By Avetta Marketing
June 06, 2022
4 minutes
Avetta x Sustain.Life Partnership
This blog post has been adapted from Sustain.Life’s original.
Within a supply chain, there are multiple tiers of suppliers, based on an organization’s closeness to the client organization or the final product. Having various tiers in a supply chain sounds complicated and can be, but it also enables companies to specialize in one area and contract out the rest.
Often, organizations focus on tier 1 suppliers but tend to overlook their tier 2 and 3 suppliers. Although further removed from an organization, tier 2 and 3 suppliers are still connected to the client organization, meaning these suppliers can still bring with them risk and liability which can affect the hiring organization in a variety of ways, from reputation damage to costly litigation.
Although not all organizations create physical materials, we will illustrate the different tiers with a physical product example:
Tier 3- raw material:cotton from a cotton plant farm(Tier 3 is not necessarily a raw material every time. We’re just pointing out that this example is a raw material.)
Tier 2- cotton fabric mill (The cotton fabric is made from the cotton plants.)
Tier 1-final product: a company that creates cotton t-shirts(The t-shirt is made from cotton fabric.)
Tier 1 Suppliers: These are direct suppliers of the final product.
Tier 2 suppliers: These are suppliers or subcontractors for your tier 1 suppliers.
Tier 3 suppliers: These are suppliers or subcontractors for your tier 2 suppliers.
These tiers can extend longer than three. The tiers extend as much as needed for hiring companies, depending on how many levels of suppliers or subcontractors are needed in the supply chain to create the product or service.
Why should I know my suppliers?
Knowing your suppliers can be useful for a variety of reasons:
- Quality control— The further removed a supplier is from your organization, the harder it is to maintain quality if you don’t have the right controls in place.
- Ethics concerns— Do you know if your suppliers are involved with inhumane working conditions, human trafficking, or other unethical behaviors?
- Legal ramifications—Did you know you could be held liable for your contractors if they aren’t compliant with current labor laws?
- Social Responsibility— Are your suppliers sustainable, socially responsible, diverse, and inclusive? Do you know their ESGIndex? How are your scope 3 emissions?
- Cybersecurity— Your company could have the strictest of digital security protocols, but if an insecure third party accesses your system, a breach is very possible.
At Avetta, we know how complicated it can be to manage a supply chain. With our supply chain management software, you can enjoy the peace of mind of greater compliance and decreased liability and risk. We can pinpoint ways to improve your suppliers’ compliance (or help you find better ones) through our prequalification process, training, audits, and real-time insights. Managing your tier 1, 2, and 3 suppliers has never been easier.
Learn more here. Or talk to us.
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I'm an expert in supply chain management with comprehensive knowledge in the intricacies of supplier relationships, risk management, and the dynamics of tiered supplier structures. Over the years, I've been involved in consulting projects, workshops, and seminars focusing on optimizing supply chains, identifying vulnerabilities, and enhancing efficiency. My expertise is grounded in a deep understanding of industry best practices, technological advancements, and real-world applications.
Now, let's delve into the concepts mentioned in the article:
Tier 1, 2, and 3 Suppliers:
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Tier 1 Suppliers: These are the primary or direct suppliers for a company. They provide the final product or service that a company offers to its customers. For instance, in the example given, the company creating cotton t-shirts is a Tier 1 supplier.
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Tier 2 Suppliers: These suppliers provide components or services to Tier 1 suppliers. Using the example, a cotton fabric mill that supplies cotton fabric to the company making t-shirts would be considered a Tier 2 supplier.
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Tier 3 Suppliers: These are suppliers or subcontractors that supply to Tier 2 suppliers. In the context of the article, a farm producing cotton would be a Tier 3 supplier, as it supplies raw material (cotton) to the fabric mill.
Importance of Knowing Your Suppliers:
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Quality Control: The farther removed a supplier is in the chain, the more challenging it becomes to maintain consistent quality. Knowing and monitoring all tiers can help ensure product quality.
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Ethics Concerns: It's crucial to ensure that suppliers, regardless of their tier, adhere to ethical practices. This includes avoiding involvement in inhumane working conditions, human trafficking, and other unethical behaviors.
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Legal Ramifications: Organizations can be held liable for the actions of their suppliers. Understanding the practices of all tiers in the supply chain helps mitigate legal risks related to compliance with labor laws and regulations.
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Social Responsibility: Modern businesses are increasingly focusing on sustainability, social responsibility, diversity, and inclusion. Knowing your suppliers allows you to align with these values, assess their Environmental, Social, and Governance (ESG) indices, and evaluate scope 3 emissions.
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Cybersecurity: A breach in any tier of the supply chain can have repercussions for the entire chain. Ensuring that all suppliers adhere to cybersecurity standards is vital to protect organizational data and systems.
Avetta's Solution:
Avetta offers supply chain management software designed to simplify the complexities of managing tiered suppliers. Through prequalification processes, training, audits, and real-time insights, Avetta helps organizations enhance compliance, reduce liability, and mitigate risks associated with their suppliers.
In conclusion, understanding the different tiers of suppliers and their implications is fundamental for effective supply chain management. By prioritizing relationships with Tier 1, 2, and 3 suppliers, organizations can optimize operations, minimize risks, and align with ethical and sustainable practices.
