Fonterra never checked Sanlu's dairy products prior to deadly China melamine crisis, study warns

Writing in the International Journal of Production Economics ​this month, Chen et al. use Sanlu’s demise – bankrupt by the December 2008 – as a case study to draw out managerial and policy insights and implications regarding supply chain design, informational visibility, corporate social responsibility and regulatory action to manage global food supply chain quality and risk.

“Our analytical results and two comparative cases show that,  instead of the common ‘poor quality’ misperception of food products from global emerging markets, it is actually the poor vertical control strategy for managing the food supply chain quality and risk that caused the adulterated milk incident,” ​they write.

In 2008 Sanlu Group – Fonterra’s partner had high melamine levels in its products – was quick to blame milk farmers and dealers who sold it milk contaminated with the chemical compound, which was later used in infant formula.

Sanlu was subsequently implicated in the adulterated milk powder scandal that properly broke in the Chinese and world media in September 2008; this affected circa. 300,000 Chinese infants and killed six due to kidney damage.

Dubbed by the World Health Organization (WHO) the “largest food safety event…in recent years”​, the scandal – which arose because melamine was added to milk to misrepresent protein content – was a hammer blow to the Chinese dairy industry, which had been driven by what Chen et al. calls the “blind expansion”​ of China’s big four in the 2000s – Yili, Mengniu, Sanlu and Bright.

The 2008 incident - melamine was first officially detected in Sanlu’s formula in August 2008, Fonterra claimed it pushed hard for a full recall then – coupled with problems in operations and supply chain management led to a “breakdown of quality assurance in the Chinese dairy industry”​, Chen et al. insist.

Sanlu relied unduly on a highly decentralized ‘dispersed sourcing model’ to cut costs and maintain flexibility as it worked to establish markets then factories, they write – paying more or less for milk using a gradated system that measured protein levels and thus provided the temptation for fraud.

Inadequate oversight led to Sanlu’s suppliers and collection agents using melamine, Chen et al. write, while price caps imposed by China’s government and feed price hikes also encouraged cheating.

“Sequential investigations and analyses revealed that Sanlu’s weak supply chain control, especially the lack and training and monitoring of business partners, allowed the adulterated milk to pass through the quality control and inspection points in the company’s supply chain and eventually reach its customers,”​ they add.

But since most multinationals have established quality management systems, the academics write that it is “hard to imagine how those hazardous food products could have passed all the quality inspections along their supply chains to reach the marketplace on such a massive scale”.​

“Additionally, the pressing requirements for fast delivery and low costs imposed by multinational firms can also severely challenge a supplier’s bottom line, which results in quality alteration or deterioration,” ​Chen et al. add.

However, the academics claim that in 2008 Fonterra's experience – as Sanlu’s foreign partner and major stakeholder with a 43% shareholding - "did not appear to be helpful"​ in stopping quality/safety problems.

“While Fonterra advised Sanlu on quality testing, the New Zealand company said that it never checked any of its partner's products and was not aware of the practice of adulteration until one month before the incident erupted,”​ they add, citing a Financial Times ​article from 2008​.

Advancing a new theoretical model for food supply chain quality control, Chen et al. and claims to present the first analytical model identifying the effects of “quality distortion”​ due to sampling testing technology and different supply chain structures.

“Our analyses show an important truth about food quality control in today's global emerging markets. Managing food supply chain quality and risk requires the integrated strategy which addresses issues in supply chain design, quality testing and verification, informational visibility, regulatory environment, and perhaps most importantly, corporate social responsibility,”​ Chen et al. conclude.

Title: ​‘Quality Control in Food Supply Chain Management: An Analytical Model and Case Study of the Adulterated Milk Incident in China’

Authors: ​Chen, C., Zhang, J, Delaurentis, T.

Source: ​International Journal of Production Economics​, Volume 152, June 2014, pp.118-189 DOI: 10.1016/j.ijpe.2013.12.016​