Venture Hacks

Ed: This is a guest post by Kevin Meyer, the President of Factory Strategies Group, which operates Superfactory. He also writes an excellent blog called Evolving Excellence. In this post, Kevin describes how American Apparel unwittingly applies lean practices like short cycle times (concept-to-product in 8 days), integrated QA, cross-functional teams, and more.

American Apparel has long been one of my favorite companies. I love companies that think outside the box, ignore popular wisdom, and, in doing so, teach us some lessons.

Brief background on why I like them so much: this is a $500 million manufacturer of t-shirts, underwear, and the like. Typically low margin products, the kind of thing that usually comes from Asian and Central American sweatshops.

But not at American Apparel. This company makes over 1 million articles of clothing per week, from their one factory in Los Angeles and they grew 40% this year. They pay their 5,000-person workforce significantly above minimum wage (average is $12-$15 per hour), give them full subsidized benefits (such as high quality health care insurance for $8 per week), and they turn a profit.

This should embarrass the heck out of any executive who thinks he has to outsource in order to find effective labor. Or at least call into question his fundamental competence as a leader. If American Apparel can manufacture low margin clothing efficiently enough to beat the sweatshops (in California no less), then anyone should be able to. If they try hard enough.

Apparently some of the brass at the company have kept tabs on my blog as, about a month ago, I got a phone call inviting me to come down for a visit. It was everything I expected, and more, and in many aspects it rivaled the various Japanese factories I visited recently.

First Impressions

One of those aspects was the first impression. When we arrived at Saishunkan in Japan, we were greeted by a gardener who turned out to be the chairwoman of the $270 million company. At another factory we walked in to see the president of a $100 million company on his knees scrubbing the floor.

When you arrive at American Apparel, you see several massive multi-story warehouse buildings. At the business address is an open entrance with an old table and a visitor sign-in sheet. That’s it. It’s on the lower left of building in the photo below. No, not the far left… that would be the company store. The open gap entrance just to the right of the store… which looks like any of the other roll-up dock doors.

No fancy lobby with glitzy lighting and display cases, no plush waiting rooms. An open entrance with a guard and a sign-in sheet. For a $500 million company with over 5,000 employees.

As you can tell from this photo and the others, the buildings aren’t in particularly great shape either. But they serve their purpose, and do it well. They may need a coat of paint, but they’re clean, neat, and filled with a lot of happy brains.

The people

The value at American Apparel isn’t created by the building, or the machines, but by the people. So many companies—probably the vast majority—think of their people as a cost. Very few companies recognize the value of the brain that sits slightly north of their people’s hands. American Apparel realizes that the value of that brain more than offsets the traditional cost difference between their employee’s hands and a pair of hands in a sweatshop.

What value has been added by the brains of their employees? How about this: their highest volume product, a “deep V” t-shirt, was the idea of one of their shop floor folks. Or this: American Apparel makes and sells a variety of unusual products, such as dog sweaters and baby bibs. Why? Because their employees figured out how to design those products with the little remaining scrap that exists after cutting out the patterns for the mainline products. There’s still some scrap left, so they had another idea: create a machine that would combine and weave it into bikini straps and cords for hoodies… like in the photo on the right. There’s still a tiny bit of scrap material left, so that is sent to a recycler, who turns it back into yarn and thread, which is then turned back into cloth for more products.

In fact, sustainability is a big deal to American Apparel. How many of you haven’t embarked on sustainability programs because of their cost? Well, American Apparel recycles just about everything, obtains 30% of its power from solar cells on the roof (and they are looking into getting much more), and many of their trucks run on biodiesel. They buy as much organic cotton as they can… domestic organic cotton—they believe that the carbon footprint created by sourcing organic cotton from overseas is too much of a negative offset. Anyone interested in growing more organic cotton in the U.S., here’s your customer. So once again, if you think sustainability is too expensive, then you should be embarrassed.

