Lecture 7 - Pal's Sudden Service

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UVA-OM-1506
Dec. 9, 2013
PAL’S SUDDEN SERVICE: THE RIGHT RECIPE

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Pal Barger’s father and mother had been in the restaurant business. So when he was
discharged from the air force in December 1953, it was natural for him to lease the Virginia
House in Marion, Virginia. In 1956, Barger sold his interest in the Virginia House for $10,000.
This document is authorized for use only by namrata sansare at Universal Business School.
Using that capital and a $10,000 loan, he leased land (which he later purchased) and built the
first Pal’s Sudden Service (Pal’s) location in downtown Kingsport, Tennesee (Figure 1). Pal’s
was a fast-food chain focused on hamburgers, hot dogs, and french fries. It was inspired by a
restaurant called 2-J’s that Barger had seen in Austin, Texas. Additional inspiration came from a
chance meeting with Ray Kroc, the founder of McDonald’s, at the National Restaurant Show in
Chicago, Illinois. Barger brought the work ethic and dedication to positive cultural change and
high performance that he had learned in the air force to that first Pal’s store.
Figure 1. The first Pal’s location.
Source: Goldberg Productions, Inc.
By 2000, Barger had expanded the successful restaurant chain to 17 stores, at which point
he shifted his role to chairman of the board and moved Thom Crosby into the role of company
CEO. Crosby had come to Pal’s in 1981 as operator of the original Pal’s location. By 2013, he
This case was prepared by Case Writer Rebecca Goldberg, MBA ’03, under the supervision of Elliott N. Weiss,
Oliver Wight Professor of Business Administration. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright  2013 by the University of
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had seen and participated in 31 years of growth and development. Under his leadership, Pal’s
expanded to 26 stores across Tennessee and southwestern Virginia (Figure 2)—but more than
that, the company consistently hit revenue-growth targets and per-store contribution margins far
beyond the industry norm. Pal’s stated mission was to “delight the customer in ways that create
loyalty.”1 In keeping with this mission, Barger, Crosby, and 12-year veteran CFO Rob
Thompson attributed the strong growth and store expansion to unique flavor profiles and
consistency of execution. Underlying these modest claims, however, was a successful formula
for talent development, robust processes, and relationships based on trust and high expectations.
Pal’s was famous in its service area for speed of delivery—an average of one car every
18 seconds could pull away from the drive-through window carrying a happy customer and his
or her correct order. Even this trademark speed of service, however, was at its core not a means
to an end, but a byproduct of a tightly designed process and consistent execution. In recognition
of its excellence in continuous process improvement, Pal’s became the first restaurant company
to win the Malcolm Baldrige National Quality Award in 2001 and the first company of any type
to twice win the Excellence Award from the Tennessee Center for Performance Excellence, first
in 2001 and again in 2006.2
Figure 2: Map of Pal’s locations in the central southeastern United States.
Source: Company documents. Used with permission.
1
Unless otherwise specified, all information was provided to the case writer by the company on July 29 and 30,
2013. Quotes are, at times, slightly rearranged and condensed for clarity.
2
Pal’s company pamphlet, page 6. Used with permission.
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Pal’s unique flavor profiles didn’t happen accidentally. Nor did the fact that no matter the
weather, the season, or the price of beef, Pal’s food always tasted the same. Simplicity lay at the
base of Pal’s systems. While McDonald’s, Hardee’s, and other national competitors in the quick-
service restaurant (QSR) industry were almost flatlining in terms of sales growth (only 1%) in
2013, Pal’s was tracking 15 times that. (See Table 1 for a comparison of key industry-average
ratios and Pal’s corresponding averages.) But what were the real differences that made Pal’s
productivity and return on invested dollars such a standout from the crowd in a notoriously
difficult market characterized by high turnover, high error rates, and low return on investment?
Table 1. Comparison of Pal’s and Industry Average Key Ratios

Metric Industry Average Pal’s
Gross Margin 66.7% 69.6%
Advertising and Sales 2.9% 2.0%
Operating Expenses 63.7% 51.3%
Operating Income 3.1% 16.3%
Net Income 1.3% 9.6%
Quick Ratio 1.0% 3.2
Current Ratio 1.5% 3.6
Days Accounts Receivable 10 0
Inventory Turnover ×27.33 ×143
Pretax Return on Sales 2.2% 15.9%
Pretax Return on Assets 4.3% 26.5%
Capital Expenditures to Sales 5.4% 3.6%
Data source: Pal’s data is courtesy of the company. Industry-average data

