AACHEN, Germany — When twenty-somethings Bahman Nedaei and Zahir Dehnadi launched Navabi, an e-commerce site for plus-size fashion, they were sure of one thing: the fashion industry's dominant business model was broken.

Most fashion retailers pre-order collections months before they go on sale. Holding inventory is a costly business. It’s also a risky one. In a trend-based industry like fashion, no combination of historical sales data, fashion forecasting tools and human instincts has been been able to accurately predict what customers will buy, meaning supply rarely matches demand. When high-performing styles sell out, retailers cannot replenish stock fast enough, losing potential profit. When products prove unpopular, retailers resort to discounts to shift excess stock, hurting their margins.

“The supply chain — the economics of it are flawed,” said Dehnadi, who, along with Nedaei, is co-chief executive of Navabi. “The producer gives all the risks to the buyers or the retailers. There is no a fair share of risk… The customer ends up paying more because the companies need the margin and the company ends up not gaining the highest possible profit.”

So what’s the alternative?

Frustrated by the inefficiencies of the traditional system — and convinced that there was a big gap in the market for on-trend, premium quality plus-size clothing — Navabi turned the dominant model inside out.

In 2011, two years after Navabi began as a multi-brand e-commerce business, the company launched the first of its three own-brand clothing collections. Today, two of these collections operate according to a unique 'just-in-time' production model (one of the company’s own-brand clothing collections and all of its multi-brand retail business operate a more conventional e-commerce model). For the 'just-in-time' lines, instead of producing the full collection before it goes on sale, Navabi manufactures garments one by one, sale by sale, as they are received by its e-commerce site. From the moment someone clicks buy, the product is produced, packaged and shipped to customers, who received the goods within ten days.

“As a start-up you want to find the best way to grow without needing huge amounts of cash,” said Nedaei, who described fashion’s usual model of pre-production as “very old school. We saw that many other industries have found much more efficient supply chain models. So it was, for us, just a natural step — why hasn’t anyone come up with a better way?”

If a style sells unusually fast, Navabi has developed an algorithm that predicts it will become a bestseller, communicating to its factories to prepare to pre-produce the style in greater quantities to match the anticipated demand. By doing this only for their bestselling items, Navabi minimises leftover stock, while still reaping the lower cost per garment achieved by producing at scale. “Once the style is online, [the algorithm] sees what the engagement and velocity of the style is compared to others in the database.” The more data the algorithm can process, the more accurate its sales predictions become.

"I think the key here was our team and the production team being very well connected, and having great communication about our plan and what we think is going to happen," said Nedaei. "Fabrics were a key challenge — how much do we need and when? Do we need to create monitoring systems that really give them a horizon — not six months, but enough horizon to continuously reorder the fabric that they needed? That was the sophisticated piece of work that needed to be done, with our team and the production side."

Navabi spreads its 'just-in-time' production across a network of factories in Germany, Italy, Greece and Asia, rather than using just one. This builds flexibility into the model and helps create a steadier production workload for each factory. According to Dehnadi, it also means “the facilities are always at their capacity to produce.”

Of course, operating a 'just-in-time' model means Navabi has also eliminated the cost of holding inventory. Apart from the single sample that is made for each style and can be seen pictured on the online store, nothing is produced until the customer makes a purchase. Left-over stock is no longer an issue and demand always meets supply. “The primary upside of Navabi's concept is the reduced inventory exposure. Production can never exceed sales, which is every manufacturer's dream,” said Doug Stephens, founder of Retail Prophet, a retail consultancy firm.

What’s more, this system creates an efficient negative working capital cycle. Customers pay upfront and Navabi uses this cash to produce the garment, meaning the company is never out of pocket.

