Case Study 3 - Sanlu

1. How did the Sanlu milk crisis arise? Who should be deemed responsible for the crisis? Why?

Background of Sanlu’s Milk Crisis 

• In 2000, “AQSIQ” self-regulation in quality control.
• By the late 1980s Sanlu had already met the qualifications imposed by AQSIQ to be deemed able to carry out self-regulation.
• Take advantage in price with only 18RMB, compared with imported milk powders and as a consequence, take the main market in Mainland.
• Sanlu continued to retain country’s top seller of milk powder for 15 years+ (added pressure)

Stakeholders 

1. Sanlu
• Should bear large responsibility 
• Milk powder is using its brand-name 
• Understand but neglect the harmful effect of its products 
• Over-emphasized on profit and ignore the basic quality control 
• Reduce cost and use Melamine
      
2. Supplier 
• Producers and sellers of faked protein powder, milk dealers, sales distributors and diary farmers 
• The penalties are reasonable in reflection of their responsibility in the crisis. 
• It put many infant lives at risk, some did not even make it out alive.
         
3. Dairy product industry
• Also need to bear huge responsibility 
• Using Melamine used to be a common practice among whole industry, and had grown to be a phenomenon 
• Increase in competitiveness by gaining cost advantage shouldn’t surpass the need of basic nutrition
      
4. Government 
• Certain responsibility should be bourn 
• Played a big part in allowing soft regulation in quality control as early as 2000 
• Bribery and corruption may be involved to lead to this situation 
• More restrictions and regulations should be put in place, and should carry out quality regulations compulsorily
     
5. Customer
• They are victims and unaware of harmful effects of Melamine 
• Lack of relevant knowledge and exposure 
• Placing too much trust and without doubting on famous and popular brands may have let to the crisis

2. Referring to the case, why do companies outsource? What are the pros and cons of outsourcing?

Why companies outsource?

1.  To obtain cost advantage
     • Outsourcing is usually linked to a low-cost in production
  • And consequentially they can offer the product to customers at lower prices
  • Less costs related to maintaining the facilities and machinery

2. To focus on its area of strength 

     • Concentrate on the research and development of its own products with whole effort 

     • Can neglect the part of production of dividing its tasks to other companies 

     • Can act merely as the brand face for producers without a public presence

3. To put less pressure on company’s resources

     • Complicated procedures of setting up initially

     • Need of experts

     • Need of labor’s training
   • Employee advantages, other needs taken care of by outsourcing company
     • More time and cost effective

4. To exploit the expertise of outsourcers
     • No need for hiring experts in field in question
     • No need to extra efforts to train employees
     • Exploit expensive machinery and maintenance cost

Pros of outsourcing

i.     Cost effective 
ii.    Specialise on R&D of product 
iii.   Exploit outsourcers skills 
iv.   Sharing 
v.    Reduction of recruitment and operational costs 
vi.   Cash flow being streamlined 
vii.  Increase productivity and efficiency 
viii. Flexibility in staffing and manpower management

Cons of outsourcing

i.     Risk of exposing confidential information
ii.    Lost of central control
iii.   Exposed to dishonesty from outsourcers
iv.   Over-dependency on outsourcers
v.    Reduction in flexibility of production
vi.   Risk of poor coordination
vii.  Problems of quality

3. What is the role of ethics in supply-chain management?

• Ethics should be treated as principles or bottom-lines of SCM.
• SCM should be transparency between upstream and downstream.
• Mission and core value of a SC should keep step with the ethics.
• Different steps or parties should build a standard and regulation to guarantee the products quality and reputation.
• Every partner should carry the whole SC responsibilities and take the whole SCM’s profits as their owns.

4. What can be done to restore consumer confidence in Chinese dairy products?

Dairy product industry 

• Press conference: get the media involved to increase transparency
• Taking responsibility and admitting to their mistakes
• Discontinue production and distribution of fainted products
• More can be done to boost transparency
• No secrets should be kept in the process of production, e.g. raw materials used, production methods etc. 
• Communication between customers and retailers to get the feedback form customers
• Enhance the general quality of dairy products
• Can ally with foreign dairy product companies to use their brand as a promotion method, e.g. Promote that using the same ingredient as that company
• Tightly control the entry barrier
• Pass the quality control test, fail to enter the industry if cannot pass the test)

Government

• To strength regulations on dairy products
• Penalising responsible parties harshly
• Promote education to farmers
• Can be aware of what they are doing
• Develop a new government development may help
• Similar to “ICAC”, independent department used to control the dairy production tightly
• Education to general public
• To create the awareness of food safety

Society

• Media can take an active role to monitor the production process of dairy products
• Announce any related information promptly to the public
• Public’s awareness on food can be improved
• A phenomenon should be created among the society: People should be brave to voice out when they faced the unfair issue without the permit of government
• Consumer can, thus, have a larger bargaining power to strive for their self interest, at least not to be harmed