was sourced from First Research, “Fast-Food & Quick-Service
Restaurants” industry profile, August 26, 2013, 7–8.
The Pal’s Customer
Defining the market
Pal’s existed first and foremost to serve its customers, who were loyal, long-term, and
willing to pay full price for Pal’s menu items—which they knew were of the highest quality
possible for the price. Pal’s made a commitment never to chase after what Crosby called
“marginal, low-quality sales”—meaning that Pal’s would never discount its food or attempt to
gain incremental market share if the resulting customers didn’t fit the desired profile. He cited
McDonald’s dollar menu and Taco Bell’s 39-cent taco as examples of going after the wrong
market, or discounting a product in the wrong way. He said:
We saw a flaw in this approach because if you establish that a taco is a 39-cent
product, you can’t go back and say, “Now, it’s a 59-cent product.” We were faced
with asking ourselves how we would compete with this tactic. It’s not in our
culture and belief system that Pal’s should chase after low-margin sales. Our
response was that we altered our four-ounce hamburgers by increasing our burger
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weight to 5.33-ounce hamburgers. We increased the weight, but only increased

the product price by the amount of the cost increase in the burger meat.
As a result of this decision, at the same time that the dollar menus and 39-cent
tacos were being launched by our competitors, our sales went way up. Pal’s had
been an airplane, but we turned it into a rocket ship.
Simplicity
Another way in which Pal’s responded to customer preferences was by keeping its menu
simple. Simplifying its product offerings enabled Pal’s to focus on getting a more limited
selection of foods “just right” and at the highest quality possible. This approach also created an
overall simplification of all of the processes and operating systems within Pal’s: the fewer menu
items there were, the fewer raw materials, suppliers, and training modules would be required.
With simplicity came lowered risk and a higher probability of successful execution, all of which
Pal’s was able to transform into higher value for its customers. Furthermore, simplicity allowed
Pal’s to focus on what its loyal customers counted on, which was high-quality food at a fair
price, delivered quickly and flawlessly.
Product choices
Pal’s menu was simple and focused on both hot dog and hamburger selections (see
Exhibit 1 for the complete menu as of July 2013). The road to complete focus on its customer’s
needs had not always been a straight one; for instance, in 1992, Pal’s grappled with the question
of serving breakfast. Before 1992, Pal’s only had one menu, available for both lunch and dinner.
Pal’s iced-tea customers, in fact, were the ones who pushed the company into offering breakfast
foods. In the Tennessee market, customers placed a high value on real brewed iced tea, so Pal’s
had taken great pains to source a high-quality tea and create standards for steeping the tea, which
was sweetened only with pure cane sugar. Crosby reminisced:
Our employees were in the stores in the morning to prep for lunch and dinner.
People were banging on the windows and doors in the morning, asking if they
could buy the iced tea. We decided to open the store during the morning and if
people wanted that iced tea, then we would give it to them.
We looked at the sales volume, and just on iced tea alone, we were amazed. Then
we had customers who were challenging us, saying, “Why do you force me to
come here for my beverage and go somewhere else to get my breakfast?” Well
that’s the voice of the customer. They were telling us, “I like gravy biscuits,
country ham, and sausage.”
Pal’s taste-tested several iterations of different formulations of breakfast foods with

market-study groups. Each time, Pal’s came up with different ideas about what would be the best
menu items, looking to be, as Crosby put it, “radically unique but traditional at the same time.”
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Croissants shaped like ice-cream cones filled with eggs, toasted hot dog buns filled with link
sausage, and other iterations later, Pal’s management team realized that it hadn’t been listening
to its customers the way it needed to. All along, customers had been asking for gravy, sausage,
and biscuits—and instead of trying to be “cute,” Pal’s finally listened. Crosby described the
situation:
We decided to use the best whole-hog sausage we could find, a hot bone
sausage—which means that less than 60 minutes can elapse between slaughter
and package. We found a supplier that met our specifications in Knoxville,
Tennessee. We used really good jellies and jams, good butter, and good bacon.
We went back and found a country ham recipe from 1909, and determined that we
needed to manufacture to that standard. Our focus group said, “This is great!”—so
we did an initial piloting test in one store, and then a three-store test. For our
three-store tests on new menu items or other changes, we always select a “hero”
store who loves the idea, an “antagonist” store that doesn’t like the idea, and a
neutral store. We wanted to remove any internal bias as we looked at the taste.
Once we backed up and tried listening, we got it right. It’s been a tremendous
adventure. Our goal was to get to 13% of sales at breakfast within three years, but
we did that in the first year.
Experimentation and improvement
One example of Pal’s approach to experimenting with improvements was its

