Saunders says the phased development approach may have saved Krispy Kreme as much as 50% on the work his company did for the online ordering project. Allowing for less-than-pallet orders after getting feedback on a prototype, for instance, meant the development team didn't have to go back into the system and recode for the capability after release. "The old model of keeping all the requirements frozen is unrealistic," he says. "It can't be taboo to say in the middle of a build that requirements have changed."

The ordering system, rolled out to the entire company by late 2001, is part of an intranet known as mykrispykreme.com, which was built using software from vendor CoreChange. It replaced a system in which store orders were faxed to keypunch operators, thus freeing those operators to provide customer service to three or four times the number of stores they could handle before. The new method also lets store managers order at their convenience instead of restricting them to business hours when they have customers of their own to service. "We wanted return on investment in one year, and it paid for itself," says Hood of the efficiencies the system has brought.

The warehouse management system, built with radio- frequency tag technology from Integrated Visual Systems, was rolled out in 2000 and quickly paid for itself by increasing the accuracy of picking and packing orders. "There are virtually no errors now as far as correct orders coming to us," says Mar- tin Hendrix, general manager of a Krispy Kreme in Fayetteville, N.C. "Before there were probably three or four mistakes a week—it could be off by as much as ten or fifteen bags of mix, usually not enough of it instead of too much."

Krispy Kreme needs an efficient supply chain not only to meet consumer demand for its trademark hot doughnuts, but also because selling supplies to its franchisees is an important part of its business. "They want to be like Coca-Cola, selling the syrup to its bottlers," says financial analyst Andrew Wolf of BB&T Capital Markets in Richmond, Va. "Franchises have to buy their mix, and they charge a lot for it." Wolf estimates that margins on mix, prior to interest and tax expenses, are in the 30%-40% range.

Krispy Kreme also sells franchisees its proprietary doughnut-making machinery, manufactured at a new plant in High Point, N.C. The company has upgraded its physical facilities as well as its technology, adding a distribution facility in Mira Loma, Calif., and a distribution and manufacturing site in Effingham, Ill., to its Winston-Salem operation. (Last year, Krispy Kreme used an accounting gimmick to reduce its balance sheet exposure to the Illinois plant, but reversed itself after a spate of post-Enron criticism.)

Franchising is critical to Krispy Kreme's growth strategy, and the company needs systems that will help its franchises prosper. There are three types of Krispy Kreme stores—90 or so owned or co-owned by the company itself, the rest owned by an older generation of franchisees who operate a small number of outlets, and by the newer wave of so-called area developers, partners responsible for opening up new territories with multiple stores. Under its franchise agreements, Krispy Kreme gets a royalty of 4.5% of all revenues from its area developers. From its smaller franchisees the company gets 1% of wholesale revenues (doughnuts sold at grocery stores and other offsite outlets) and 3% of retail sales.