Babies with flat heads are very common now - sometimes flat at the back and sometimes on either side. It is as a result of babies spending too much time on their backs and not having enough "tummy time". Babies also spend alot of time in car seats - long after they've been removed from the car. Babies skull bones are very soft and very quickly mould into a shape if in a position for too long.
The recommendation about putting babies to sleep on their backs is not a new thing - it's been that way for around 20 years or so, to prevent cot death.
The jury is out on treatment for this - there is no evidence to show that anything would help. In fact, once the baby's hair has grown it is likely that you wouldn't even see it.
Your sister really should speak to a health visitor about this - just for reassurance if nothing else.
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