development of a weather-protection system. In 2003, Pal’s developed a prototype rain awning
that employed an elaborate draining system; the prototype was deployed at a test store. The idea
was that if customers knew they would be shielded from the rain when ordering food from Pal’s,
they would be more likely to go out during bad weather. Pal’s tracked both weather and sales
data at the test store for six months and saw no change in sales. Without a business case,
company management determined that the awnings weren’t a good investment. In 2012, due to
significant customer feedback, management determined that they would implement the rain
protection in a simpler design, despite the lack of data supporting the decision (see Exhibit 2 for
an architectural rendition of Pal’s awnings). Crosby explained the results:
It’s been a mixed blessing. We have one group of customers who couldn’t come
through the lines after we installed the rain shields—the nine-foot truckers. We
created a new process just for them, so now they can pull off to the side of the
drive-through line and give the order from there, and then we deliver it to them.
This group is not a large number, but there was a response, so we accommodated
them. Otherwise, we’re getting lots of positive reactions.
Now, looking back on the data, the thing we were missing in our original
measurement design was that we were comparing sales between a nontest store
and a test store. We didn’t know how many people we were losing just because
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there was no protection from the rain. We now have measurements showing that
the rain shields did provide a return on investment. We started examining how
sales were trending before the rain started, during, and after the rain.
We took other considerations into the design of the rain shields. They all have
translucent covers to preserve the face-to-face experience and natural lighting of

