Last fall's melamine scandal illustrates the dangers of a less-than-rigorous approach to quality assurance Teresa DeLaurentis
Companies doing business in China have had difficulty maintaining quality throughout the supply chain, as illustrated by recent food and product safety scandals. For example, in last year's melamine- tainted milk scandal, inherent problems in manufacturing processes and supply chains led to a breakdown of quality assurance. The scandal severely damaged China's dairy industry; it took more than six months from the time the scandal broke for dairy- product sales to recover 70-75 percent of their pre-scandal value, according to one Beijing dairy analyst. To salvage consumer confidence, companies must place new importance on quality assurance. And to achieve good quality control, managers must build more accountable, transparent, and ethically managed supply chains.
The melamine scandal provides lessons on how companies can better control their supply chains. Melamine, a chemical used to produce plastics and fertilizer, can appear to heighten the protein levels of milk so that the milk is erroneously iden- tified as a higher grade and yields a higher price. PRC author- ities found that melamine was added to roughly 70 milk products from 20 companies in China last year; the chemical sickened nearly 300,000 infants and caused the death of at least six children, according to press reports. Leading dairy company Sanlu Group, a partially state-owned enterprise that is now defunct, sat at the heart of the scandal. Investigations determined that some Sanlu staff were aware that third parties had added melamine to milk used for its baby formula, but that Sanlu continued to produce and distribute the formula for months after the discovery The scandal forced New Zealand dairy company Fonterra Cooperative Group Ltd., which at the time owned a 43 percent stake in Sanlu, into the international spotlight. Meanwhile, Beijing Sanyuan Foods Co. Ltd., another state-owned Chinese dairy company, managed to keep fairly free of the scandal, and its business is booming - 2008 net profits rose 87 percent over 2007.
Transparency, accountability, and ethics
An analysis of the quality assurance management and financial performance of Sanlu and Sanyuan illustrates the importance of accountability and ethical management in the supply chain. The lack of accountable supply chain partners - specifically the lack of training and monitoring of business partners - allowed Sanlu's suppliers to taint milk with melamine. Ultimately, weaknesses in Sanlu's supply chain destroyed the company. Though other companies' products tested positive for melamine, all of the publicly reported deaths (as of spring 2009) and most of the controversy in the milk scandal were linked to Sanlu.
By contrast, Sanyuan's business model - with an integrated, company- owned and operated supply chain - has contributed to a boost in sales following September 2008 product tests that con- firmed the quality of its products. According to a November Xinhua News Agency report, the company said that its sales had tripled in Beijing, "panic buying" was reported in other cities, and machines ran 18 to 20 hours a day. (At an auction in March 2009, Sanyuan bought Sanlu Group's core assets for ¥616.5 million [$90.1 million] - less than half of its peak worth. Fonterra has written off its investment in Sanlu.)
Supply chain management pitfalls
Companies investing in China should be aware of several potential pitfalls when trying to build and manage supply chains ethically in China. Though the examples below are discussed in the context of the dairy industry and the melamine scandal, many industries in China face similar problems.
Weak regulations and enforcement
The PRC Administration of Quality, Supervision, Inspection, and Quarantine (AQSIQ) - China's primary quality watchdog - launched a food and toy recall …