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AMERICAN APPAREL VERTICAL INTEGRATION

American apparel vertical integration case analysis highlights the product diversification and global expansion problems of American Apparel which faces the challenges of efficient supply chain operations to take advantage of global retail expansion. In this case study, three alternatives have been sort out, each of which pros has as well cons. Based on thorough analysis of the case and management literature, the disintegration along with integrated supply chain has been recommended to enable the company to add more lines of products and target more markets of the world.

The distinctive feature of American Apparel vertical integration is high level of its integration. The company undertakes most stages of its production. It performs its own design, marketing and advertising and owned and operated its entire retails stores even it’s overseas.

Problem Statement:

“how to support product diversification and global retail expansion while overcoming the challenges of complex supply chain”

American Apparel underwent various changes in 2008 by going publicly to follow expansion of stores and diversification of the products. However, as American Apparel diversifies & expands internationally, the company is expected to face issues concerns regarding Financial Management as they are diversifying, expanding and even going overseas.

The current structure of the organization is supportive to the medium sized company where the founder is engaged in approval of design, taking advertisement photographs, selecting sites for new retail outlets. Owing to the targeted expansion, the company is expected to face inventory management a biggest issue. As mentioned in the case study that the auditors have pointed material weaknesses in the company. However, the company is planning for the implementation of Hyperion Financial Management. Further, the company is going for the transformation of its systems to Enterprise resource planning ERP in 2009 due to growing network and effective usage of the resources. Hence, with the diversification and expansion the control on the inventory will pose serious threats. This threat can lead to the halt of all operational activities of the company.

The company is concentrating in penetration and diversification while becoming a trendsetter in fashion industry. However, this dream is not possible if the supply chain is not working smoothly. Any gap in the supply chain management can hamper the preceding activities. The company is relying the future expansion on the current structure. The current structure is also not yet well equipped to meet the growing demands. The company has not integrated all its function well as ERP implementation is part of 2009 policy.

Analysis:

The company is expanding and diversifying its products. Further they are penetrating in various other geographical markets that are new for them. When the organizations grow in terms of product or network some necessary changes must be undertaken to adapt to the changing environment. However, the environment of the American Apparel is not conducive for such expansion as it does not facilitate the necessary infrastructure to lead that growth. The company is rapidly moving in the international market. The international stores in 2004 were only 3 that increased to 73 in 2008 just in the period of 4 years.

Financial Management when the company is facing geographical and product diversification is real challenge. Maintenance of vertical integrated supply chain will bring challenges like inventory management, quality control, payables and collection management, logistics management and final delivery of the product to the customers. Further, with the diversification it will be difficult for Charney to quickly approve the designs of the variant products and also effectively run the advertisement campaigns.

Hence, a functional division where all decision making is centralized is not appropriate for the bigger companies.

Alternatives:

The problem of expansion in the era of globalization while solving the problems of maintaining an efficient supply chain to support that expansion can be solved by following alternatives each of which has its own cost and benefits

Vertical Integration:

The core competences of American apparel its backward integration of manufacturing operation from buying of Yarn to kitting, dying, sewing and final design and selling the products through its own retail stores worldwide  can still replicated in this era of globalization where  bargaining power of suppliers is increasing day by day. Another benefit of this strategy is that the company can reap the benefits of cost leadership amid the low cost fashion garments manufacturers of China and other developing countries. Moreover, this strategy may enable American Apparel to buy some of its Chinese suppliers and easily integrate some of their manufacturing process into its own existing manufacturing facilities to emerge as a cost leadership. However, there are some drawbacks of vertical integration in the long run, which may incur problems for the company. For instance, the company’s image of high-end fashion apparel and differential in designing may get fade, since its focus on backward integrated various manufacturing operations. Further, it may not be able to focus on its retail expansion throughout the world, which requires brand building and efficient supply chain operations.

  1. Disintegration strategy

American Apparel may go on the extreme of integration by adopting disintegration strategy for its forward growth in the global retailing fashion apparel. Through disintegration of manufacturing activities, it will be able to compete successfully the top brands such as Hannesbrand, J.Crew, Next(U.K) and GAP etc in the global marketplace since these brands have long been following disintegrated strategy by outsourcing most of their manufacturing activities. Further, American Apparel may also put due focus on its core competence of in-house designing of fashion clothing. Moreover, the expansion may require the firm to make some acquisition of renowned branded retail garments in the emerging markets of the world. However, going to the opposite of the integration requires huge change as well as cost. Disintegration also offers disadvantage of high cost and costly products in the global economy whose growth is already dwindling and is expected to remain on the downside. Moreover, the company might not be able to reap economies of scale and gain competitive edge amid the price war throughout the world.

  1. Integrated supply chain Operations

The company can combat the challenge of increasing  its size and scope through global expansion in retailing and adding more product ranges to its exiting T-shirt, undergarments and accessories by integrating its whole supply chain operations. This solution alternative has advantages as well as disadvantages. For instance, through latest tools of SCM, American Apparel may integrate its whole backward as well forward supply chain operation with cost efficiencies needed to remain competitive in the global marketplace.

It may be able still following the integration along with support and integrated supply chain operations to take advantage of the potential growth of clothing business. However, this option also comes with some drawbacks. The company may be able to successfully integrate its complex distribution and supply chain operation worldwide to support its retail expansion however it may lose its core competencies of designing T-shirts and other clothing lines. In addition, it might become impossible to have efficient control over cost and thus it may lose its competitiveness in the emerging market where price war is on rise.

Decision and Recommendations:

After evaluating each of the above stated alternative solutions to the problem of growth expansion while overcoming the challenges of supply chain and complex distribution, the management of American Apparel is recommended to have following:

American apparel should follow an aggressive approach characterized by non-traditional management style and strategies to support its expansion and secure the top most position on the leading fashion apparel companies of the world. The company should follow disintegration strategy along with integrated supply chain operations to focus on differentiation as well as cost efficiencies. As the fashion apparel industry not solely compete on the basis of price, disintegration of some non-core manufacturing activities might enable the company to follow differentiation strategy to build global brand presence.  Moreover, American Apparel may able to add further clothing and accessories lines in its existing portfolio of products. Moreover, it should sell some of its manicuring activities in order to follow the strategy of mergers acquisition in the emerging markets of the world for its retail store expansion and building a global brand.

Since, the sexual appeal of the company’s add have raised some negative opinion about the company’s long term brand image, it should also diverter its attention to differentiate its brand through new non-tradition designs of T-shirts and other apparels.

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