"What I’m going to prove, and I’m going to embarrass the entire fucking establishment," said Charney in one of his standard politically-incorrect interviews, "is that sweatshops are more expensive in the end than vertically integrated manufacturing in Canada or the U.S."

How can working with a network of cheap suppliers be more expensive than owning a US-based factory and paying U.S. salaries? The answer lies with American Apparel's take on two management concepts: "Vertical Integration" and "Coordination Costs". Vertical integration occurs when a company takes ownership over the various processes required to bring a product to the market. In the apparel industry, these processes include growing the cotton, weaving it into a fabric, knitting it, sewing it, marketing it and selling it to the end customer.

In many industries, vertical integration is considered to be a thing of the past.Developments in Information Technology

"What I'm going to prove, and I'm going to embarass the entire fucking establishment, is the sweatshops are more expensive in the end than vertically integrated manufacturing in Canada or in the U.S. "

and the introduction of new business practices have reduced the cost of coordinating production processes between companies to a point where many companies now focus solely on what they do best (often called "core competencies") and outsource everything else to third parties.

So why does Dov Charney pay his workers $13 an hour when he could get away with paying offshore laborers 9 cents? Why would you pay more to do something in-house, when you can find an external contractor that can do it for less?

According to American Apparel, vertical integration enables it to produce "the highest-quality product on the market." If a mistake happens, if some t-shirt comes out not like it's supposed to, AA can make the necessary changes immediately.

Quality control isn't the only advantage American Apparel enjoys by keeping its production in house - responsiveness is another. "We're doing things in days that other companies have to have weeks, especially if it's offshore," says Marty Baily, American Apparel's VP of Operations. "If we don't have something specifically in stock.. I don't have to call Honduras or another country to see how we stand. I have to call the 4th floor to see if we have cloth. Because If we have cloth I can turn it around in a day."

Thus, American Apparel weaves, designs, cuts, sews, photographs, packages and markets its product all from one location, using the gains in efficiency and innovation to cover for the higher employment costs.

Myth #2: Profits and Corporate Responsibility Don't Go Together

In 1970, Nobel Prize economist Milton Friedman wrote a scathing op-ed piece for the New York Times. "Socially responsible" businesses, according to Friedman, were stealing money away from their investors. The "one and only one social responsibility of business," he argued, is "to use its resources and engage in activities designed to increase its profits."

Much has changed since Friedman published his article and many companies today have, in one way or another, embarked on some kind of social responsibility program.

Unfortunately, most companies still "do good" because it sounds good, not because it's good for business. It seems as if most companies simply haven't found the way to be both profitable AND socially responsible.

American Apparel thinks it's found the way. By fusing between Socialism and Capitalism, by being fair to their employees and developing a quality product that people will pay a premium price for, AA is proving that it is possible to do good AND make good money.

"We don't want to be a sucker liberal company," says Charney. "We want to be socialist and capitalistic at the same time. We're saying that the business models of the baby boomers are poor because they are based on exploitation."

Charney himself isn't against exploitation. "What I’m talking about is the exploitation of human potential instead of the exploitation of humanity. I’m saying you don’t have to fuck the Third World up the ass, or the shareholders, or the consumers, or the Canadian and American workers, to do business."

Profanities aside, Charney's neo-socialist approach to business is delivering results. Not only are consumers lining up to purchase American Apparel's products (it just opened its 20th store last month), but would-be employees are lining up for a chance to work for the company. Last time they counted, 1,000 people were on AA's waiting list.

Myth #3: You Can't Brand a Commodity

The first time I came across American Apparel was through one of their magazine ads. A black and white photo of an aging white man is superimposed with the text "Fuck the brands that are fucking the people."

At first I was shocked. Then I got angry. What kind of company brands itself by focusing on other brands? Couldn't American Apparel focus on what it stands for?!

Then it sunk in: American Apparel has taken the staple American clothing item--the t-shirt--and made it cool again... without putting a logo on it.

AA's meteoric success lends itself to the fact that their identity is based not on what they are, but on what they are not: They are not a sweatshop. They do not offshore their manufacturing. They do not put their logo on their clothes.

But don't confuse "sweatshop free" American Apparel with a charity store. Dov Charney is in this business not because he's a bleeding-heart liberalist but because he wants to make money. "A lot of people misunderstand it and think it was a moral decision. I think there is some morality to it. I mean it is more fun to pay people well than to pay people poorly. But it's also an economic one... Don't buy my t-shirts because we have a sorry story."

Charney wants the act of buying his t-shirts to make you feel good - inside and out. In the process, he's offering a unique alternative to the growing disgust with established brand names and corporate America in general.

Changing the world, one t-shirt at a time

It's clear that behind the flamboyant demeanor of Dov Charney stands something much more serious and provocative than making t-shirts. Charney is on a mission to change the way we do business, and he isn't going to stop with the t-shirt industry.

All this got me thinking about an article I wrote a few months ago on offshoring. "Faced with the massive benefits that offshoring business processes hold," I said confidently, "companies that choose to pay more for the same work will find it hard to stay in business, let alone compete with their counterparts that do opt to offshore."

After watching Dov Charney for several hours on AA's website, I couldn't help but admit that I was mistaken. What started out as a wave of cynicism, when I first encountered the American Apparel, slowly turned into admiration.

In one of his many TV interviews, the camera chases Charney as he rushes through the factory floor. "I'm going to change the world making T-shirts," he says, without an ounce of humor in his voice.

I, for one, hope he does.

Ziv Navoth helps organizations improve their performance by creating a unique and valuable position in the marketplace. He is the Managing Director of Verve! (www.verve.nu) and can be reached at ziv@verve.nu.

Copyright 2006, Ziv Navoth. Feel free to print, quote, or forward, so long as you credit me.