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 process would outweigh the costs.
Furthermore, the fashion industry is constantly changing, and there are therefore risks associated with the change in customer demand. APP’s adoption of vertically integrated production aimed to mitigate this risk and remedy losses associated with an inability of non-vertically-integrated companies to effectively asses the demand, and respond to it in a timely profitable manner.
For a company that was not vertically integrated the design, manufacture, and production process was long and arduous. APP however, could design a t-shirt and it would be available for purchase in under 2 weeks. The long cycle of design to distribution for other companies in the industry meant that by the time a new product was to reach a retailer it may no longer be as fashionable as when it was designed.
For these reasons Charney saw vertical integration as the most innovative business model as it reduced risk, and increased profitability (even though it carried a greater cost). In-Class Learnings
Seminar Preparation Asst. Question 2
In order to assess whether APP should withdraw from any step of the value chain it is important to examine each step in cost vs. benefit