What steps should Fonterra have taken to prevent the crisis? Why? iPad 9:43 AM M

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What steps should Fonterra have taken to prevent the crisis? Why?
iPad 9:43 AM Mini-Case: The Melamine Milk Crisis in China Melamine is a product that is used in the making of plastics and laminates. Unfortunately, it has also been illegally added to milk to boost its protein rating. The product is extremely dangerous once consumed and can cause kidney stones and renal failure (Pickert, 2008). In China, a scandal erupted in which dairy mid- dlemen were spiking milk with melamine after they had watered down the milk to extend the product usage. The higher protein content enabled these middlemen to command higher prices on the market (Long, Crandall, & Parnell, 2010). One Chinese company, the Sanlu Group, was purchasing melamine-laced milk for use in its baby formula. Initially, Sanlu management was unaware of the melamine presence in the product. However, some Sanlu staff eventually discovered the melamine but continued to produce and distribute their baby milk formula, even months afterward (DeLaurentis, 2009). The case is reminiscent of Beech-Nut's 1979 discovery, discussed earlier in the chapter, of fake apple juice concentrate that it had unknowingly purchased from one of its suppliers (Hartley, 1993). Rather than abandoning the supplier, Beech-Nut executives continued to use the supplier covertly and eventually found itself in the midst of a major crisis. The fallout from the Beech-Nutapple juice scandal did not include health problems for the babies that consumed its apple juice. Unfortunately, the same outcome would not be true for the Sanlu Group. On June 28, 2008, an infant with kidney stones was admitted to a hospital in Gansu's provincial capital of Lanzhou. The parents told doctors they had been feeding their baby milk produced by the Sanlu Group. Within two months, 14 infants with similar problems had been admitted to the hospital. Other cases were reported in provinces of the Ningxia Hui Autonomous region, Shandong. Jiangxi, Hubei, Shanxi, Jiangsu, Shandong. Anhui, and Hunan. All of the affected infants had been fed the milk formula produced by the Sanlu Group (Long et al, 2010) By September 2008, the cases o mine-induced sickness escalated overa much wider geographic area. The World Health Organization (WHO) reported more than 54,000 children in China had sought medical treatment, with four fatalities reported (Schlein, 2010). In other countries, reports of the melamine scandal began to surface. Bans on the Chinese-made milk products were reported in Japan, Malaysia, Bangladesh, Tanzania, and Gabon. The 27-nation European Union also put a ban on all baby food containing Chinese milk (Long et al., 2010) The Sanlu Group moved slowly in its response to the crisis. In fact, even before the hospitalization of children in June, the company had received complaints about its baby formula milk in March 2008. At that time, the Sanlu Group claimed its products had repeatedly passed quality tests, met national quality standards, and that sick babies must have been fed counterfeit milk powder that used the Sanlu brand name. However, the company later learned that melamine had indeed been introduced into its milk supply. The discovery occurred in early August when its co-owner, New Zealand-based Fonterra, used melamine-testing equipment to verify the presence of the substance. At that time, Fonterra owned 43 percent of the Sanlu Group "Sanlu Dairy, 2009). Although Sanlu confirmed the melamine contamination in August, it did not report the problem to the Chinese government,

Explanation / Answer

Fonterra, was a co-ownwer of SanLu, the chinese based company that was purchasing melamine laced milk for preparing the formula for children.

The necessary actions to be taken by Fonterra can be divided into two broad categories:-

1. Preventive Actions

2. Corrective Actions

Preventive Actions:

Proper Quality checks at the earliest stage. The cost of quality correction is dependent upon the time of detection. That is the cost of correction increases as the detection time increases.

Often a third party quality certification is used to ensure proper quality of the products. Quality inspection companies should be chosen for each country the company sells its products in.

Another way to ensure safety from quality issues is to use multi vendor policy. As the companies diversify their supplier the risk reduces and this also allows us to have a scorecard for each vendors that creates healthy competition among the vendors.

Corrective Actions:-

The company should have immediately reported the issue with the health authorties and called for a product recall as soon as it was realized. Again damaged would have been lesser if it was identified and curbed earlier, insted of allowing the child fatalities.

A whistle blowing policy is often created by compaies to allow the employees to report such issues to the management as and when they are discovered.

Please note, we are talking about internal whistle blowing, which allows the company to take corrective actions internaly.

Companies have issues, but unless they are addressed, they shall become big and at times as in the above case may lead to the demise of the company.

Thanks!

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