Session 9 Case Study Doing the Right Thing: The Schwan Food Company

In September 1994, an outbreak of salmonella struck southern and southeast Minnesota. The most common way to be afflicted with salmonella is through tainted food products. On October 7, 1994, the Minnesota Department of Health (MDH) contacted The Schwan Food Company about the MDHs plans to issue an advisory recommending that consumers not eat Schwans ice cream. The MDH advisory was based on a preliminary study. Obviously Schwan, which has a reputation for high quality, had a dilemma. How should the company respond, and when should it respond? Until further evidence was presented, Schwan could not even be sure that its ice cream was involved. Nonetheless, Schwan acted immediately. On October 7, Schwan issued a press release announcing the voluntary recall of all its ice cream products. Schwan also announced the shutdown of its ice cream plant in Marshall, Minnesota. A 24-hour hotline was established. Schwan also offered to pay for tests that would help diagnose a customers illness and determine whether it could be linked to salmonella. Hundreds of subsequent tests at Schwans ice cream plant in Marshall, Minnesota, tested negative for salmonella. Yet between October 8 and October 10, the MDH hotline reported that, based on calls received, it believed that over 1,200 people had become ill after eating Schwans ice cream. Only later did tests determine that salmonella was present in some samples of Schwans ice cream that had been taken from the homes of those who had become sick. How had the ice cream become contaminated? This was the mystery. The Companys Ethical Foundation In addition to its reputation for quality, Schwan also has a solid reputation as a highly ethical company. Marvin Schwan, the founder of Schwan, walked the talk when it came to ethics. He set an example with his own conduct and expected employees to walk the straight and narrow. In 1991, Marvin wrote a statement of values that Schwan would embody. These values included hard work, enthusiasm, integrity, growth, and helping one another. Clearly, some of these values are ethical in nature. Schwan also has a company Credo that has quality as its focal point. The Credo begins as follows: We believe that to achieve the Vision of Our Heritage of Quality Policy, our family of businesses must operate under the following principles: Total Quality Commitment 1. 2. Quality is customer satisfaction and includes both internal and external customers. Total quality includes quality service, quality products, quality relationships, and is EVERYONEs responsibility.

A key to understanding Schwans quick and effective response to the salmonella crisis is a portion of the value statement made by Marvin Schwan: The Schwan Food Company has a sacred trust with its customers, and integrity means doing what is right regardless of the consequences. Just as Johnson & Johnson had done years before when it based its response to the Tylenol crisis by involving its own Credo, Schwan embraced its Credo and Mr. Schwans statement of values in determining how it would respond to the October 7 notification by the MDH. Taking Action before Responsibility Had Been Established As mentioned, Schwan acted immediately on October 7 to protect its customers without confirmation that its ice cream was involved in the salmonella outbreak. By October 9 a total recall plan was in place. Among the items in Schwans recall plan were provisions for giving refunds to customers. Ads appeared that communicated the recall information. All of this occurred before it was absolutely certain that Schwans ice cream was involved in the salmonella outbreak. Schwan worked with its wholesale accounts in numerous states and personally delivered information letters regarding the recall to thousands of individual customers on scheduled individual delivery routes. Schwan also shut down its ice cream plant, and microbiological testing began in earnest. In addition to the testing at the plant, all Schwans plant employees were tested for salmonella. Also tested were hundreds of finished ice cream products as well as the tankers that had carried the ice cream premix. Observers agree that both the recall and the overall Schwans response went above and beyond what was normally done in this kind of situation. Schwans Plant Not the Cause of the Contamination Finally the mystery was solved. The MDH ultimately determined that the Schwans plant was not the cause of the ice cream contamination. The MDH determined that the contamination was caused when tanker trucks that had previously carried non-pasteurised liquid eggs were later used to transport pasteurized ice cream premix from vendors to the Schwans plant. Schwan brought a lawsuit against the tanker truck company and the ice cream mix vendors alleging, among other things, that these shipments to Schwan of ice cream premix which contained salmonella were in violation of contractual agreements. As a result of the MDHs determination and the information obtained in the lawsuit, Schwan now uses only dedicated tankers to transport the ice cream premix. A dedicated tanker is one that is used exclusively by Schwan for shipping items used in Schwans production of foodstuffs. Schwan also built and now uses a pasteurization unit that subjects the already pasteurised ice cream premix to an additional pasteurization process upon its arrival at the Schwans plant. Both before and after this incident, Schwan has continually proven to be a leader in food quality and safety. Schwan was the first company to distribute irradiated ground beef nationwide. Moreover, any ground beef it sells from the route trucks has been electronically pasteurized. And, with respect to food allergies, Schwan has initiated a corporate-wide practice of putting allergen labelling on its food products. Litigation from Incident

As is usually the case in these situations, there was class action litigation even though the salmonella crisis may not have been as extensive as originally thought. However, thousands of Schwans customers recognized that Schwan was not at fault and either accepted Schwans offers of discount coupons and/or replacement product or simply refused to sue Schwan. Schwan also responded so well to customer complaints that the class-action lawsuits were resolved relatively quickly, and a three-judge panel of the Minnesota Court of Appeals said: that so few plaintiffs objected to the settlement is a significant factor that supports the fairness and adequacy of the settlement terms. A front-page article in the November 1995 issue of Corporate Legal Times was titled A Model to FollowSchwan Beats Salmonella and Possible Disaster. Many now argue that Schwan emerged from the crisis a stronger company than it had been before. It held on to most of its original customers and added new customers as well. Some of Schwans route drivers found that some customers did not even want to return the ice cream products that had been labeled for recall! Questions 1. 2. Is Schwans reputation for high quality and integrity a financial asset that should be recognised and counted as part of the financial value of the company? Taking responsibility for a problem when one is not even sure one is the cause of the problem is costly. Was Schwan correct in moving so quickly to shut down its plant and conduct a voluntary recall of all its ice cream products? 3. Taking responsibility often implies liability. Sometimes lawyers argue against admitting anything that even resembles liability, given the possible legal consequences. Again, did Schwan overreact by moving so quickly to protect its customers and the public at large?