the Pal’s transaction.
Customer feedback
Every customer comment that came through the Pal’s website was routed directly to
Crosby. Although eliminating waste and simplifying transactions were obsessions of his, he
never reduced his focus on what really mattered—and to Barger and Crosby, that meant staying
in direct touch with the customer. Barger often answered the phones at the main office, because
he believed it was critical for top leadership to stay in touch with customers and suppliers.
Crosby commented:
I answered three e-mails this morning. Someone said, “I’m moving, will you
make a Pal’s where I’m moving to?” And I wrote back, “I’d love to, but I’ve
taken a look at the census data, and we’d have to have every person in town eat
there twice a day.” I have no canned responses. Every reply is unique.
Other customers want to tell me their Pal’s story. These are mostly positive.
Sometimes we did make a mistake. Then the whole system is really focused on
that. We need to continually improve. I get involved and immediately send these
notes out to the store in question and we respond. The customer hears, “I’ve seen
it, I’m responding to it, and here’s what we’re going to do to fix it.” After 30
days, we do a follow-up with everyone. We ask, “Have you been back to Pal’s?
Do we need to do anything to satisfy the situation?” Once a situation starts, I get
copied on all the e-mail transactions and communications so I can add comments
if necessary. We need to win our customers back over and turn them into
marketing people for us.
In 2013, Pal’s leadership was evaluating new software that would automatically connect
incoming customer calls to an employee at an individual store who was able to respond to the
concern. The software would also allow Pal’s to track the response process.
Pal’s Capabilities
Pal’s designed all of its operating systems around delivering on its promises to customers.
Central to this design was a focus on simplicity, which was the basis for Pal’s consistent
performance.
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The drive-through line
One example of Pal’s approach to examining and optimizing processes could be seen in
its treatment of the drive-through line. Except for four Pal’s locations, all restaurants were drive-
through only. Pal’s customer pipeline, which was represented by the line of cars, began when a
driver on the road glanced over at Pal’s and made a “go” or “no-go” decision. The pipeline ended
when the driver received a correct order and correct change and drove off of the Pal’s lot. Herb, a
Pal’s general manager, noticed that too many cars were glancing at the length of the drive-
through line and making a “no-go” decision—in other words, after seeing the length of the line,
they were driving away and deciding not to place a drive-through order. By one estimate, nearly
20 cars per hour were choosing not to purchase Pal’s food, purely on the basis of the visible line.
Hoping to improve the process, Pal’s leadership team decided to closely observe the
drive-through line. The team noted that “drive-offs” (potential customers who decided that the
line was too long and drove away) had different thresholds for moving on. On one end of the
spectrum, some drive-offs occurred because more than one car was visible in line at the first
window, which was observable from the road. On the other end of the spectrum, drive-offs
occurred when the line of cars waiting for that first window extended into, and blocked, a travel
lane in the road. Because this particular restaurant was sited in close proximity to the road, it was
not possible to extend the length of the “stack.” In other words, the stretch of pavement between
the first drive-through window and the road could not be made longer.
QSRs were traditionally structured so that the customer would order at a speakerphone
near a menu (sometimes using a monitor) and then drive to the first window, where the person
taking orders via a microphone would also take money and make change. Next, the car would
drive to the second window to receive their food. At Pal’s, customers would order face-to-face
with a real person at the first window (i.e., not via a speaker or a monitor.) The order-taker would
then “translate” the order into the standardized Pal’s production language used by the production
team, take the customer’s money, and make change. Crosby, Barger, and the rest of the Pal’s
team hypothesized during their observations that the visual backup produced during the
relatively lengthy process at the first window may have been causing some potential customers
to become “drive-offs.”
One of the first changes made at that Pal’s location was to rearrange the drive-through
experience by moving the money-taking function from the first window to the second window,
which was on the other side of the building (see Exhibit 3). As a customer drove around to the
back, the second-window associate would make the coin change and prepare the bag for
delivery. Then, if the customer handed cash bills to the cashier, he or she would be presented
with correct change and the correct order. If a customer insisted on providing exact change, the
cashier would accept the change and toss it into a bucket to be counted and sorted later. Barger
noted that credit cards were an even better value proposition for Pal’s than receiving bills from
customers. He had determined that by serving only three more cars per hour, a Pal’s location
could offset the additional fees that were likely to result if everyone paid by credit card. Credit
card payments took less time, eliminated the need to deposit funds at the bank or make (and
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count) change, and removed the possibility of theft. Crosby reflected on Pal’s improvement
process and some of the reasons for the changes:
Humans are visual creatures. One of the things we do in increasing our accuracy
is face-to-face ordering, because you get visual cues from the person placing the
order and the order is correct more often. It also becomes a more personal
transaction.
The decision to move cash payment from the order-taking window to the handout
window was a direct result of going to the store, watching the line, and timing it.
We determined that the length of time between when the wheels on one car
started (in order to drive away from the second window) and when the wheels
started on the next car that had stopped at the second window was our takt time.3
That store is really close to the road, so you could see the whole process. We were
timing the cars pulling away from the second (handout) window and also
watching the behavior of the cars on the road. We saw them watching—
hesitating—I knew that they wanted to buy, but they were not buying when the
line was too long. We set up an experiment to try moving the payment collection
part of the process to the second window. The idea was to limit the number of
cars you could see in line from the road.
We had to discount the first set of results because they weren’t a lot better. The
line didn’t get short right away, because it took so long to take the orders.
Customers wanted to know why they weren’t being asked to pay at the first
(ordering) window, and this slowed down the process. We ran the experiment for
a month, during which time we explained to our customers what we were doing
and why. We recalibrated our process by working with our customers, and then
we went back and made the measurements again. Sales had gone up, and the
number of cars per unit of time had also gone up. Things had skyrocketed. There
were still some drive-offs, but we took all that into consideration. We
hypothesized that part of the reason that people might drive away might be the
short stack at that location between the road and the store. When we opened our
next store, we kept in mind our new configuration and designed a bigger stack
from the street to begin with. This worked out well and brought down the number
of drive-offs even more.
3
Takt time is a common term used in the Lean lexicon. In this context, takt time is meant to indicate the time
that elapsed between successive customers.
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The production line
The production line at Pal’s began in the back of the store, where deliveries were taken.
Items that were used more often were brought closer to the production area, and those that were
used less often were kept at the back of the store, or “staging area,” which was split into two
parallel spaces. The right side contained all ingredients, materials, and equipment required to
modify food ingredients before placing them on the production line. For instance, shredded
prewashed lettuce was washed and spun dry again, tomatoes were sliced, and barbecue pork was
broken up into smaller pieces so that it fit more delicately on a hot dog bun. The left side of the
staging area contained stored food items that did not need modification between when they
arrived at the store and when they were placed on the production line, such as hamburger patties
and hot dogs (see Figures 3 and 4).
Figure 3: Pal’s prep and no-prep staging areas.
The “nose” of the store consisted of a production line that had an order-taking window at
one end and a handout (and payment collection) window at the other, each of which were staffed
by “translators.” In between these two windows were the griddles, microwaves, toasters,
produce, food items, and condiments required for a highly trained, efficient team to assemble and
deliver a completed, correct order once every 18 seconds (Figure 4). Non-value-added activities
had been removed from the production area, leaving only what truly mattered: quality
ingredients, right-size pricing, and personal interaction. Crosby reflected on the production line
design:
The production area is designed with efficiency in mind. For instance, all
condiment dispensers are stored upside down. You don’t have to shake them. If
you look at the build of each of our sandwiches, all the component pieces that go
on as it’s being built, each one of them has the shortest possible hand-movement
route in each instance to build that sandwich. You’re not using up nanoseconds by
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crossing over other people or reaching past where you need to—time that
multiplies in the production of the sandwiches. This is all part of the training to be
on a Pal’s production line. When you have built-in memory about the motions
you’re making, you’re functioning automatically.
Figure 4. Production line.

