China Milk Crisis: Quality Is Everybody's Problem

Better writers have covered the Melamine Milk Crisis at great depth already (check out Imagethief's article here as an example, or China Law Blog's coverage) so I won't belabor the story. I do, however, have two points to add, germane to what we've been writing here till now.

The Joint Venture and Ethical Rot

Fonterra, the large New Zealand food cooperative that partnered with Sanlu to manufacture the formula, will be remembered for a long time as a company that allegedly knew about the contamination some weeks prior to the kidney stone outbreak, that, justly or otherwise, reputedly did nothing to either stop the sale of the product or alert authorities. I cannot speak for the veracity of these claims, but they are circulating as if they are the truth.

In the Court of Public Opinion, what Fronterra did and did not know is now immaterial, and if the allegations of inaction are false, the company is going to face an epic and expensive effort in China and elsewhere to repair their reputation. I will not speculate on the cost to the company if the allegations are true.

The lesson of Fronterra is plain: foreign partners in joint ventures have three choices:

1. Pick a China partner of unquestionable operational integrity, and then watch over them like a hawk to ensure they continue to operate in an ethical manner, especially in crises;

2. Pick a China partner of imperfect operational integrity, then cram into every employee the importance of maintaining the public trust over any other consideration;

or my favorite

3. Avoid the joint-venture question entirely to ensure you can set and enforce ethical standards with ease.

Readers of this blog know that I am fond of saying that the Sino-foreign joint venture is a lawyer's dream and a manager's nightmare. Maintaining a semblance of control and a consistent strategy are difficult enough in a JV. In an environment where business ethics and corporate governance are no longer of mere academic importance, yet where moral relativism and the Eleventh Commandment ("thou shalt not get caught") frame individual and corporate codes of conduct, the joint-venture does not lend itself to the cultivation of ethical leadership.

My point is not to absolve Fronterra, Sanlu, or anyone else of any action or inaction because of their corporate structure. Rather, it is to sound a warning to companies who are in or are considering a joint venture that these are easy places for ethical lapses to fester unless both partners are committed to setting - and enforcing - high ethical standards. Articulating those standards, training to them, and sticking by them even when there will be hell to pay for doing so is the only way to prepare for a crisis like this, and to have much hope of long-term recovery in its wake.

Quality is Free

When I was fresh out of graduate school, I was thrust into a production management role for which I was somewhat under-qualified. (I'm being charitable, here.) My job was to spend six days a week supervising the outsourced production of accessory furniture across 30 factories in greater China. I had trained in marketing and logistics.

Two things saved me: A deep affection for factories and line workers I gained working teen summers in my dad's investment casting foundry, and Philip B. Crosby's book Quality Is Free: The Art of Making Quality Certain. In the space of less than three hundred readable pages, Crosby gave me a graduate course in managing quality. But what was important was his core point: ensuring quality - and the considerable time, attention, and costs associated with the effort - is where profits come from. Until you stop seeing quality control as a cost center, you will never have passable quality.

Or, as cookie-madam Debbie Fields once said, "good enough never is."

The end result of this upheaval (once the children are healed and the accused have done the perp walk) will be that a few smart companies across China's food sector will see this as an opportunity, and will make major investments in quality assurance, both human and technical. These companies will realize that if nothing else, making investments in inspectors and equipment will be cheaper than regularly yanking product off the shelves.

As Mattel and hundreds of toy retailers learned last year, though, you can't trust quality to the last guy up the supply chain. There has been far too much "trust" and not enough "verify" in handling quality issues out of The World's Factory of late. When I was inspecting furniture in Taiwan, I frequently did it alongside third-party inspectors and buyers from some of my company's largest customers - American retailers. It pissed me off, it was costly for the buyers, but it was the only way to ensure that nothing slipped through.

It would be easy to throw this whole issue on the government, but this crisis has proved once again that business cannot wait for government action. The real lesson of the Melamine Milk Crisis is that quality is everybody's problem, from the farmer to the retailer.

Nota Bene

If you haven't already, you have got to read what David Dayton over at the Silk Road blog is writing about all of this. David is a longtime China and Thailand factory guy. He knows the ugliness around the quality control business, including what it is like to go into a factory and get accused of racism (or worse) for rejecting a critical shipment for quality lapses. In his writing, he's pretty merciless about the issues, but he's absolutely right. I am a certified Pollyanna when it comes to China, but not when it comes to quality control.

The price of quality is eternal vigilance. And it is really clear there are lots of people asleep at their posts - or just looking the other way.

Comments

[David Wolf:]

All - the correct name of the New Zealand dairy firm in question is "Fonterra" not "Fronterra." I apologize for the typo and any inconvenience caused.

David

2008 Sep 24 12:15 PM

[d_teller:]

This problem of "doping" a food product with melamine, I believe, is the same problem that occurred last year with supplying gluten-doped-with-mela... to pet food producers in many countries..

Quality control is only as good as the tests on the intermediates...and the old AAOAC indirect tests for "protein nitrogen" are duped by addition of melamine. Since the time the pet food recall occurred, it now seems obvious that the test should have been updated.

There are a lot of clever chemists, who can almost duplicate mined diamonds, etc. But Deceitful manufactureres should be executed..as were some who used ditethylene glycol to sweeten what was labeled as Pepsodent toothpaste in the Latin American "bargain" markets , as were some who used the hypersulphonated chondroitin to mimic the essential acetyl-glucosamine test in qualifying intermediates for intravenous Heparin...and poisoned thousands of kidney dialysis patients.

There are many creative minds, and subterfuges. There are, fortunately, somewhat fewer executives at manufacturing plants who wilfully endanger others. Creative minds are not necessarily evil; criminal CEO's and QC certifiers are evil, and should face the death penalty, even if they are related to the highest members of govt.!

2008 Sep 26 11:07 PM

[Asser:]

... in an ethical manner....This is the key and completely not possible to overcome by setting any external industrial or internal SOP standard.

Quality sense is a pschological issue, it is not a just traing or education, it is a very very long term accumulative willingness. I believe it may take more than another 40 years or even longer for China workers to build up the "DEEP HEART UNDERSTANDING" on quality.

Foreign partner, please read the mind of Chineses people, make sure you truly know something before JV action.

Taiwan Chinese even do not know how to communicate with China Chinese, how could be for those not Chinese?

Dear Foreign partner, western pschological knowledge or practice mostly do not work in China.

Don't just stick the quality issue on technique, or on training. It is a deep mind issue.

2008 Oct 23 10:41 PM

[HaavBline:]

To Asser:

You are talking sheer nonsense.

Quality can be achieved through good managerial control and process improvement. Good hiring and HR pratices are also critical. Many excellent products are and continue will be procured from China.

2008 Dec 04 01:34 AM

[d_teller:]

This' just a followup to my comment... the newspaper last week, reported that three principals involved in this sickening melamine-in-milk were found guilty and two were sentenced to death. Perhaps that will deter some others from "doping" that's deadly.

Jan 25 10:53 PM