American Apparel - June 20, 2008

So what does it look like when someone is doing it right?

[In the following post, I know I sound like an American Apparel fanboy, but it's because I want to highlight a company that's doing more good than evil]

I had the chance to tour the American Apparel factory in downtown Los Angeles today. Normally, I wouldn't be all that excited to tour a clothing factory. Clothing is about as far from my areas of interest and expertise as you can get, but this was different. American Apparel is what a manufacturing company looks like when it applies edge economy principles to an old business model.

The conventional wisdom is that you pay your workers as little as possible, either by putting your manufacturing centers in places with a very low cost of living or outsourcing the whole operation but they don't do this. The whole operation is contained in two buildings in downtown Los Angeles (not counting the retail outlets), a city with an unbelievably high cost of living. And while other factories in Los Angeles pay between $30 - $40 a day, at American Apparel it's possible for the garment workers to make between $80 - $120 dollars a day[1]. To put that in perspective, my friends who work as assistants to Hollywood agents make less.

More important than the pay is the functional organization. Instead of having an assembly line system where people are disconnected from each other, people are organized into groups and the group decides how many articles of clothing they're going to make that hour. Since everyone is paid a base of $8 an hour and then a bonus for hitting certain production goals, the group decides how hard to work and how much to make in a day.

A group meeting on the production floor

Each group has a board that tracks what their goal for the hour is

And it's the small things. American Apparel fosters an environment that takes care of their employees. There's a medical clinic in the factory that serves not only the employees but their families as well. And since most of the workers are legal immigrants with family outside the United States, there are phones in the cafeteria that allow for free long distance calls to anywhere in the world. The phones also have assigned phone numbers so that people are able to take phone calls there as well.

It's an amazing amount of freedom to give people and the potential for abuse is huge. Think about what's happening here. It's the garment workers who decide what daily production is going to be. And American Apparel has to eat the cost of an international phone call whenever someone wants to phone home. But it works and it works because when you invest in your people and take care of them, they have no incentive to abuse the system.

But what's the advantage for the company? Having everyone in the same place allows for a huge amount of flexibility. A designer can come up with a design in the morning and have a sample that afternoon and the product in stores the next week. This is only possible because everyone is in the same building. Contrasted against other clothing manufacturers that have to scan and email designs then wait weeks for the samples to be mailed back, American Apparel is nimble in an industry that isn't.

All advertisements are done in house as well.

A bigger advantage however is that everyone's incentives are aligned. American Apparel wants to produce and sell as many t-shirts as possible and since people are paid by the only metric that matters, how much they produce, they produce[2].

What American Apparel has done is turned the conventional wisdom of manufacturing on its head. Instead of outsourcing, American Apparel is located in one of the most expensive cities in the world. And instead of paying the average wage, they pay 2 to 3 times it. Instead of tightly controlling costs by cutting services they're giving away health care and the ability for people to connect with their families. Instead of mandating quotas, they let workers determine ouput.

And then there is the political involvement. American Apparel is involved in both immigration reform, with their "Legalize LA" campaign and environmental reform with solar panels on the top of the factory that reduced energy costs by 20% and the use of organic cotton in their products.

I know I sound like a paid advertisement but I'm not. I want to highlight that there are two ways of doing things. There is this idea that capitalism is a race to the bottom, that it has to be cutthroat and ruthless. But I think that's wrong. There are ways to invest people into the jobs that they work so that value is created all along the chain. From the factory workers to the consumers and everyone in between that makes selling a product possible.

Solar power

I also understand that most people go to work for the paycheck. Most people wouldn't show up to work if they weren't getting paid. But that doesn't mean they can't love their company or be treated right. It doesn't mean that their companies don't have to make the right decisions.

---
[1] http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/07/04/BUGB67G1G21.DTL
[2] http://www.inc.com/inc5000/2007/company-profile.html?id=2006308

Posted by Ben Corman at 2:34 PM

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I've been very supportive of American Apparel for many years, believing that it is still possible for a company to have success in spite of overwhelming trends of outsourcing. I was unaware, however, that they leave their employees in control of output. Thanks for providing more insight into their system, I'm left inspired and hopeful that these are the habits some other companies adopt when our economy starts going to shit.

Do you know anything about how their retail stores operate?

Posted by: Laura at June 21, 2008 07:49 AM

I think ABC's 20/20 did a report on American Apparel a few years ago. Even then, the company seemed different than the other clothing companies out there. The atmosphere in the workplace seemed very relaxed, and it felt like an environment where workers are appreciated and treated fairly.

I wish I could shop there, but the closest store is an hour away. Someday.

Jane magazine also did a small feature on some of the female workers of American Apparel. They all said that they were happy working there.

By the way, how did you score the tour?

Posted by: Mel at June 21, 2008 06:03 PM

That was really interesting Ben, thanks. I don't know much about the company or their clothes at the moment, but I'm inclined to check them out based on the production and human resources values you outline here.

Posted by: Andrew McMillen at June 21, 2008 06:28 PM

Hey Laura,

I don't know anything about the retail stores except that they're owned by American Apparel. As in, there aren't any franchises.

Mel,

I have a friend who works there and we started talking companies who embody edge economy principles and it was his excitement about working there that got me interested in taking a tour.

Posted by: Ben Corman at June 22, 2008 09:28 AM

It's interesting that you brought up Umair Haque and the edge economy. If there is a company that embodies the Manifesto for the Next Industrial Revolution, American Apparel is it.

Great post, Ben!

Posted by: S at June 23, 2008 04:39 PM

awesome post dude! i'm looking forward to visiting HQ myself!

Posted by: Anonymous at June 23, 2008 07:55 PM

While the business model is great, the CEO is kind of sexist asshole. see this article:
http://www.nytimes.com/2005/07/10/fashion/sundaystyles/10HARASS.html?_r=1&oref=slogin

Posted by: amanda at June 26, 2008 07:26 AM

If it wasn't for a former employee who was fucked by dov and then fired and bought off I wouldn't be paying my student loans off today. thanks to APP stock and the marketing which DOV himself admits is only based on sex I've made a few hundred thousand and will be a doctor. So even though Dov is fucking his employees and having inappropriate relationships with loser retail hoes I don't care, the company makes money and thats a lot for an economy that is sucking big time. I say Dov should leave as CEO he does cost us when WSJ or Business Week write about him getting sued so if he wasn't at the helm we'd be even richer. But rich is good richer is better Dov is bad APP is good. So he's a hedonist, some dumb gashes will learn a lesson big deal.

Posted by: David Vida at June 30, 2008 02:46 AM

Hey Ben,

I think this business model only works for companies like American Apparel because of the kind of manufacturing they do. The clothes-making process is still relatively manual and consumes very little energy and time per total volume production.

Whereas something like ceramics, plastics or metals, once the kiln is fired up, a certain volume of product has to be made in a a certain amount of time. The laborer's "commitment" to produce more can not really affect total production.

Clothing also uses lesser energy than other manufacturing because they don't use heavy duty machinery. The main hurdle of manufacturing in a city like Los Angeles instead of China or India is energy costs. Although labor is significantly more expensive in America, energy is exponentially more expensive (due to tax and other hoopla).

Although American Apparel's business model is an interesting one, I just don't think it is applicable to any other manufacturing industry except the garment/clothing industry.

-Howard

Posted by: Howard Lin at July 7, 2008 01:17 PM