What are Tier 1, 2, and 3 suppliers

What are Tier 1, 2, and 3 suppliers

Understanding Tier 1, Tier 2, and Tier  3 Suppliers in Supply Chain Management

 

Within the domain of supply chain management, especially in sectors such as FMCG/CPG, Beauty and Wellness, Manufacturing, and D2C, it is essential to comprehend the hierarchical structure of suppliers. These providers are commonly known as Tier 1, Tier 2, and Tier 3 in the hierarchy. This blog will explore the meaning of these tiers and their significance in procurement in supply chain management.

 

Tier 1, 2, and 3 suppliers refer to different levels of suppliers in a supply chain. Tier 1 suppliers are the direct suppliers to the original equipment manufacturer (OEM), while Tier 2 suppliers provide components or services to Tier 1 suppliers. Tier 3 suppliers, on the other hand, supply materials or parts to Tier 2 suppliers.

 

 

  • Tier 1 Supplier:

 

Tier 1 suppliers are entities that directly provide products or services to the main corporation. They serve as the primary suppliers in the supply chain and frequently maintain a direct contractual association with the company. For example, within the FMCG industry, Tier 1 suppliers encompass raw material suppliers and packaging makers.

 

  • Tier 2 Supplier: 

 

Tier 2 suppliers refer to those who provide goods or services directly to Tier 1 suppliers. Secondary suppliers are entities that supply components or materials to Tier 1 suppliers, which are subsequently utilised in the production process. Within the realm of Beauty and Wellness, Tier 2 suppliers refer to producers who provide specialised ingredients utilised by Tier 1 suppliers in the creation of their goods.

 

  • Tier 3 Supplier: 

 

Tier 3 suppliers refer to the vendors who provide goods or services directly to Tier 2 suppliers. They supply unprocessed materials, parts, or services to secondary suppliers, ultimately contributing to the end product or service. Gaining comprehension of Tier 3 suppliers is essential for guaranteeing a strong and durable supply chain.

 

 

The Importance of Procurement in Supply Chain Management

 

Efficient procurement management is crucial for maximising the supply chain and guaranteeing the seamless movement of materials and resources. Let us examine why:

 

  • Optimal Resource Allocation: 

Through proficient procurement management, organisations may deploy resources in a highly efficient manner, hence minimising inefficiencies and lowering costs across the whole supply chain.

 

  • Risk Mitigation: 

By comprehending the different levels of suppliers, firms may pinpoint possible risks and weaknesses in the supply chain. This facilitates the implementation of proactive risk management techniques, so ensuring the uninterrupted continuation of activities.

 

  • Supplier Relationship Management: 

Establishing robust partnerships with Tier 1, Tier 2, and Tier 3 suppliers is essential for promoting cooperation, creativity, and environmental responsibility throughout the supply chain.

 

The Significance of ESG Factors and Sustainability in the Management of Supply Chains

 

ESG issues have a substantial impact on supply chain management procurement in the current corporate environment. Unilever and similar companies have been leading the way in integrating responsible sourcing rules into their operations. Let’s understand the importance of ESG in supply chains:

 

Responsible Sourcing: 

Ethical and sustainable practices are becoming a priority for companies as they seek to source materials and components from responsible sources. This encompasses factors such as equitable employment practices, ecological sustainability, and the ethical acquisition of primary resources. Unilever’s responsible sourcing policy is one of the best leading examples to take inspiration from.

 

Supply Chain Transparency: 

The presence of transparency in the supply chain is crucial for guaranteeing accountability and sustainability. By implementing sustainability reporting software, firms may effectively monitor and document ESG KPIs across their entire supply chain.

 

Network for firm Sustainability: 

Establishing a network of environmentally responsible suppliers and partners is crucial for ensuring the long-term viability and durability of a firm. The collaboration and sharing of information within this network enable the implementation of optimal methods and promote ongoing enhancement in the sustainability of the supply chain.

Ultimately, comprehending the hierarchical structure of Tier 1, Tier 2, and Tier 3 suppliers is essential for efficient supply chain management. Companies may enhance the durability and sustainability of their supply chains and promote long-term commercial success by utilising procurement strategies and integrating environmental, social, and governance (ESG) factors.

 

FAQs: Tiers in the Supply Chain

 

What is the significance of Tier 1, Tier 2, and Tier 3 suppliers in supply chain management procurement?

 

Tier 1, Tier 2, and Tier 3 suppliers represent different levels within the supply chain hierarchy. Understanding the significance of these tiers is essential for effective supply chain management procurement. Tier 1 suppliers are those who directly supply products or services to the primary company, forming the first level of the supply chain. Tier 2 suppliers provide materials or components to Tier 1 suppliers, while Tier 3 suppliers are the suppliers of Tier 2 suppliers. By categorizing tier suppliers into these tiers, companies can gain insights into their supply chain structure, identify potential risks, optimize procurement strategies, and enhance overall supply chain resilience and sustainability.

 

How can companies ensure sustainability and responsible sourcing within their Tier 1, Tier 2, and Tier 3 supplier networks?

 

Ensuring sustainability and responsible sourcing within Tier 1, Tier 2, and Tier 3 supplier networks is crucial for modern businesses committed to environmental and social responsibility. To achieve this, companies can take several steps to create a network for business sustainability:

 

1. Implement Ethical Sourcing Policies: Develop and enforce ethical sourcing policies that require suppliers to adhere to fair labour practices, environmental sustainability standards, and ethical sourcing of raw materials.

 

2. Supplier Audits and Assessments: Conduct regular audits and assessments of suppliers across all tiers to evaluate their compliance with sustainability criteria. This includes assessing factors such as labour conditions, environmental impact, and ethical business practices.

 

3. Supplier Collaboration and Transparency: Foster collaboration and transparency within the supplier network by sharing sustainability goals, best practices, and performance metrics. Encourage tier suppliers to be transparent about their practices and provide visibility into their tier supply chains.

 

4. Invest in Sustainable Technologies: Invest in sustainable technologies and solutions, such as supply chain sustainability software and sustainability reporting software, to track and manage environmental and social metrics across the tier supply chain.

 

By implementing these strategies, companies can build resilient, sustainable, and socially responsible supply chains that contribute to long-term business success while positively impacting society and the environment.

Image Credit: SNOWKAP