Supplier tiering is the process of organizing suppliers into tiers based on their importance to your supply chain. Categorizing suppliers into tiers helps to streamline communications between a business and its suppliers.
Supplier tiering also allows businesses to manage its supplier base more efficiently, perform supply chain risk management activities, and get the best possible results from its suppliers.
This article will discuss the advantages of supplier tiering and some best practices for implementing it in your own supply chain.
What Is Supplier Tiering?
The concept of supplier tiering originated in the automotive industry. It means categorizing your supply base into tiers based on their “distance” from your organization and your final product.
First-tier suppliers are the most important to your business. These are the partners that you interact with directly. Less important suppliers are in lower tiers (second-tier suppliers and so on). You may not directly work with them, but they’re still part of your supply chain.
- Tier 1: Direct partners that help you assemble the end product
- Tier 2: Sub-suppliers to your Tier 1 partners (parts, components, and so forth)
- Tier 3: Parts or raw materials suppliers
Suppose you are a retailer selling men’s T-shirts. If you see the supply chain as a pyramid, your company would be at the top. This is what your supplier tier structure could look like:
- Tier 1: The company that supplies the t-shirts to you in bulk, and in turn, you sell at a markup.
- Tier 2: The factory that stitches the t-shirts and supplies them to your partner.
- Tier 3: The fabric mill that supplies the cloth (raw material) to the tailoring business.
Suppose you are a car manufacturer. You purchase modules from various tier 1 suppliers and assemble them into a car. Your supplier tier structure could look as follows:
- Tier 1: Supplier that provides the door system
- Tier 2: The suppliers that provide the door’s parts, such as its:
- Interior and exterior handles
- Locks and latches
- Seals and weatherstripping
- Tier 3: Suppliers that provide the raw materials for these parts
What Are the Advantages of Supplier Tiering?
There are several benefits to using a supplier tiering system.
Improved Communication and Coordination
By organizing suppliers into tiers, you can more easily communicate with them and create a more collaborative environment. Collaboration leads to better supplier performance, improved relationships, and increased trust.
Streamlined Monitoring and Management
Supplier tiering helps your company manage supply chain threats and improve supply chain performance. You can prioritize your key suppliers and assure that they receive all necessary information in a timely manner, which further streamlines your supply chain’s operations.
It is easier to find suitable suppliers for your needs with a well-organized and tiered supplier base. This increased efficiency can lead to shorter lead times, eliminate delays, and speed up time-to-market.
Suppliers in a higher tier have an incentive to produce high quality output and to speed up delivery times. Consequently, they’re likely to work harder to maintain their ranking. As the quality and timeliness of their output improve, your performance improves too; ultimately resulting in a boost to your competitiveness, revenues, and profits.
By creating a multi-tier supply chain, you can identify the suppliers whose business practices are aligned with your environmental sustainability or social responsibility goals. This is especially important if your customers expect your business to operate responsibly towards the environment and community.
The tiering exercise can help you weed out the undesirables and show customers that you carefully select your partners and suppliers. You can demonstrate that you take supply chain sustainability seriously, which builds brand trust and garners goodwill for your business.
Supplier Tiering Best Practices
Supplier tiering is valuable for businesses looking to improve their supply chain operations. Consider some best practices to assure that your supplier tiering system is effective and easy to manage.
Clearly Define the Tiers
Clearly define the various tiers, what they represent, and the roles and responsibilities of the different suppliers in each tier. Communicate this information to all suppliers and relevant stakeholders.
This will help all parties to understand where they stand and what is expected of them. It can incentivize suppliers to perform better and deliver better results for your organization.
Limit the Number of Tiers
Keep the number of tiers as small as possible, preferably three or four. Too many tiers can make it challenging to coordinate with all suppliers and manage your relationships with them.
Update the Tiers Regularly
Today’s supply chains are highly dynamic, so your supplier ecosystem may change regularly. When this happens, assess your suppliers and update the tiers. This periodic review ensures that the rankings continue to reflect the current state of your supply chain accurately.
Communicate with Suppliers
Communicate with suppliers regularly to keep them informed of changes and maintain good relationships.
Improve Supply Chain Management with ZenGRC
As your business grows, your supply chain may grow as well. While this can garner many benefits, it can also create a fair amount of risk. To mitigate this supply risk, you need a solution to collect and manage vendor risk information effectively, without burdening internal teams.
ZenGRC can help you automate supply chain risk management. Get enhanced visibility into supply chain threats and address them in real-time to mitigate business exposure. Create an efficient risk-based approach to streamline vendor management, keep your supplier tiers updated, minimize risk, and enhance business results.
ZenGRC’s automated features do the tedious tasks for you, allowing you to focus on the bigger picture. The result: more efficient and effective vendor risk management. Schedule a demo for a hands-on introduction to ZenGRC.