Sandwich-prep side of the production line Handout/payment window
Griddle side of the production line

Order window
Pal’s Control Systems
Robust processes
Process development at Pal’s was taken very seriously and spanned every aspect of
operations, from hiring and employee development, to building aftermarket customizations, to
production equipment and building features, to thoroughly laying out the production line so that
it minimized specific categories of waste such as excess motion, transportation, waiting,
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inventory, and the like. To Barger and Crosby, successfully building robust processes meant that
their corporate offices (which were also run in a Lean manner, with only Barger, Crosby, and
Thompson onsite) were relatively free of the typical distractions and issues that might beset a
competitor. The senior team simply didn’t need to spend its time putting out fires, because Pal’s
systems and processes were able to manage problems before they escalated to situations that
required the team’s attention. Thus, the leadership team was able to spend more of its time on
strategic future planning than on day-to-day crisis management.
Robustness in a process was measured by how well that process performed in a variable
environment. The concept of robustness at Pal’s moved beyond just meeting design
specifications of equipment, and reflected considerations relative to layout, design, sourcing,
installation, and operation. One example is the placement of grease-catch pans on cooking
equipment. Crosby said:
All the manufacturers, for some crazy reason, put the grease-catch trays in the
front. When you use the griddles, you actually scrape them by pushing everything
to the back, and then you have to pull the grease to the front to get it out. In the
process of cleaning, preparing, and using the equipment, it is easy to inadvertently
push grease and cooked food particles to the side, which causes you to burn out
the controls. We prefer to work with manufacturers from the beginning so that a
piece of equipment meets the demands of our processes. When the manufacturers
won’t change a product, we rebuild the equipment in a formation that prevents
failures. Our attention to the details that create a robust process starts at that level
and rolls up to process flow, design, and ergonomics.
Data to inform action
Barger (who had studied accounting) and Crosby had a fundamental orientation toward
the use of data that involved aggregating or annualizing data so that it was more meaningful and
could prompt important actions rather than unnecessary reactions. Crosby said of their approach:
When people observe data, they tend to react to noise and not underlying trends.
They want to tell you about weekly sales, for instance, and make decisions (such
as letting people go) based on that. But weekly sales can be influenced by traffic
patterns, weather, anything. At Pal’s, we annualize everything. That helps level
out the data and takes a lot of the noise out. The data we get from our systems is
true information, actionable information, because it has been aggregated and
collected over time.
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We want emotional data. We want data that allow people to say, “Great news!”
because it’s a reliable indicator. Or they can say, “Oh, this is bad, we have to do
something!” because the data shows us that it’s really a bad situation that needs to
be responded to. They can truly get emotional about it one way or another.
Metrics that matter
Certain data points were examined at the store level on a daily basis. One of these was
“cash over and short,” which was the amount of cash in the till at the end of each shift compared
against that day’s gross receipts. Similar QSR companies set a standard for the cash over and
short of no more than $2 per shift, or $6 per day. Pal’s cash over and short would typically be
less than $2.50 per day, which beat the industry standard by a significant margin. Barger and
Crosby attributed this discrepancy to Pal’s superior training, culture, and processes.
Crosby thought of metrics as providing either a short-term or a long-term view; many

times, he contended, metrics that provided a short-term view should not be used to make long-
term decisions because they are too dependent on external forces that are beyond the control of
the entity. When variations in short-term metrics can be fully explained by internal dynamics,
then, he believed, they were more actionable. He said:
Metrics with a longer view include sales, customer counts, profit in dollars, profit
as a percent of sales, cash flow, and R&M [repair and maintenance]. Shorter-term
metrics include cash plus or minus in a cash drawer at a store at the end of the
day, labor cost, COGS [cost of goods sold), and supply expenses.
Many companies focus primarily on sales and profits. Within a restaurant, they
may look at weekly and/or monthly data and then make big strategic decisions
that affect operations based on that data. Oftentimes, changes observed within
data collected over such short periods are driven by outside forces that are not
controllable by operations such as weather, short-term changes in traffic patterns
caused by factors such as road work, and new competitors having opened
recently.
Making decisions to celebrate, sustain, or correct based on the short-term view

can result in poor decisions and changes. There are, however, some areas where
the major influences are nearly 100% internal. These are the areas where making
decisions and changes based on the short-term view are valid.
As a result of this orientation, Barger, Crosby, and Thompson tended to spend their time
paying attention to metrics that revealed larger trends in important drivers for the company, such
as the cost of goods sold. At the store level, variability in the cost components of each menu item
showed up as “dollar variation”—but at the strategic level, this variability was represented in
COGS. Crosby said, “We’re making pricing decisions, we’re looking at and making predictions
on markets, what’s going on, how are we going to hedge against certain things.” He further
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commented on a Pal’s approach to creating a “metric dashboard” that was in line with its
company strategy:
We are most concerned with our transaction accounts—not sales figures. Anyone
can increase sales by raising prices. If you run out of customers, though, you’re in
trouble.
Our next priority is monitoring the number of negative customer comments. Top
leadership is actively involved with the voice of the customer, especially when it
involves a negative customer experience with the brand. We also pay attention to
how the staff is progressing through our leadership-development pipeline. We
don’t open a new store until there are enough qualified people who are ready, and
we don’t rush it.
After that, we pay attention to our supply chains. We are at the level of being able
to track the number of coffee stir sticks in each location. We monitor the supply
chain on a continual basis. Lastly, we look at sales and average check.
We have individualized control charts for every store. Each store needs an
individual strategy that links tightly with the overall corporate strategy. We give
the stores the right to not run control charts, or you can decide to monitor any of
the processes that are running. All of our owner-operators know the tools in the
toolbox—but we only require stores to run these tools when there’s a strategic
importance to run them. A process may be in control but centered around the
wrong standard. We make sure our owner-operators know how to drive an out-of-
control process in order to redesign the process controls around the right standard.
Coordination at Pal’s
Pal’s first considerations in working with a supplier were quality, price, and whether the
supplier had a culture of continuous improvement. Pal’s leadership also took into account a
supplier’s commitment to sustainability in terms of energy and water use, as well as whether the
supplier was local—although Barger and Crosby considered global suppliers as well when it
made the most sense overall. Another overarching requirement when it came to supplier
interaction was Pal’s ongoing search for simplicity and excellence. Pal’s obsession with limiting
core ingredients while maximizing the flavor profiles and quality of its menu items had the
additional effect of simplifying supplier transactions. Crosby said:
With suppliers, we simplify the overall communications and invoice structure.

