One of our very first series of commentaries in 2008, the year of the founding of Supply Chain Matters, related to the ongoing melamine contamination of milk powder and milk products that occurred throughout China. Tragically, six children died and thousands of children were sickened and suffered major health impacts. As the events unfolded for weeks and months since, we have been amazed by the impacts.
This specific incident continues to be top of mind for many Chinese consumers of dairy related products, who even today, in spite of massive remediation efforts by China’s agriculture authorities, have more trust in foreign brands and supply of dairy products than in Chinese brands. This lack of confidence in Chinese producers has fueled shortages of infant milk formula produced by foreign producers causing consumers to shop in other foreign countries for their needs. The Financial Times reports that Australian students were recruited to buy tins of formula and ship them to China where they sold for twice the price. This has caused Australian supermarket chains to in-turn, limit the amount of sales from popular brands such as Karicare, which comes from New Zealand producers.
In 2010, we penned a follow-up commentary, Turning Supply Chain Risk into Opportunity, related to New Zealand based Fonterra, the world’s largest diary producer by volume. This company became indirectly involved in the 2008 incidents because of its prior minority ownership in Sanlu, a major producer of dairy products across China. Fonterra officials were the first to inform the Chinese government, via the government of New Zealand, of the existence of contamination.
The company paid a dire price monetarily, by having to liquidate its entire ownership of Sanlu, while rebuilding its creditability as a major supplier to food companies such as Nestle and Kraft. In 2010, Fonterra was resolute to return to China and rebuild its brand creditability, by establishing a network of its own operated dairy farms within that country. It has since been building an integrated milk business through two directly owned dairy farms.
This week comes news of another twist of turning supply chain disruption into opportunity.
Readers may have read that New Zealand has been suffering from major drought conditions, the worst in 30 years. Many dairy farms have been impacted and here are concerns for as much as a 20 percent drop in total milk production this year.
Fonterra, having to warn of both supply and earnings impacts for the second-half of its fiscal year, has announced this week that it plans to move into China’s infant formula market, the same market that was at the center of the 2008 contamination incidents, and currently has to rations foreign brands because of overwhelming consumer demand. The company will launch its own Anmum brand of infant milk formula later this year along with plans to construct a Chinese plant to process ultra-high temperature (UHT) milk.
Thus, nearly five years later, Fonterra is ready to build-out the last leg of its owned dairy supply chain, the control and processing of milk production. Stockholder in the company were pleased, driving the stock up over 7 percent on hearing the news.
We keep an eye out for industry examples that highlight how companies turn supply chain disruption and risk into a more positive market opportunity, which we will continue to share on Supply Chain Matters. Add Fonterra to this list, and it continues to proactively convert a series of setbacks into market opportunities. Knowing your global market and the dynamics of that market that involve disruptive supply or demand events is an important capability component.
We continue to wish Fonterra and its supply chain teams well in its endeavors across the globe.