Red, White, and Blue: A Manufacturing and Loss Prevention Department Revolution

This article from 2012 examines the development of American Apparel’s unique asset protection and loss prevention department. 

No company quite like American Apparel exists in the United States anymore. It’s both cutting edge and an anachronism; a company that defies modern accepted practices. It harkens back to an earlier era of manufacturing, one that used to flourish here, before it became in vogue to outsource everything and send all production to the Far East somewhere.

If you haven’t heard of American Apparel by now, you’re probably not paying close attention to the retail industry. Launched by Canadian immigrant and entrepreneur Dov Charney in 1986, American Apparel is a powerhouse clothing manufacturer that makes all of its products right in the heart of downtown Los Angeles, using local labor and all American materials. With over 1.6 million square feet of factory space in LA alone, as well as 250-plus retail stores scattered throughout the globe, this $547 million public company is a model for the way things used to be done.

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Taking a trip down to Los Angeles’ historic garment and warehouse districts reveals a glimpse into the past. Impossibly large and mostly vacant factories dot the landscape; silent testaments to a bygone era when products were actually manufactured here. American Apparel’s buildings stand out in stark contrast to the rest of the district. The parking lot is full to capacity; in fact, a good portion of the vehicles are crammed together because there isn’t enough room for them all. The place is a bustling hive of activity.

American Apparel employs over 2,400 Angelinos 24 hours per day in their bustling factory. The place serves as world headquarters as well. Everything is either done, made, or controlled from here. Even American Apparel’s advertising campaigns are conceived, designed, and photographed here. Technical support for its retail stores is based here. Web programmers and designers that run and design American Apparel’s site work here as well.

It’s this uniqueness that sets American Apparel apart from other garment manufacturers. While its competitors, such as GUESS and Forever 21, also maintain a manufacturing presence in LA, none of them produce 100 percent of their product in the United States. Can American Apparel produce its products for less money in China? Most certainly—but they won’t.

The Loss Prevention Challenge

Like any company, American Apparel has its share of loss prevention concerns, exacerbated somewhat by the fact that it has to deal with factory environments as well as retail stores, which means its LP team has to switch gears often. Incredibly, American Apparel really didn’t even have a loss prevention department a few years ago, when loss-control efforts were handled by personnel from the IT department, headed by Stacey Shulman, who held the position of chief technology officer (CTO) for American Apparel until 2013. “We knew we had problems in the factory, and that we needed to bring on an LP professional,” states Shulman, which they did.

American Apparel’s asset protection department reports directly to its chief technology officer. While most LP teams report to someone in operations or finance, American Apparel once again takes a different tack than just about any other company on this issue, due in part to the technological nature of its LP efforts.

Before Montez and his team were brought on, the IT department paved the way for LP efforts by equipping its stores with remote camera systems, employing heavy RFID tags for inventory control, as well as installing EAS gates. Before Montez came along, Shulman and her IT department had the tools in place to prevent the theft, but they lacked the detailed knowledge on how an LP operation was supposed to be run.

“We wanted the loss prevention department to be less like security and more like the FBI,” she stated. “We weren’t getting a lot out of the implementation.” While technology is the backbone of many LP operations, it doesn’t replace the knowledge of how to prevent the thefts in the first place. And that’s where Montez came in.

American_Apparel_LAGx400The Factory Environment

In and of itself, American Apparel’s factory represents a formidable challenge to an LP professional. The sheer size of it, not to mention its porous nature of multiple entrances and an abundance of property to steal, makes it a challenging environment in which to keep losses in check.

Before Montez and his team arrived, Shulman made no bones about the fact that “shrink was out of control.” In her estimation, American Apparel was suffering from a corporate culture problem first and foremost. “Books were being written online about how to steal specifically from American Apparel,” said Shulman. “Employees posted on social media networks that the reason why they took jobs with us was so they could steal.”

Shulman realized that the culture was to blame for this, and sought to change it. “Theft impacted more than just the shrink; it lowered morale,” she explained. “We needed to educate our people that our items have value; that every item counts.”

In case one thinks that poor working conditions were to blame for this culture, consider that American Apparel pays above-average wages to its employees and supplies them with some of the most unique perks in the industry. “It’s the complete opposite of a sweat shop,” stated the onsite doctor, clad in his immaculate white lab coat. American Apparel’s employees were among the best-treated factory workers in the country, and yet there was still rampant theft.

After bringing Montez on, the first order of business was to announce the formation of the asset protection department and the company’s new emphasis on controlling loss. In cooperation with the in-house advertising department, Montez formulated an awareness campaign that was designed to encourage employees to report theft and make them aware that changes were afoot.

A confidential tip line was also put in place. The campaign wasn’t designed to be intimidating. Rather, it was designed to make employees feel like they had an outlet to avail themselves of, a place where someone would listen to what they had to say.

As in most companies, American Apparel’s workers are a mirror of society—the majority of them are excellent, honest employees, and a few are where the bulk of the problems come from. The awareness campaign was designed to appeal to this majority in order to get them to help the company by rooting out the problem employees.

Montez immediately began drawing on the strength of his IT department as they learned from internal investigations and identified areas of opportunity. “We had situations where we could not effectively control what an employee was working on,” stated Montez. “We would see them sewing something on a machine, but we couldn’t be sure if it was for their own personal use (considered theft) or part of a job.”

