By Kevin Meyer
In his piece yesterday on A New Ball Game, Bill actually beat me to the punch a bit on the sordid story of American Apparel. I've been planning an update to my oversight of that company I once lauded, and he's right – it's not exactly a good story anymore. That change is both a result of happenings at American Apparel and an evolution of how I look at organizations – and especially their leaders.
The operational metrics aren't exactly stellar. Yes, as I had mentioned years ago, American Apparel does some great things. Everything is manufactured out of their facility in Los Angeles, where they happen to pay well above minimum wage and provide good medical and other benefits. Their supply chain is fast in that they can design a new garment and get it to market within a couple days without having to wait on a boat to cross the ocean.
As Bill mentions, their inventory turns are a ridiculous 1.4 times a year. Not to make excuses, but there is one underlying reason that accounts for part – a small part – of that number. Whereas many apparel manufacturers will cut clothing out of large swatches and then throw the excess away, American Apparel keeps the scraps and eventually turns it into drawstrings and other accessories. Throwing away excess inventory can make your turns look better, but there is the offsetting cost. It's a balance.
But not a balance to the tune of 1.4 turns. Most of that is because they are simply making clothing that isn't selling so the inventory is sitting at distribution centers and stores. A "fast" supply chain – or perhaps better termed a development chain – that can get a new style into stores fast isn't necessarily a good thing if that new style doesn't sell.
That's value, from the perspective of the customer. If you don't create value, your business suffers – regardless of how fast you move.
However a far bigger problem, and a major contributor to the losses and low turns, is management. A historical look at turns shows that in the past it was far higher, far faster, and then the bottom fell out. The reason? The production workforce dropped by nearly 25% in one year, not because of sales, but because of a poor decision to hire illegal immigrants – even if they then paid them very well. Long term contracts for raw materials then dumped raw inventory into a precarious production system that was already beginning to produce products that didn't sell well. I say precarious because their production operations were very good, and very lean in many respects, but they didn't understand why it worked. That's dangerous. And like a house of cards it started to fall apart.
The clothing company makes roughly $500 million in annual revenue. It's a rare occurrence to see a growing textile company these days in the U.S., a country that once dominated the garment business. But Charney thinks those days are coming back.
"Labor costs in China, for example, are skyrocketing," he said. "Transportation costs are skyrocketing, and it's only going to get worse. … So the people that have the most efficient manufacturing are going to win, so that's what we are practicing."
But American Apparel has been losing money for three years, in part, because of production problems that arose after almost 2,000 workers had to be let go after a government investigation in 2009 found they were in the country illegally. Charney said things will turn around for his company by 2015.
Good luck with that – I don't have high confidence it will happen. Because there's yet another factor involved, and one that over the years I've learned is an even more powerful contributor to long-term success: the ethics and character of leadership.
In my posts on the American Apparel from five or so years ago, I glossed over or was even somewhat amused at CEO Dov Charney's propensity to portray himself as a bit of a porn star, at least in his own mind. He had affairs, wild parties, used underaged girls in provocative advertising, and was and is part of several sexual harassment lawsuits. He flirted with the law, both in that regard and with the hiring of illegal immigrants.
Maybe I'm just getting old – more of a fuddy duddy or perhaps just more mature – but character means something. Many try to divorce the personal activities of a leader from their professional accomplishments – see how many excused the proclivities of President Bill Clinton, Representative Andrew Weiner, and even the unbelievable excesses of Tyco's ex-CEO Dennis Kozlowski. I'm probably showing my age with that last one.
But when you reach leadership positions, and I'd even argue that it's part and parcel of every individual regardless of leadership position, personal and professional character does matter – and they are intertwined. I wrote about this in The Character of a Weiner right after Representative Weiner resigned. He both exposed himself and then lied about it. Many argued it shouldn't matter, I strongly believe it does, regardless of party affiliation.
Dov Charney is the perfect example of why. His personal character shaped how he ran his organization. Slowly and perhaps innocently at first, then to a greater extent, and finally it severely damaged American Apparel. Shareholders can bail on the company, and they have. Aside from voting or creating such an uproar that they resign, citizens have a much harder time bailing on political leaders.
The ethics and character of the leader influences the ethics and character of employees which drives how the organization operates. Whether it's Dov Charney or Dennis Kozlowski or Bill Clinton.
Character matters. Value from the perspective of the customer matters. And they are related.