The price verification to us is simply an e-mail. If the supplier’s numbers match
ours, we pay. Pal’s wants to be remembered as a customer who pays early. Since
we use cash accounting, everyone has to be paid by the morning of the last day of
the month. Our discussion right now with our suppliers is about prepaying an
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average amount, and then adjusting up or down as necessary. If that will simplify
things on their end, we’re all for it. It changes their mode of communication with
us when we value their time as much as we want them to value ours. When we do
a supplier review, the first two line items are, “What can we do better to remove
the hassle that we’ve put into the system on your side?” and the second question
is, “How can we prove out a system where you’re going to make more money
from us next year without raising prices?” By approaching it this way, we focus
on throughput. We also have a dialogue about how we would like to interact. We
tell them, “Don’t send us anything for free. Don’t send us gifts—give me the
lower price instead. Don’t call us to check up on us, and don’t send anyone to call
us. We don’t need personal time with you. Let’s simplify and give me the name
and number of the person who’s really in charge. We are going to call you once,
and we need decisions and actions then. We won’t go through gatekeepers. We
have an agreement with our suppliers, if a product is bad—for instance, if a
shipment of buns has too much flour—then our general managers need to be able
to dispose of the bad product immediately so we can go straight to adjusted
invoice. We want strong relationships and we strip the waste out.
What we’re doing works. For our size, [based on industry norms,] we should be
negotiating only with the distributors for some of our items. However, we are so
good to work with that in certain cases our distributor has allowed us to negotiate
with their manufacturer so we can work out a better deal for the cost of the
product—the distributor knows that they’ll be paid the same regardless.
Where possible, we will source and work with suppliers who show a commitment
to the use of renewable resources. For example, a nearby sausage distributor that
met all of our other requirements also uses solar to power their plant, and works
with a zero-emissions biomass-generator site. They have enough solar panels and
excess power that they sell power back to the grid.
We also look at cutting down on packaging material—both ours and others’. We

look at maximizing space without being wasteful. Our Styrofoam cups, for
instance, are recyclable. We use thin paper wraps for our sandwiches. We’ve
invested in various conversions when the technology is right—for instance,
lighting. We’ve also experimented with chaining together instant water heaters,
but this technology isn’t currently right for a commercial setting. When a supplier
can help us by providing innovative reduced-packaging options, that is a selection
factor.
We evaluate geographic location, and then coordinate with our distribution

company to consider transportation. We look at where that supplier already
delivers product to current customers. Everywhere we can, we look for
transportation synergies among our suppliers.
Page 14 of 21
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Sometimes, we save money on sourcing because we put a lot of thought into what
it is that we’re buying. For instance, we sell 10 iced teas for every Coke we sell.
We know we need to brand the iced-tea packaging. We move so many iced-tea
cups that the cost of putting a logo on the cup—even a one-color logo—was a
million-dollar expense that hit the store-level profits. We needed to come up with
a cost-effective solution to brand those plain white Styrofoam cups. We had three
components that were possible to alter. We could do something with the lid, the
straw, or the cup. The only solution that made financial sense was to do
something with the straw. But how does a company our size get a proprietary
straw made? We relied on a relationship we had built over a number of years—

