Chinese Milk Scandal Highlights Need for Preemption

Yesterday I noted the impact of the Chinese tainted-milk scandal on a number of global food companies. Today, the Wall Street Journal takes an in-depth look at the problem.

The scandal, the Journal states, "exposes one of the pitfalls of a key strategy of the world's big multinational food companies: relying on local suppliers in emerging markets."

Yes, it does that for sure. And such problems are likely to get worse -- and more expensive -- before they get better.

Food companies pretty much have to rely on local suppliers if they want to do business globally. The ones that take action now will be in a better position than those who wait until they are confronted with a crisis.

Kraft, the Journal notes, already conducts quality checks on its suppliers. Confectioner Mars does business only with those Chinese suppliers that control the entire production process.

By contrast, HJ Heinz dropped its Chinese suppliers after it had to recall 270 cases of baby food in Hong Kong as a precaution and now has started testing all its dairy ingredients in China for melamine. British confectioner Cadbury is recalling the 11 products made in its Beijing factory, again as a precaution after trace amounts of melamine were found in its Chinese products. Tests it conducted "cast doubt on the integrity of a range of our products manufactured in China," the company said.

The trick is to remove the possibility of such doubt in the first place. Cadbury tests all of its own operations, but basically trusts its suppliers to provide taint-free ingredients. "Nobody can look for everything," a spokesman told the Journal.

Maybe not, but its becoming clear that the trust-but-verify model is more likely than to be effective than trust alone.