What are… “tier one suppliers”?

Robust supply chains are essential for the smooth working of retail and, in particular, manufacturing – a fact the COVID-19 pandemic has underlined. Suppliers have an important role to play, and they are generally categorized in three tiers. But what exactly are these tiers? And what is the supplier pyramid?

Almost all products comprise multiple parts and materials. Take a car: to make a vehicle, you need many components – and not all of them will be made by the car marque itself. It’s a safe bet, for example, that air filters, batteries and spark plugs are sourced from trusted suppliers. Typically, the vehicle maker orders entire modules or systems, such as driver assistance systems, from their direct supplier. This company will, in turn, have ordered components for these modules from another supplier – who themselves obtained smaller individual parts, such as screws or hinges, from yet another supplier(s).

No wonder it can be difficult to maintain visibility. This is where the supplier pyramid comes in. At the very top are the OEMs, i.e. original equipment manufacturers. In our example above, that would be the car manufacturer. The level, or tier, directly below them comprises the suppliers of modules and systems, e.g. assistance systems. Below them are the component suppliers. And at the base are the suppliers of smaller, individual and basic parts.

Now to name these categories according to levels, or tiers: the level nearest, i.e. right below, the OEMs represents the tier one suppliers. The component suppliers below them form tier two, and the suppliers of parts, e.g. screws, at the bottom of the pyramid make up tier three. In fact, a given company can be both tier one and tier two, for instance if they deliver both directly to OEMs and provide individual components to other tier one suppliers.

Transparent, digital communications play a key role

Even before COVID-19 came along it was clear that seamless coordination between the individual tiers is essential to manufacturing. Higher-tier suppliers can only manufacture their goods if their own suppliers deliver the right parts – meaning each player has an impact on the supply chain as a whole. To maintain an overview and, where needed, make timely interventions, transparent and readily accessible information is key. It is the only way of ensuring the reliable supply of systems, components and parts – because without tier three parts, tier one suppliers cannot provide their goods to the OEM. This is where electronic data interchange (EDI) solutions can help. Using defined, standardized procedures, information on items, orders, delivery notes and invoices can be entered into a centralized system. In addition, the status of individual orders, inventory lists or sales can be shared, and corresponding changes and updates to timeframes coordinated.