and we ended up identifying certain production runs on our supplier’s equipment
that wouldn’t require a cleanup between batches. We prepay it, they do a
production run, and we now have our proprietary, branded straws. There are
locals eating with us, and anyone can look at that cup and they know it’s a Pal’s
cup right from the straw. The cup doesn’t sweat,4 and it keeps the iced tea cold a
long time.
Context and Culture at Pal’s
Pal’s had a strong commitment to education that extended into regular community
involvement, a well-defined leadership-development-pipeline model that ensured cultural
alignment, and exposure to ideas from leading authors in Lean implementation. In addition, Pal’s
maintained a business excellence institute (BEI) that offered executive-level education in the
Pal’s process and other Lean learning objectives to Fortune 500 companies and local community
organizations.
The owner-operator model
Pal’s used an owner-operator model that had some similarities and some major
differences from the franchise model. New owner-operators did not buy in to their stores, did not
have an equity stake, and could not pass their stores on to their children. They worked 100% on
commission and earned no base salary. Pal’s corporate entity received a contribution margin as a
profit-and-loss expense, and after that, owner-operators kept 100% of profit. Ongoing goal-
setting and conversations about future planning ensured that when owner-operators retired at 62,
they were able to live well. Crosby explained:
It’s a licensing and royalty arrangement with that one individual and when it
expires, it expires. We put up all the money for the concept, and we have all the
rights. Pal’s can terminate an owner-operator agreement at will, and owner-
operators are required to give 90 days’ notice. The agreement is renewable
4
In this context, sweat refers to beads of water building up on the exterior of the cup as a result of condensation.
Page 15 of 21
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annually until the operator turns age 62, and then it terminates for good. There’s
an age where dealing with teenagers and standing up on concrete all day is not
such a good idea.
Involvement of owner-operators in planning and decision making

During the strategic planning process at Pal’s, every person had a voice, especially during
the SWOT (strengths, weaknesses, opportunities, and threats) analysis phase. Planning
documents were published, and training modules were then based on those decisions. Pal’s
helped everyone understand what the company’s strategic plans were and how each role fit into
company success, as well as how success was measured. Crosby said of the Pal’s decision-
making process:
We are a democratic monarchy. In everything we can, we use the democratic

process. Our steering-committee team is made up of the owner-operator of each
Pal’s location, individuals from the leadership-development pipeline, and the
three senior leaders. A two-thirds-majority vote of the steering committee is
required for a change in the company. But at the end of the day, Pal and I might
have a passion for something, and if we say, “We’re doing this,” everyone will do
it. We could force issues, but we don’t unless something is very important to us.
On existing-store capital improvements, we split the entire cost, including

installation, fifty-fifty with the operators. When they look at it on that scale—
perhaps with a $10,000 improvement we are asking them to make—they know we
have thoroughly evaluated the return on investment, and it doesn’t impact them at
that $10,000 level because they get $5,000 back from us. For example, we just
spent $120,000 on one company-wide improvement [that only cost each store
around $2,000]. The operator knows it’s a big number for us, because we get all
those multiples. It keeps the facilities and equipment updated and in top working
condition. We all know how important maintaining top operational capability is
and the cost to do so, and the operators know we’ll always go in with them on it.
Employees
Barger noted that while the new employees that Pal’s hired might know certain things,
such as how to work a griddle, Pal’s typically had to “untrain and then train them again.” This
was due to the intense work ethic and commitment to personal development that was necessary
for someone to make a career at Pal’s. While the company paid floor operators at competitive
wages relative to the industry, it also offered a clean, positive culture and opportunity for
advancement. Another nonmonetary benefit of employment at Pal’s was the distinction of having
Pal’s as a previous employer—many former employees reported being considered at a level of
greater distinction due to time spent at Pal’s. Crosby said:
Page 16 of 21
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It’s an issue of culture. We are cognizant of wanting to recalibrate you, and we

