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Milk’s Message: Know What You Are Buying (And What You Are Selling)

We have been here before with baby milk, pet food and Sudan Red (see more here [1]). Not to mention the execution of the former head of the State Food and Drug Administration. But the current baby milk powder crisis shows that there is still a serious supply chain risk, and that companies need to proactively protect their brands – and their consumers. The current, Sanlu, scandal has now become front page news around the world. Reuters reported on 17 September:

But how did it happen. Just like our firm found when investigating the background to the Sudan Red crisis on behalf of big foreign brands, it seems to have come down to a dangerous mixture of desire for profit and lack of risk management process, and too much trust. Reuters notes:

Imagethief has provided background to the case in this post: Melamine in Sanlu milk powder? Now that’s a crisis! [2]

From the foreign investors’ prespective it is interesting to note that Sanlu has a foreign joint venture partner, Fonterra of New Zealand. Apparently they may have known of the problems but (while moving behind the scenes) did not go public. And Imagethief gets right to the point:

We all know about the potential risks of joint ventures [3]. But this is no longer a theoretical issue for Fonterra which, according to China Law Blog [4], invested US$153 million for 43 percent of the business in 2005. China Law Blog goes straight to the law, with Steve Dickinson being quoted, in an article from the Dominion Post, as saying:

So much for the joint venture! Of course it could be argued that anyone (local or foreign) involved in the business had the (moral) power to make the dangers public. And of course communications, politics (and the “harmonious society” – if not the Olympic timing – makes this political), and business can be complicated in China. But try telling that to the parents of a sick baby.

A Chinese mother on TV the other day said she was not worried as she had fed her baby with foreign baby milk powder – and pretty much the whole local dairy industry in China is suffering the fallout leaving, according to the Economist, “not much but Nestle”. Perhaps that mother has faith in foreign regulation of food or foreign brands. But if brands can be undermined by what the supply chain secretly adds to them, those brands can suffer serious consequences – though economic loss is the least of anyone’s worries in the current case.

One moral of the story here is that, in a crisis, consumers need to be protected ahead of the company that serves them. Another is that lack of control creates business risk.

But for all those wondering what might happen (or might be happening) in their own supply chains, a process review, regular testing, due diligence on suppliers (and suppliers of suppliers), as well as a regular reality check on costs (which cannot always go down), might be some things to put on the “to do” list on Monday morning.

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