{"id":23591,"date":"2024-05-16T12:47:44","date_gmt":"2024-05-16T09:47:44","guid":{"rendered":"https:\/\/fractory.com\/?p=23591"},"modified":"2024-10-21T17:27:14","modified_gmt":"2024-10-21T14:27:14","slug":"supplier-tiers-explained","status":"publish","type":"post","link":"https:\/\/fractory.com\/supplier-tiers-explained\/","title":{"rendered":"Supplier Tiers Explained"},"content":{"rendered":"

Supply chains have evolved into complex networks of interconnected suppliers who collectively provide the materials, services and essential components needed to create a finished product. Managing these relationships<\/a> effectively is crucial for companies to ensure their success in supply chain management.<\/p>\n

Supplier tiering categorises suppliers based on their importance and proximity to the final product.<\/strong> The concept originates from the automotive industry and was applied to identify how far various elements are in the supply chain. As the benefits became obvious over time, procurement<\/a> and supply chain experts from other sectors realised the importance of supplier classification and introduced supplier tiering into their businesses.<\/p>\n

What Is Supplier Tiering?<\/h2>\n

Supplier tiering is a categorisation system that groups suppliers or subcontractors into tiers based on two key factors:<\/p>\n

    \n
  1. \n

    Distance from the final product: <\/strong>This refers to how closely a supplier is involved in the physical creation of the final output.<\/p>\n<\/li>\n

  2. \n

    Level of importance to the business: <\/strong>This signifies the impact a supplier has on the company’s success, considering factors like cost, quality and delivery timelines.<\/p>\n<\/li>\n<\/ol>\n

    This classification helps companies gain supply chain visibility, understand their supplier base thoroughly as well as empower them to make informed decisions regarding resource allocation and risk management<\/a>, ultimately shaping their operational strategies.<\/p>\n

    While the impact of suppliers on businesses generally decreases with distance (tier 2 and higher), they can still be crucial for maintaining supply chain visibility and upholding sustainable procurement practices<\/a>.<\/p>\n

    The different tiers of suppliers are typically categorised into the following tiers, further explained in Figure 1:<\/p>\n

    Tier 1 Suppliers<\/h3>\n

    Tier 1 suppliers are your closest partners with whom you directly engage and conduct business with. They’re also known as manufacturing partners who provide essential services and components used directly in your finished product. They have a significant impact on your business, specifically on your product’s cost, quality and delivery timelines<\/a>.<\/p>\n

    Tier 2 Suppliers<\/h3>\n

    Tier 2 suppliers are often referred to as secondary suppliers. These companies supply materials or services to your tier 1 suppliers. They are one step further removed from the end product and have an indirect impact on its quality and delivery.<\/p>\n

    Tier 3 Suppliers<\/h3>\n

    These suppliers are even further removed from the final product and typically provide raw materials or services to your tier 2 suppliers. While their impact on the end item is indirect and generally considered less significant compared to tier 1 and 2 suppliers, they are still the base of the entire supply chain, and thus, essential.<\/p>\n

    \n\n\n\n\n\n\n\n
    Tier<\/td>\nDescription<\/td>\nImpact on Final Product<\/td>\nExample<\/td>\n<\/tr>\n<\/thead>\n
    Tier 1<\/td>\nDirect suppliers:<\/strong>
    \nProviding materials or components for the final product<\/td>\n    		High<\/td>\nSpecialist part manufacturers supplying various transmission parts to a car company<\/td>\n<\/tr>\n
    Tier 2<\/td>\nSuppliers to tier 1:<\/strong>
    \nProviding materials or services<\/td>\n    		Moderate<\/td>\nSteelmaking company processing the iron ore and supplying specialist part manufacturers with steel.<\/td>\n<\/tr>\n
    Tier 3<\/td>\nSuppliers to tier 2:<\/strong>
    \nProviding raw materials<\/td>\n    		Low<\/td>\nMining company supplying raw materials to the steelmaking company<\/td>\n<\/tr>\n
    Note:<\/strong> Depending on the complexity of the supply chain, there may be multiple tiers beyond tier 3 (i.e. tier 4, tier 5 and so on).<\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n

    [ Figure 1: Supplier Tiers Breakdown Table]<\/p>\n

    Real-World Example<\/strong><\/h2>\n

    As a simple example of the supplier tiering method, imagine a car manufacturer, illustrated in the table above.<\/p>\n

    A car manufacturer\u2019s tier 1 suppliers might include companies that provide engines, transmission parts, car bodies, fasteners<\/a> and electronics.<\/p>\n

    Tier 2 suppliers could be companies that process sheet metal<\/a> for tier 1 suppliers or supply specific parts for sub-assemblies.<\/p>\n

    Finally, tier 3 suppliers may be companies that supply raw materials necessary to manufacture the goods and services, like iron ore to the steel company or aluminium<\/a> to the engine parts manufacturer.<\/p>\n

    When Does Supplier Tiering Go Beyond the Basics? Exploring Advanced Considerations<\/strong><\/h2>\n

    While the basic three-tier system provides a valuable foundation, complex supply networks might necessitate a more nuanced approach.<\/p>\n

    Here are some additional considerations:<\/p>\n