American Apparel Case Study Essay

1127 Words May 30th, 2011 5 Pages
Seminar Preparation Assignment
Question 1.
The founder of APP, Dov Charney, adopted a vertically integrated production model as he believed that ‘the higher costs of manufacturing in the United States would be offset by the price premium from superior quality, styling, and image, and by the advantages of speed to market’.

In order to effectively capture these benefits, APP maintained tight linkage between design, manufacture, and marketing, with extensive quality control measures at each step (the CEO himself being involved in approving all new designs). While this entire process was far more costly than the outsourcing of labour costs to China, Charney believed that the benefits gained at the end of an ‘all-American’ production
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In-house manufacturing, while essential to APP’s ability to roll out a new product in approx. 2 weeks, is incredibly costly compared to methods employed by its peers. While this has been a source of success in the past, its current implementation is decreasing the profitability per unit produced (again due to high costs).

Should the manufacturing process be outsourced?
This question is further complicated by one of the core principals that APP was founded on – a sweat-shop free environment. Charney was convinced that the higher costs associated with in-house production, and the staff benefits that he offered his workers would lead to a greater quality of product, and the cost would therefore be offset by the premium he could charge for superiority in quality and styling.

While at first this was the case, the question remains as to whether this trend will continue. Will the novelty of a new successful brand wear off, and will APP be forced to charge less (consistent with its peers)? In examining APP’s operating statement we can see that recently the increase in operating expenses (primarilty due to wages) is significantly greater than the increase in income from sales. Furthermore, the abolishment of the Multifiber Agreement in 2006 has lead to a decrease in the number of US garment workers, and a trend to ship manufacturing overseas. This trend has seen an increase in the quality of outsourced product, accompanied by a decrease in

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