BenCorman.com - 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