The IT department installed timekeeping/productivity devices at each work station that require an employee to sign in and enter the order number he or she is working on in order to use the machine. The system provided exceptions on employees’ productivity and, more importantly, ensured that employees are working on valid orders they have been assigned to, thus closing that loophole for all intents and purposes. High-tech biometric punch clocks also ensured that the employees’ time was closely monitored and accounted for.

The Internal Investigations Process

Montez instituted an internal investigative model to pursue the less-casual thefts, and had a team of people closely watching the goings on at the American_Apparel__in_storex400factory both visually and through surveillance. Montez also forged new allegiances with his department managers, encouraging them to work closely with him to take care of their theft and related personnel problems.

Montez’s initiatives resulted in the construction of an interrogation room on site at the factory. Essentially, the in-house loss prevention department compiles evidence based on surveillance or investigation and then requests that the employee come in for an interview. “The interviews last about two hours,” said Montez. The employee is brought in and questioned on his or her activities, and then Montez’s team decides what needs to happen to that employee. “Sometimes we find the employee has made an honest mistake,” states Montez. “They may have been told something was okay to do by someone else, and there is no malicious intent.” The employee is then educated on how to avoid the error, thus helping to curb shrink a little at a time.

In other cases, the interviews will reap full-on malicious activity, and employees are prosecuted criminally. As of 2012, Montez’s biggest case culminated in the bust of a ring of employees who had stolen over $180,000 worth of materials and finished goods. The employees had set up a scheme where both first- and second-quality finished goods as well as materials were being moved out of the factory, in some cases using American Apparel’s own FedEx accounts. These goods were then being fenced locally for profit.

Has the investigative model and interview process worked thus far at American Apparel? “Absolutely,” stated Kim unequivocally. “We have been able to work alongside security at the factory, and since the inception of the loss prevention department, we have been able to bring in new methods, added resources and skill sets that have made a huge impact here at the factory.”

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Marylou Vazquez, AP corporate analyst in 2012, conducts a store audit on her iPad with store manager Sandy Altamirano.

Asked about the success of the loss prevention department, Montez is guarded. “Have we addressed it entirely? I feel strongly today we have greatly raised awareness and implemented intelligent programs that have established the foundation of our department’s future,” he stated, fully realizing that reining in shrink within his massive facility is a work in progress.

Employee morale is also increasing in conjunction with the new LP initiatives; after all, no one wants to work in a culture of theft and dishonesty. Montez claimed that morale “definitely improved for the better, and we are viewed as a partner to many factory department managers. Today there is a sense of importance that we have implemented where the factory employees are aware of the role we play within American Apparel.”

The Retail Stores

When sitting in Montez’s office, the headquarters within a headquarters at American Apparel, it’s easy to forget that Montez has retail stores to deal with as well, one of which is housed within American Apparel’s own factory.

American Apparel’s model is to produce the garments in Los Angeles and then move them out to its retail stores for sale. In 2012, American Apparel boasted 142 stores in the United States alone, as well as stores in twenty countries, including Canada, Japan, Korea, Israel, Australia, France, the United Kingdom, Italy, and Germany—250-plus stores in total.

American Apparel’s revenue includes both their retail stores as well as American Apparel’s wholesale customers—companies that take American Apparel’s clothing and brand it with their own name.

The asset protection team meets quarterly to discuss, results, initiatives, and future strategies. The stores are another area where American Apparel’s unique LP model, headed by IT, really shines. Being headed up by an IT department has its advantages, and one of them is seamless technology integration with loss prevention efforts. The stores rely on RFID technology for loss prevention and inventory-control purposes, and Montez’s team does lots of remote monitoring of its product. “Just by showing the stores how to properly sensor tag the product, we were able to prevent $30K per store in losses,” stated Montez, a testament to the fact that technology alone does not solve LP problems, but that technology, married to good LP

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The asset protection team meets quarterly to discuss results, initiatives and future strategies.

practices, makes an impact.

Montez’s team works on a hybrid LP model where the stores are concerned. The actual security and external investigative functions are outsourced, allowing Montez’s department to be a little leaner. The team focuses mainly on shrink-prevention awareness programs, internal investigations, financial-fraud prevention, remote store audits, and remote viewing. All of American Apparel’s stores worldwide are extensively monitored with cameras, except where local laws prevent such video.

Much of American Apparel’s LP efforts related to the stores center around inventory discrepancies, with an extra close eye given to American Apparel’s high-shrink markets. “We’re essentially concerned with internal process operations, auditing, and reviewing store footage,” Montez stated. However, Montez does not take outsourcing lightly. “You can only outsource something that you have mastered yourself,” he added, referring to the fact that his highly experienced LP team knows how to oversee critical store LP functions without actually having to perform the task themselves. American Apparel’s LP team isn’t beholden to their outsourced in-store LP teams while being left in the dark. They are firmly in charge of them.

The corporate culture change has also trickled down to the retail stores, where efforts were made to bring store managers into the new culture of accountability. In a break from the norm, store managers were encouraged to directly communicate with Montez and his team, and he hears from them frequently regarding the issues they are experiencing.

An Update

What’s it like being headed up by an IT department? “Technology groups are just more creative when it comes to LP issues,” stated Shulman, and Montez concurred: “It improves and modernizes the asset protection department.”

It’s no coincidence that American Apparel, a company known for being different in almost every way compared to its competitors, uses a novel—and frankly unorthodox—model with which to run its loss prevention department. And like many other things American Apparel does, its fledgling loss prevention department enjoyed much success, with an increasingly bright future in store—and in factory.

This article was originally published in 2012 and was updated on January 7, 2016. 

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