Payoff Matrices Pay Off at Hallmark

The “newsboy” model, expressed as a payoff matrix, enables inventory control managers to incorporate three important contingencies—demand uncertainty, salvage value, and shortage cost—in determining run size or purchase quantity. To use this model, managers had to learn to provide subjective probability distributions of demand as well as model formulation, model solution, and sensitivity analysis. Parallel analyses (business as usual versus the model) demonstrated higher profits for model-based decisions. In several product areas, model-based decisions are now business as usual.