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What is the difference between Tier 1, 2, and 3 suppliers and why do they matter?

By Avetta Marketing
June 06, 2022
4 minutes
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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:

  1. 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.
  2. Ethics concerns— Do you know if your suppliers are involved with inhumane working conditions, human trafficking, or other unethical behaviors?
  3. Legal ramifications—Did you know you could be held liable for your contractors if they aren’t compliant with current labor laws?
  4. Social Responsibility— Are your suppliers sustainable, socially responsible, diverse, and inclusive? Do you know their ESG Index? How are your scope 3 emissions?
  5. 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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