are going to educate you. You might be an hourly employee, but we’ll make you a
hero—you are helping to change the company. We’re paying you a fair wage.
We’re not overpaying those people, but on top of that, we give what we think is a
much better culture and we actively engage and your voice becomes an active part
of the dialogue.
If you go to the post office looking for a job and you’ve been in the military, you
get points up, extra consideration. Pal’s is that way in this market. If you have
Pal’s on your resume, you are going to get extra consideration. We have
companies that will seek out Pal’s employees. This region is familiar with our
standards and training. There are high expectations, but we’ll do everything in our
power to help you succeed.
We are currently operating at about a 34% turnover rate. In February 2013, the
best we could tell in the local markets, including the national chains, was that they
were running a 90% turnover rate for hourly employees. At the assistant-manager
level turnover, we think our competitors are running at around a 12% to 15%
turnover, but we have only 2% turnover. At the general manager or owner-
operator level—I’ve been here 31 years, and we’ve turned over six GMs in all
that time.
Succession
Crosby commented on Pal’s succession planning:
We have a robust succession plan, starting at the store level with key employees
such as openers, closers, and assistant managers. There’s a written succession
plan that each store fills in, rolling up to their lead assistant manager. It has to be
kept up with an actual name in place. The owner-operator roles and above fall
under the corporate purview and are updated once a quarter. That is kept in this
office, and then we have a leadership-development pipeline team of operators
who are part of that planning.
In the corporate office, there are only three of us. We have an agreement with our
third-party accounting firm that if something happens to Rob, we have access to
three different individuals for transition possibility, and we have a formal contract
stating this with the accounting firm. Then there’s me. We have three individual
operators who are targeted for my job in a line of succession. If Pal can’t be the
chairman, I assume the chairman role. We have an individual who is targeted for
my long-term replacement and this person is getting special long-term
development experience. This is a grooming process, and we’re progressing right
along. We think the prime target is for me to hand this over when he becomes 35.
So in nine years, I would assume more of Pal’s role [as the chairman].
Page 17 of 21
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Growth
Barger, Crosby, and the rest of the Pal’s team believed strongly that they should never
allow the competition to set the rules of the profitability game. They preferred instead to redefine
the game and refocus their value proposition on something that was relevant and important to the
customer. When it came to determining the pace of growth, several self-imposed constraints
helped shape the rules of the game that Pal’s set for itself. One of these was the decision never to
incur debt. Another was the decision not to grow too quickly, and to focus on having the right
people for a new location fully trained before moving forward with other considerations, such as
finding a location that was a good fit and conducting land-purchase negotiations. Crosby
explained:
We are highly successful in making all the right choices with the right leader on
the ground. We purposefully limit how quickly we want to grow. We see a lot of
companies that grow too fast and they hit a wall. We could scale up more quickly,
but we are conservative. We generate our own cash flow, we pay cash as we go,
and that puts a limit on growth.
A lot of industries get caught up in assets on the ground, and they think that leads
to money in the bank. We think about money in the bank first. We don’t want to
take a suboptimal market and then bring in low-quality sales and suboptimize the
amount of money in the bank. We maximize the efficiency of our funds. We may
invest in stocks and other things.
We’re more interested in marketing the brand correctly, delivering the customer
experience correctly, and practicing smart growth. We have a good life, the
people in our work force have a good life, and we make sure that everywhere the
brand goes, everyone will say, “Oh wow, isn’t that great.”
We’re in a change process. As small as we were in the beginning, we needed to

constantly bring in employees from outside and put them through a training
process. We needed diversity of thought and experience coming in. But we are
now at a size where we will soon have around 1,000 employees, and we are
making a swing now to bring up internal people who have much longer exposure
to the culture and our development process. As a result, we can ramp up the
growth model. We also have a lot more cash available. We are fishing out of our
own pond, and there are more resources. Pal and I are considering ways to
innovate the Pal’s growth model.
Page 18 of 21
Source: Company document. Used with permission.

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Exhibit 1
Page 19 of 21
Pal’s Menu, as of July 2013
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Exhibit 2
Page 20 of 21
Source: Company documents. Used with permission.
Architectural Rendition of Awnings
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Exhibit 3
Aerial Representation of Drive-Through Line, Before and After Improvement Changes
Source: Created by case writer.
Page 21 of 21

Lecture 7 - Pal&#39;s Sudden Service

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PAL’S SUDDEN SERVICE: THE RIGHT RECIPE

Figure 1. The first Pal’s location.

Source: Goldberg Productions, Inc.

Figure 2: Map of Pal’s locations in the central southeastern United States.

Source: Company documents. Used with permission.

Table 1. Comparison of Pal’s and Industry Average Key Ratios

Data source: Pal’s data is courtesy of the company. Industry-average data

The Pal’s Customer

Defining the market

weight to 5.33-ounce hamburgers. We increased the weight, but only increased

been an airplane, but we turned it into a rocket ship.

Pal’s taste-tested several iterations of different formulations of breakfast foods with

Experimentation and improvement

One example of Pal’s approach to experimenting with improvements was its

translucent covers to preserve the face-to-face experience and natural lighting of

The drive-through line

The production line

Figure 3: Pal’s prep and no-prep staging areas.

Source: Goldberg Productions, Inc.

Figure 4. Production line.

Sandwich-prep side of the production line Handout/payment window

Griddle side of the production line

Pal’s Control Systems

Data to inform action

Metrics that matter

Crosby thought of metrics as providing either a short-term or a long-term view; many

Making decisions to celebrate, sustain, or correct based on the short-term view

With suppliers, we simplify the overall communications and invoice structure.

We also look at cutting down on packaging material—both ours and others’. We

We evaluate geographic location, and then coordinate with our distribution

straw made? We relied on a relationship we had built over a number of years—

Context and Culture at Pal’s

The owner-operator model

Involvement of owner-operators in planning and decision making

We are a democratic monarchy. In everything we can, we use the democratic

On existing-store capital improvements, we split the entire cost, including

It’s an issue of culture. We are cognizant of wanting to recalibrate you, and we

Crosby commented on Pal’s succession planning:

We’re in a change process. As small as we were in the beginning, we needed to

Source: Company document. Used with permission.

Source: Created by case writer.

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Lecture 7 - Pal's Sudden Service

Lecture 7 - Pal's Sudden Service