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Focus: Manufacturing

Feature Article from Our Manufacturing Subject Area - See All

From SCDigest's On-Target E-Magazine

- Oct. 12, 2015 -

 
Supply Chain News: American Apparel's Made in USA Model May Not Survive Bankruptcy Process

 

CEO Vows to Keep Producing in America, but the Math Makes Strategy Challenging

 

 

SCDigest Editorial Staff

As the vast preponderance of US apparel retailers and brand companies long ago left US shores for production in low cost countries across the globe, retailer American Apparel has maintained a Made in USA focus for all of its 15-year history, producing nearly all of its clothes in the Southern California area to supply its 250 stores, half of which are outside the US.

But the company's 4600 factory workers in Los Angeles are in danger of losing their jobs. American Apparel has been struggling financially for several years, burdened by a high level of debt, and last week not surprisingly it filed for Chapter 11 bankruptcy protection. And that has brought the entire Made in USA model into question.

SCDigest Says:

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One possible path out for American Apparel, industry experts say, is to move production from Los Angeles but keep it in the US, perhaps in the Southeast.

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After the filing, CEO Paula Schneider said management had no plans to move manufacturing operations from Los Angeles to offshore locations. The restructuring that lies ahead, she said, will enable American Apparel to keep production in the US.

"That's what makes us a really important company and a company that needs to thrive and be saved," Schneider said.

But that model is under threat from several directions, despite some small signs of apparel manufacturing returning to the US. (See More than 20 Years Later, Is Quick Response Going to Revive US Apparel and Textile Sector?)

To start with, many Wall Street analysts seem to think American Apparel is simply out of touch in trying to keep most of its production in the Los Angeles area.

Take, for example, these comments from Lloyd Greif, chief executive of investment banking firm Greif & Co.

"There is too much emphasis being placed in having things made in America," Greif told the Los Angeles Times. The company needs to move offshore, he said, "If they want to survive."

Greif is hardly the only one with such a view.

"This manufacturing model makes no sense," said Josh Arnold, an equities analyst and contributor to financial site Seeking Alpha. "It costs way too much money."

But it's not as though American Apparel factory workers in California are highly paid.

American Apparel workers, primarily sewers, have averaged about $12 an hour in recent years. But after production slowed down this year, several workers said they are earning closer to $9 an hour now – California's 's current minimum wage. That would translate into pay of about $1440 per month for a full-time employee.

But those lowly hourly wages compare to perhaps the equivalent of $68 per month in Bangladesh or $90 per month in Vietnam, both major apparel producers. In the still labor intensive apparel sector, that leads to much higher costs even at US minimum wage levels versus producing offshore.


(Manufacturing Article Continued Below)

 

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A long-sleeved shirt made in the US, for example, was estimated in 2005 to cost about $13.22 to make, including $7.47 for labor, according to the Institute for Global Labor and Human Rights. That same shirt in Bangladesh would then have cost about $4.70, with just 22 cents in labor costs. Costs for both have risen since the report was published, but the general ratios probably still hold.

So American Apparel's recent poor financial results and the views of many Wall Street analysts seem to argue against keeping production in LA, even at wages of $9-12 per hour. Unfortunately for American Apparel, the minimum wage in Los Angeles scheduled to go much higher, rising in increments to $15 per hour by 2020.

But the total story is complicated. In 2009, American Apparel fired 1,800 factory after questions about their immigration status.

"After that immigration audit, American Apparel had to scramble to replace inexpensive, experienced employees with expensive, inexperienced employees," Matt Covington, a managing director with financial consulting firm Conway MacKenzie, told the Los Angeles Times last week. "It really seemed like the made-in-America economic model didn't work after they lost such a high percentage of workers."

One possible path out for American Apparel, industry experts say, is to move production from Los Angeles but keep it in the US, perhaps in the Southeast, where in many states the minimum wage is still just $7.25 per hour, with no plans to increase it to anything like $15 per hour any time soon.

As an aside, American Apparel has been one of the leaders in deploying item-level RFID to track inventory in its stores. How the bankruptcy will impact that roll out across the chain is not yet clear.

Evan Clark, deputy editor of Women's Wear Daily, thinks there is still some hope for American Apparel manufacturing in the US, but it will have to thread the market needle to do so.

"I think millennials are very conscious of social issues and being environmentally friendly and all of that," Clark told NPR last week. "So I think made in the USA ethos resonates very much with that population. But the consumers seem to mostly make their decisions based on style and cost. So if you're making it in the United States, the path would seem to be kind of get the styling right or get the timeliness. You need to somehow compensate for the cost factor in there."


What is your take on the American Apparel story? Can they possibly keep producing in the USA? Let us know your thoughts at the Feedback section below.


Recent Feedback

This article clearly ignore FACTS and NUMBERS. It probably stems from Weber Shandwick, one of the various PR sources that APP has pumped millions into in order to spread mischaracterizations and falsehoods to smear the founder. 

In the last 9 out of 10 years of being a young retailer, American Apparel has always had POSITIVE OPERATIONAL EARNINGS - POSITIVE EBITDA. With CONCRETE NUMBERS, Charney proved that Made in USA done correctly and HUMANELY (sweatshop free) can provide HIGH GROSS MARGINS while still maintaining a company with ethical manufacturing standards. 

In the four quarters after Dov's firing, the company lost 58.6 million in operating earnings, which is even more than the loss the company sustained during Immigration. 

You also have to understand that APP is a 10 year old retailer and they've only been public for 8 years. They sustained one time costs, but what young growing company doesn't?  What company of this size doesn't have financing and loans? 
 


Paul Carter
Director
Manufacturing
Oct, 12 2015

While consumers and millennials might be environmentally conscious they are also socially conscious. American Apparel has been know to push the boundaries with using racy ads and underage models in nude photos, much of which doesn't translate well with a generation that doesn't put much emphasis on brands with a less than a clean record. Its former-ousted CEO has been battling lawsuits for sexual harassment. The past few years the company has been running flat in terms of sales and hasn't turned an annual profit since 2009, the height of its popularity.

I agree with Evan Clark, the Made in America model doesn't need to change because there are very profitable, proud clothing companies like Under Armour and Ralph Lauren that manufacture in America. The problem with AP isn't its Made in the USA, but the image and branded style that needs a revamping if it wants to be trendy and profitable again. If AP were to move off shores it would alienate consumers that believe in the Made in USA, core to their brand. The small offset of savings in labor costs still won't bring back the company's former glory. AP would still need to appeal to the younger demographic that shops in malls where many of their retail stores are located. They need to be more relevant, have fashion that is continually changing, following trend, and has lower price points, similar to its competitors H&M, Zara, & Forever 21.

AP is going bankrupt because it is stuck in a past decade like Hollister and Ambercrombie & Fitch.


Sasha Tomas
Supply Chain Mgmt Student
CPCC
Oct, 14 2015
 
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