In the modern farm and sideline products processing industry, as a production model, manufacturers tend to grow raw materials themselves to meet the needs of production. This production model is not only beneficial for enterprises to better control the final product quality, but also can effectively reduce the production costs. And yet, there is an indisputable fact that the yield of crops is susceptible to adverse events (such as natural disasters), resulting in uncertainty of production. This uncertainty can lead to a heavy shortage of final product output, and even develop financial crisis if it is getting serious enough. In response to potential risks, farm and sideline products manufacturers may purchase business insurance from financial institutions. However, the purchase of business insurance requires a certain amount of premium to be paid in advance. The premium should be a sunk cost to the enterprise concerned if there would be no adverse events during the whole planting period of crops. In view of the huge economic losses from sunk cost and little probability of adverse events, there emerges a crucial theme of production and operation management for boththe theoretical and practical circles to deal with; namely, whether or not manufacturers should avoid farm and sideline products raw materials yield uncertainty risks by means of purchasing business insurance, and, if purchasing, how for the manufacturers to establish the optimal strategy of business insurance.
Firstly in this paper, a single-period decision model is built up for farm and sideline products manufacturer's production planning yield. Based on the model, the influence of business insurance strategy on decisions of manufacturer's planning yield, and on expected profits as well, are analyzed respectively. In comparative studies, the boundary conditions and the optimal business insurance strategies in favor of manufacturers are explored to purchase the kind of insurance, and then the value of business insurance strategy is analyzed by means of which manufacturers avoid the uncertainty risks of raw material yield. The impact of market parameters on hedging values of the business insurance is further discussed, so as to help manufacturers better understand the operational mechanism of business insurance strategies in avoiding the uncertainty risks of raw material yield. By comparatively analyzing the optimal planning yield and the expected profit of the manufacturer under no-insurance case and purchasing business insurance case, the following conclusions are drawn:(1) Only when the security load of premium is lower than the external financing penalty cost per unit would a manufacturer buy the insurance; (2) The manufacturer's optimal business insurance strategy is independent of planned yield; (3) If the loss of the net profit caused by adverse events is higher than the external financing threshold, the manufacturer would transfer the very part of the loss which is higher than the threshold to the financial institution; And (4) the lower the net profit of the final products, the higher the value of insurance would be.