Dehnadi and Nedaei tell the story of their business in the language of visionary disruption, referring to themselves as “rebels” and their production partners as “crazy enough to give it a try.” Many in the fashion industry were unconvinced. “People told us it was impossible,” said Dehnadi. “The first reaction is always, ‘Ah, that’s impossible, nobody will produce in that way. It’s just not going to be possible from a financial point of view and from a lead time point of view. You will not get it that fast, the cost will be so high.’”

Undeterred, however, the pair took inspiration from the automobile industry, where the concept of 'just-in-time' manufacturing had first been developed in Japan by Toyota, which operates according to the principle: "only what is needed, when it is needed and in the amount needed." At its core, 'just-in-time' is a waste-elimination philosophy, cutting out excess caused by over-production, waiting times and inventory.

Iaad Kweider, Navabi’s head of business development, who had previously worked on the supply chain at Volkswagen, assembled a research team of people from the automobile and computer industries to devise Navabi’s model and build up the supply chain. The process that took almost two years.

“He travelled the world to find suppliers who were crazy enough to believe in the concept. Most of the time he was rejected,” said Nedaei. “We found a couple of production facilities who were willing to give it a try. Some were at the edge of going bankrupt, so we could convince them. Others were young — just taking over the business from their dad, for example — and willing to go a new way.”

So far, the model appears to be working. Since Navabi launched its first pre-order clothing line in 2011, these collections have grown to 25 percent of the overall business. The company declined to disclose detailed financial information, but market sources estimate Navabi’s annual revenues at between 80 to 100 million euros (about $88 million to $110 million) and the founders say the business is growing at 120 percent annually. This would mean the own-label business is earning about 20 to 25 million euros today.

For the company’s investors, the growth potential of this risk- and capital-light business model was a big draw. “Usually the number of customers you bring in is limited by your inventory — here, it’s not,” said Dominique Vidal, a partner at Index Ventures, a venture capital firm which has invested 11 million euros in Navabi. To date, Navabi has raised $28 million through four rounds of investment. The latest round, in January, was led by Bauer Venture Partners.

Investors were also attracted Navabi’s strong rate of returning customers (a trend often seen amongst plus-size retailers, whose customers have a limited choice of fashion and therefore tend to be more loyal). The impact of a made-to-order model on the company’s product margins, which Vidal said are in excess of 50 percent, was another draw.

Navabi’s plus-size customer also benefits from the company's 'just-in-time' strategy. The plus-size market is notorious for its poor selection of on-trend style and “this model enables our designers to take risks, to produce stuff that maybe other suppliers don’t,” said Dehnadi.

But the model does have its limitations. Nedaei admits that while the website offers around 1,500 styles available for pre-order, there are clearly restrictions on the types of garments that can be produced and delivered in ten days. “The challenge is going to be limited choice,” said John Thorbeck, chairman of supply chain analytics firm Change Capital LLC. “A lot of the success of this depends on how well they know their customer, how well they edit those choices and how frequently they change them.”

Navabi is fast fashion. It takes four to six weeks from the design of a garment to the moment it goes on sale for pre-order and Navabi adds around 100 new styles to its online store each week, putting it on a par with retailers like H&M and Zara. While Navabi's prices are higher, the founders attributed this to the quality of their products, although they are also unable to leverage the same economies of scale as high street behemoths like H&M.

But could a more conventional retailer like H&M adopt 'just-in-time' manufacturing?

“You could use made-to-order, not for 100 percent of your assortment, but at the top of the funnel,” suggested Dehnadi. “Good companies know very fast what are their bestsellers. If you use that to then go quickly into pre-production — because you’ve done the sample, you’ve got the pattern — you can quickly produce, get even higher margins and have still no waste.”

For Vidal, Navabi’s success lies in the way it has built a hybrid model that creates flexibility and efficiency by combining pre-production with 'just-in-time' production, rather than relying on just one. “A very good mix of offers has been one of the strengths of the Navabi model. Could you transfer everything to this model? I don’t think so.”

Disclosure: Index Ventures is part of a consortium of investors that have a minority stake in The Business of Fashion.