Payoff Matrices Pay Off at Hallmark.

This article focuses on the "newsboy" model, expressed as a payoff matrix, which enables inventory control managers to incorporate demand uncertainty, salvage value and shortage cost in determining run size or purchase quantity. Discard is a term for merchandise remaining in inventory that will no longer be offered through normal dealer channels. The discard problem consists of three distinct aspects. In some cases, clearly too much merchandise was produced or purchased. In other cases, analysis may reveal excess merchandise and yet no regret; for example, where additional items were purchased to obtain a price break. Prior to 1982, as new products were considered, no contingency analyses were conducted. Instead, product management made an estimate of sales, often based on items of similar price or type, and the product was run to fit that estimate. A simple case like Linmar Co. was used to introduce payoff matrices. This case has an easily determined set of five acts and five states, clear costs and revenues, and a historically-based probability distribution of forecast error.