Workcenters

But let’s get back to the people. Production takes place on each floor of all of these buildings by multitudes of 4 to 8 person cells (they call them “workcenters”). A kit of cut cloth is wheeled to each cell and they crank through it. A chart of metrics is maintained at each cell. See the column on the right, which I know you can’t read? It’s dollars… and reflects the dollar value of what the cell has created, and most importantly the actual dollar portion that they get to share. A form of piecework on top of a nice base hourly rate. Each cell has a quality control person, and other quality people roam between the cells.

Do you see that they’re smiling? It’s no wonder; they are valued and treated very well. Not only do they have a doctor on site, they have a full modern clinic. Back when there was a transit strike in LA, the company bought a couple thousand bicycles and created a bike loan program, with free maintenance, that still exists. How many companies have purposely eliminated phones on their manufacturing floor to cut costs? American Apparel has phones all over the place, and provides free calls—even long distance. That’s a major benefit to their primarily immigrant workforce.

And perhaps most importantly, the company actively solicits their employee’s ideas and recommendations, and they actively implement them. It’s no wonder their retention rate is over 98%.

Vertical integration

A few more concepts.

How about the importance of gemba? Administration, marketing, design, and other offices are scattered throughout the buildings. They are not adjacent to each other. So everyone must walk through the factory floor multiple times a day. Everyone is continually aware that they are in a manufacturing facility.

Another concept: complete vertical integration. Everything is done at this cluster of buildings, with the exception of some dyeing that is done a few miles away. Design is done, often tested by Dov Charney himself, and sent to the factory floor. Time from raw concept to a finished product in over 200 stores worldwide? Eight days. Compare that to the weeks and months it can take to send a container across the ocean. Did the Olson Twins wear something unique yesterday? A new design can be created and placed into stores almost immediately to capitalize on the brief craze.

Complete advertising development, through photographing the models, to final printing, is also done at the factory. The props for all of the stores are created and sent from this factory. When a new store is opened, the fixtures and initial inventory are sent, often pre-hung on hangars so the new retail clerks can focus on selling.

Since everything is created in one factory, they can react fast, and therefore the stores don’t have to maintain as much inventory. Shipments, globally, are smaller and more frequent. They have a unique way to balance raw material inventory: if raw inventory gets too large, they simply create a new design that will consume that inventory and sell it. A luxury many of us wish we had.

Are you embarrassed yet?

I’ve previously written about Sun Hydraulics, a 1,000 employee, $170M company, with no job titles except “plant manager”… the guy in charge of watering the plants in the factory. American Apparel is very similar. Sure there is the CEO, there’s a marketing department, and there are cell leaders. But not much more. I asked a couple of my hosts what they did and I got answers like “some strategy stuff, but then I also figure out how to hire people for the stores.” Basically whatever needs to be done.

American Apparel may be very altruistic, but they still realize they’re a business. A business that has to make money to continue to provide the stable solid jobs for their valued workforce. My hosts told me about some other companies with similar values, who focused too heavily on the “communal good” and soon went out of business.

And yes, I saw Dov. He’s been in the news quite a bit recently, thanks to a workplace atmosphere that would make some cringe. At the risk of offending the more sensitive among us, part of me applauds his guts to run the company as he sees fit, traditional rules be damned. It even earned him a great spoof on Saturday Night Live. By any measure, he is a retail genius and he has the smarts to see outside of the “must outsource to make clothes” traditional mindset.

But here’s my final and perhaps most important lesson: do what works. It’s that simple. Tools, even lean tools, are just tools. Leadership requires people. At American Apparel there are no cheesy signs with “Teamwork” and “Challenge” on them. There are no glitzy glass lobbies. There is no sign of lean manufacturing in the traditional sense, and they don’t profess to be lean. No heavy lean training of employees, no overwhelming visual controls besides the metrics charts at the cells, no Shingo Prizes or Baldrige Awards.

But there are bunch of people recognized and compensated for their knowledge, creativity, ideas, and experience. A group of people who realize that speed creates value, knowledge creates ideas, ideas create profit. They figure out what works, then they do it exceptionally well.

A 5,000 person, $500 million low margin clothing company, operating from a single factory in the least business-friendly state of one of the highest “cost” manufacturing countries. Beating the overseas sweatshops and still growing rapidly.

Are you embarrassed yet?