Can China Legislate its Way to Better Food Safety?

Tougher laws in China are aimed at making food safety scandals a thing of the past. But the real answer lies in more effective supply chain management

The essentials

Following a series of food safety scandals, China’s government has announced tougher regulatory requirements for the country’s food suppliers. While the new regulatory regime is welcome, Chialin Chen of Smith School of Business says companies should be looking at their own supply chain management to improve food quality and lower safety risks. China’s food supply system is highly decentralized, which has helped it scale up quickly to meet demand. Chen says greater centralization is essential for all stages, from sourcing and production to management, transportation, and distribution. And price controls have a role in distributing supply chain profit evenly, either by the government or by corporations that control the supply chains.

China’s food safety scandals in recent years have had far-reaching consequences. In 2012, thousands of German children became sick after consuming imported strawberries from China. In 2014, expired meat was processed and relabeled in Shanghai before being sold to McDonald’s, KFC, Pizza Hut, and Starbucks. Bleach and heavy metals have been found coating crops in northern China.

Following these repeated food safety scandals, a revision to the Food Safety Law in China was announced in April 2015 and will go into effect as early as October 1. The revision introduces new regulatory requirements and increases penalties for violations.

Problem solved? Chialin Chen, Smith School of Business associate professor of operations management and technology, says that while new government regulations may help, they can only do so much. “It’s still a business,” he says, “and we can’t expect government to do everything. In the end, an industry or business really needs to take control of their product.”

Ideally, Chen says, companies should be looking at their own supply chain management to improve food quality and lower safety risks.

Working with other researchers, Chen conducted studies of supply chain management in China. He extensively investigated what went wrong in the adulterated milk incident in 2008, where suppliers added melamine to boost the protein quality of raw milk. The incident left 300,000 children sick, six dead, a dairy company bankrupt, and perpetrators sentenced to life imprisonment or death.

Fallout from a Decentralized Supply Chain

One of the biggest problems China faces in strengthening the security of its food supply, according to Chen, is the decentralized approach many companies take to building their businesses, a method that boomed in 2008 to keep up with rapidly-growing markets. Most suppliers are “backyard” farmers and geographically dispersed small-scale farms. Many companies, therefore, have to deal with hundreds of suppliers and legally independent collection agents (who gather the products from suppliers) before their products reach domestic and international retailers.

The more players involved – each protecting their own interest and vying to increase profit – the harder it is to assure product quality and safety. Introducing third-party collection agents to a supply chain not only adds an extra tier to monitor in the chain; it also puts a financial squeeze on suppliers, which can lead to lower quality food products when quality control methods are limited or can be easily manipulated (such as adding water to increase the weight of fish).

"What you need to do is somehow handle the risk. It’s about quality control, not quality assurance"

Moving towards a centralized food supply chain, however, requires more time and money, which many Chinese companies cannot afford, says Chen. For them, vertical control over legally independent agents is crucial. Companies can also use certification programs, high quality standards, and strict monitoring to ensure product quality and safety. As well, employees need to be trained and shown the link between consumer safety, quality, and profit; dairy company Sanyuan reportedly had employees test-drink every batch that left its facilities.

Companies should also develop centralized approaches for further stages in the food supply chain, to include not only sourcing but production, management, transportation, and distribution. By following internationally-certified and standardized processes, companies can avoid possible problems due to having third-party operators control transportation and distribution.

Companies should be able to effectively monitor and trace the flow of goods across the entire production process, from supply to distribution, increasing transparency along the way. “Corporate social responsibility is to take control of your supply chain and verify the safety and quality of your product,” Chen says. “You need a very transparent chain between the suppliers and the company, with an emphasis on the process. You can’t just test the product. You have to work with your suppliers to get the process right, so you can eliminate the possibility of questionable product from the supplier’s system.”

Where Government Fits In

Finally, the role of the Chinese government in food supply chain safety is crucial. With such a sprawl of farms and processing companies – China has half a million food companies, 70 percent of which employ fewer than 10 people – monitoring and governing food safety is a tall task.

The first Food Safety Law was introduced in 2009, and China has been strengthening the law ever since. In the latest version, for example, whistleblowers will be rewarded and have their identity protected in cases of violations. The central government is also holding local governments more accountable for regulating companies under their jurisdiction; local governments have in the past covered up food scandals in an attempt to preserve stability and employment rates.

Beyond stiffer regulation, Chen says price controls have a role in distributing supply chain profit evenly, either through the government or by corporations that control the chains. Although the low-cost structure is often the appeal to doing business in China, the price squeeze is often what interferes with food safety. With so many players involved in a decentralized supply chain, setting a price floor not only protects suppliers but also discourages suppliers from cutting corners due to financial stress.

“If there’s a push to drive the cost down, the suppliers will often have no choice but to change the supplies,” Chen says. “That’s the risky thing, if you let supply prices be totally determined by the free market.”

Parts of China have already adopted this model in certain industries. The Heilongjiang Province, for instance, has reference prices for raw milk according to production costs and market conditions.

The key is to set prices high enough so that suppliers maintain quality standards; to train each tier in the supply chain with specific processes; to track, monitor, and verify each step in the process; and then to make that information transparent and available.

“Nothing is one hundred percent safe,” Chen says. “It’s not possible to totally eliminate the risks involved in food supply chains, since you’re working with so many different suppliers, at times from different countries. But what you need to do is somehow handle the risk. It’s about quality control, not quality assurance."

Kenza Moller

.

Three ways China’s economy is unlike any other

.

Business success in China requires an understanding of the social ties underpinning B2B and B2G relationships

Smith School of Business
Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

Follow Smith Business Insight on: