prices paid to farmers. Also at the farmers side as they could not afford appropriate maintenance of cattle, their produce started diminishing in quality. The farmers thus started providing low quality milk by diluting it with water and melamine. Also, payment to dairy farmers for their milk was based on the protein content and other quality indicators of milk. To circumvent the stricter testing, some Chinese milk suppliers started adding nitrogen rich urea to boost the protein readings of the milk. Negligence from the companys top management Even though the information about the adulterated milk was known by early May, the company continued distribution of the product till (http://www.chinadaily.com.cn/china/2009-01/01/content_7358822_2.htm) late September. The company was more concerned about its profits than the well-being of its consumers Aaron S Lobo (2011062) Chitrangada Banerjee (2011073) Navnit Sreekumar (2011090) Prajakta Athavale (2011098) Strafford J Fernandes (2011114) Sudhir K (2011115)

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A consequence of bad corporate governance and weak regulatory policies by the government Cause of Sanlus fall y Under the AQSIQ policy, Sanlu was an inspection free enterprise in China. Such exemption policies ensured that companies could flout the system easily and take advantage of the same to make personal profits. Also they prided themselves with being an enterprise with stringent quality control. However, the results show otherwise. Even though Sanlu never met international standards, the government was exempting it from quality checks. Also the government did not take any heed to the initial complaints, it took an alliance of affected parents - HSB (http://www.theepochtimes.com/n2/chinanews/stone-babies-melamine-victims-9167.html) to initiate a lawsuit against the guilty. Sanlu also failed to explain its delay in alerting the public when it first received customer complaints in late 2007. It did not heed to the complaints received and still tried to produce adulterated milk. Instead of taking strick actions, Sanlu had tried to cover up the news until being prompted by its New Zealand partner, Fonterra, which later alerted the New Zealand government. Even after this Sanlu sold 48 million yuan worth products till late September. This tells us that Sanlu was least concerned about its consumers. Also as the case tells us, when Sanlu was being questioned with regard to the Big Head Disease, it promptly took action to get the name cleared and be removed from the backlist companies. However when they were implicated in the Melamine case, they wanted to only avoid critics and prevent negative publicity. This tells for hypocrite behaviour. The senior officials also bribed a concerned consumer to remove his complaints from the internet which would cause more people to question. This is a further example of unethical behaviour of the management. Addition of Melamine was an open market secret, yet SANLU preferred to turn a blind eye towards it. Sanlu later explained that its unscrupulous raw-milk dealers had illegally added melamine to milk. Over the years, the company shifted towards an outsourcing model to get its raw milk from third parties. However, it failed to keep check on the increasing number of middle men thus giving rise to more adulterated Milk Products. Sanlu was wise in outsourcing its work, but it should not have outsourced its responsibility and blamed others for this mishap.

Learning from the Case y A company could fall or rise because of the decisions of few individuals. An organization has to always work collectively with the correct distribution of power. This could avoid frauds and incidents like the Sanlu mishap Sourcing ones core operations should be handled with utmost care. Ethics plays an important role in supply chain management system. Sometimes it has to be enforced upon all intermediaries Consumer is your primary stakeholder; once your image is tarnished before him it is difficult to repair it. Aaron S Lobo (2011062) Chitrangada Banerjee (2011073) Navnit Sreekumar (2011090) Prajakta Athavale (2011098) Strafford J Fernandes (2011114) Sudhir K (2011115)

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