Sanlu Group: Responsibility to Customers as major stakeholders

Introduction

The stakeholder theory emphasises the importance of taking care of stakeholder interests to ensure the well being of the organisation (Hemmati, et al, 2002). According to analysts, good performance can only be guaranteed when the cooperation of stakeholders is secured and this entails understanding the stakeholders’ needs and doing everything in an organisation’s power to ensure that such needs are catered for (Phillips, Robert and Freeman, 2003). One of the main stakeholders is the customer. Customers are the drivers of any business. They are the source of revenues and profits for the business and it is for them that businesses exist. Among the needs that customers have is the assurance that the products on offer are safe for use. Customers also expect organisations to be honest about their business practices and to respond positively whenever issues that may affect them arise (Phillips, Robert and Freeman, 2003). This report discusses Sanlu Group in light of the latest milk scandal in 2008 and its implications for the relationship between the group and the customers.

2.0 Findings

2.1 Company introduction

Sanlu Group was formed in 1996 as a predecessor to Shijizhuang Dairy Company which had been formed in 1995 (Yan, 2011). The group had been formed after several acquisitions after to form China’s largest market player in the milk power market. The company would then continue with this exemplary performance for the next 13 years. In 2005, the company would receive a boost with an injection of a ¥864million investment from New Zealand Dairy Cooperative, Fontera (Yan, 2011). This investment enabled the company to solidify its market leadership by increasing its production capacity with the establishment of plants with an annual capacity of 600,000 tonnes being set up in 2006 (Fu, 2011). The company would continue with its strong performance until 2008 September when its life was cut short by the infamous milk scandal whose consequences were devastating for Sanlu Group.

2.2 Sanlu Group’s position on responsibility to customers

Sanlu Group had consistently emphasised their commitment to the provision of quality products in the market. They had expressly guaranteed the safety of their products by emphasising on their rigorous quality tests with a view to ensuring that the products are of the desired quality (Yan, 2011). This was a reputation that they had built over the years to become the largest and most reliable producers of milk powder in the Chinese market. Their commitment to the safety of their target market- the infants had been repeatedly emphasised through branding campaigns and this culminated into the great confidence they were enjoying from the market prior to the milk scandal of 2008 (Fu, 2011).

2.3 Observations on customer issues at Sanlu Group

2.31 Responsibility of the company over the cause of the scandal

The contamination of the milk products is believed to have stemmed from practices by farmers who were bent on raising their incomes and this was caused by two factors: the rise in the cost of farm inputs; and the insistence by Sanlu Group to pay low prices on the milk (Vissar, 2008). To keep their profitability at bay, farmers would add water to increase the quantity of the milk then add melanine to the lighter milk in order to maintain the protein component (Vissar, 2008). A rigorous quality check system by Sanlu would have detected these anomalies with ease. The company should have been able to foresee such practices especially in view of the fact that the farmers were under pressure to keep up with rising costs of inputs. In other words, this scandal is one which should not have been allowed to happen from the beginning. This lack of quality control proved their poor commitment towards assuring the safety of their customers.

2.32 The handling of the scandal by Sanlu Group

Reports indicate that customers started complaining about Sanlu’s milk as early as December 2007 (Seng and Litao, 2008). However, the company only started to admit to the problem in August 2008 (Seng and Litao, 2008). This translates to 8 months of oblivion. The company played down the harmful effects of their products and only admitted to it after the complaints became difficult to silence. There was a deliberate attempt to ensure that the problems are contained with media stations facing strict controls to ensure that the findings of journalists on the matter were not published (Yan, 2011). The effort to silence the complaints against the milk products extended to the social media with reports indicating that China’s largest search engine, Baidu had been offered incentives to filter out any negative comments about the group (Vissarr, 2008).  

2.34 Comparison with competitors

While Sanlu engaged in a cover up, other market players such as Unilever, Nestle and Cadbury immediately initiated investigations on whether their products were affected by the melanine scandal (Fu, 2011). On discovery that this was the case, the companies initiated a costly and massive exercise of withdrawing the products from wherever markets they had been shipped to and went further to warn customers against consuming such products until proper quality audit was conducted (Tim, 2011; Guanbo and Yi, 2010). These brands were therefore able to retain some level of trust among customers and were able to survive albeit at a huge cost.

3.0 Conclusions

3.1 Sanlu Group was proven to have failed the integrity test when they failed to guarantee the safety of their customers by conducting rigorous quality checks on the raw materials used in production.

3.2 The company’s official position is that it upheld quality of products and the safety of its customers above all other interests.

3.3 This statement was proven to be invalid when the company engaged in a cover up scheme when it became apparent that their milk was contaminated and hazardous to infants. A consistent practice would have been to stop further consumption of the products with immediate effect.

3.4 The actions of Sanlu were lacking as compared to companies such as Unilever, Nestle and Cadbury that moved with speed to withdraw their products from the markets to forestall any harm to consumers.

3.5 Investigations revealed that Sanlu had covered up the scandal for close to 8 months and this was violated their ethical responsibility to their consumers.

3.6 The prosecution of their chief executives followed by massive recall costs and the costs of treating the affected patients left the company in bankruptcy hence marking the end of the successful group.

4.0 Recommendations

4.1 The problem could have been avoided through a good quality check system. Milk from suppliers should have undergone rigorous checks to avoid such occurrences

4.2 Dairy companies should consider vertical integration more seriously. Running dairy farms to provide raw materials for processing would pose fewer challenges as far as such malpractices are concerned.

4.3 Sanlu was well aware of the problem long before it broke out. A more responsible approach in tackling the problem would have seen them survive the scandal and probably emerge as a stronger and more trustworthy brand.

4.4 The company should also have made a proactive approach to solve the cases launched out of court and prove its commitment by being swift in taking care of those affected.

References

Fu, J., 2011. the 2008 china milk scandal and the role of government in corporate governance in China. (Online) Available at: http://www.clta.edu.au/professional/papers/conference2009/FuCLTA09.pdf (Accessed 25 February 2012)

Guanbo, S., Yi, L., 2010. Study on the role of social responsibility on corporation performance evaluation. (Online) Available at: http://www.bmtfi.com/upload/product/201004/2010glhy04a2.pdf (Accessed 25 February 2012)

Hemmati, M., et al., 2002. Multistakeholder Processes for Governance and Sustainability: Beyond Deadlock and Conflict. London: Earthscan

Phillips, R., Robert., Freeman, E., 2003. Stakeholder Theory and Organizational Ethics. San Francisco: Berrett-Koehler Publishers

Seng, L.T., Litao, Z., 2008. the tainted milk formula scandal: another hard lesson for China. (Online) Available at: http://www.eai.nus.edu.sg/BB406.pdf (Accessed 25 February 2012)

Tim, L., 2011. china’s tainted milk scandal- expat executives. (Online) Available at: http://fmcgblog.com.au/2008/10/chinas-tainted-milk-scandal-expat-executives/ (Accessed 25 February 2012)

Vissar, W., 2008. CSR lessons from China’s milk scandal. (Online) Available at: http://csrinternational.blogspot.com/2008/11/csr-lessons-from-chinas-milk-scandal.html (Accessed 25 February 2012)

Yan, J., 2011. Fontera in the Sanlu Milk scandal – a case study of a New Zealand company in a product-harm crisis. (Online) Available at: http://researcharchive.lincoln.ac.nz/dspace/bitstream/10182/4200/3/yan_bcom.pdf (Accessed 25 February 2012)