What Are Tier 1, 2 and 3 Suppliers?

All businesses rely on suppliers to create their final product – and that’s where tier suppliers (such as tier 1 suppliers, tier 2 suppliers, and tier 3 suppliers) come into play.

It may seem irrelevant to your company where you source your materials. However, as sustainability becomes more important as the baseline for any businesses, it’s important to understand the differences between tier 1, tier 2, and tier 3 suppliers in order to establish transparency and trust within your business. 

The truth is, tier 1 suppliers, as well as tier 2 and 3 suppliers, play a part in the amount of emissions a company is responsible for – therefore, it is important to understand them in order to implement sustainability in any company.

Tier Suppliers is a method of organizing different suppliers into categories in order to delineate which materials are most important in your supply chain. Organizing suppliers into these, “tiers” can help stimulate necessary communication between a company and its suppliers. 

There are benefits to supply tiering, as it is ultimately a form of supply management that can help a business better evaluate supply chain risk management and yield the best outcome possible from their suppliers. 

Supplier tiering started in the automotive industry, but has since expanded to nearly all businesses to depict “how far away” the supplier is from your company and the final product or service your company is trying to produce.

Tier 1 suppliers are arguably the most important of all the tier suppliers for any business, as tier 1 suppliers are the only suppliers that a business will directly communicate with. This isn’t to say that the other tier suppliers aren’t important – any part of a supply chain is essential to manufacturing any product. However, if there is a tier supplier most essential to the final product – tier 1 suppliers would take the crown.

Tier 1 suppliers are often the compulsory component to manufacture the product your business is selling. For example, a clothing company that makes t-shirts would deem a factory that produces their clothing as a tier 1 supplier.  A company that makes lemonade would call a lemonade producer their tier 1 supplier. A business that sells annual planners would most likely call a company that manufactures planners their tier 1 supplier. 

An easy way to determine who your company’s tier 1 suppliers are, is to look at your business expenditures – as tier 1 suppliers are often taking the most of your money as they are most essential to your end product. 

To remember tier 1 suppliers, think of it this way – tier 1 suppliers are the closest thing to the end product. If you’re trying to make guacamole, avocados are the closest thing to guacamole – not the other added seasonings that go into the guacamole. It is most important that you have avocados. Tier 1 suppliers function and serve the exact same purpose. 

Tier 2 suppliers are most easily defined as the place where Tier 1 suppliers receive their resources from. For instance, a t-shirt company that makes cotton T-shirts has to find cotton before doing anything else – which makes the fabric mill, the organization which turns the cotton into usable fabric itself, a Tier 2 supplier. 

Think of a tier 2 supplier as the component essential to the tier 1 supplier's success. Without the tier 2 supplier, the tier 1 supplier could not provide the end product to the company in question.

Tier 3 suppliers are the source necessary for the tier 2 supplier to deliver the desired product to the tier 1 supplier. 

For instance, the t-shirt company that makes cotton-made clothing needs cotton. Therefore, the tier 3 supplier would be a cotton farm. 

A Mexican restaurant serving guacamole has to order their avocados from somewhere, and the company in which they order the avocados from has to get their avocados from somewhere – most likely an avocado farm. The avocado farm itself would be the tier 3 supplier for the restaurant. 

A popular almond milk brand would call the factory that makes their almond milk their tier 1 supplier – but that factory couldn’t produce or bottle the almond milk in the first place without almonds, which would make an almond farm the company’s tier 3 supplier. 

Again, following the pattern – think of the tier 3 supplier as the component the tier 2 supplier can’t deliver without.

Customers are becoming increasingly aware of the importance of sustainability and eco-friendly products, and are interested in how their favorite face washes or sneakers are made. Delineating your tier 1, tier 2, and tier 3 suppliers can help you customers feel confident in your product, and ultimately – spread the word and increase your business revenue. 

In addition to creating this transparency with current and potential customers, having your supply chain mapped out can help your company tackle other sustainability issues – such as reducing emissions through determining whether your tier 1, tier 2, or tier 3 suppliers are contributing to scope 1, scope 2, or scope 3 emissions in your company.

Some other benefits of supplier tiering include increased efficiency, better quality, and best of all – improved environmental sustainability. 

Supplier tiering can help improve your businesses efficiency, as a good relationship with your suppliers can help reduce the time between delivery of the product and mitigate back orders or delays. Tier 1 suppliers will have strong intrinsic motivation to increase both their output and quality, as they will have a company completely dependent on them for business of any kind. As the tier 1 supplier ups their quality and production rate, your business will directly benefit from increased sales and new customers.

The most rewarding part of supply tiering is the positive environmental impact it can have, and how it will not only help in the fight against climate change – but improve your business standing, as well. 

Creating a supply chain will ultimately help your business discover which suppliers share the same environmental or social goals that your company does, and ending relationships with the suppliers who don’t can help propel your company towards greater sustainability and transparency – all which will garner the interest of future employees, investors, and customers alike. 

Supply tiering is a fundamental element to any business, so choosing the right suppliers that seek sustainability can be essential to the future success of your company. 

First, it’s important to clearly define your own company’s sustainability goals, and then illustrate these to your procurement team – the team in your company that discovers and acquires various goods and services. Your procurement team can decide if the current tier supplier is aligned with your company’s other environmental goals, or if they aren’t and if it’s time to look elsewhere for a new supplier.

This isn’t too difficult of a task, as many suppliers these days, just like companies, are being asked to address their environmental impact to the public in order to establish transparency. Suppliers want to avoid greenwashing as well, because then companies won’t trust them to provide businesses with the materials they need. However, it is still important that your procurement team implements a method to track the progress of both the company’s sustainability goals, as well as the supplier’s – to ensure everyone’s end of the bargain is being met and to maintain a trustworthy partnership. 

Therefore, it isn’t illogical for your procurement team to ask the tier 1, tier 2, or tier 3 supplier for their sustainability objectives – as that data will be the only surefire way to ensure that your company is partnered with a sustainable supplier. Or at least, a supplier that is putting their best foot forward to be sustainable. As long as the supplier has sustainability targets in mind and is implementing the concrete actions necessary to achieve them, they are doing their fair share and the supplier can be considered sustainable – unless those goals are not met later. 

However, that isn’t to say that long-term sustainability and data regarding those sustainability goals isn’t important. An important part to choosing a sustainable supplier is to check their track record: have they followed through with their previous sustainability goals? This is vital, because if the supplier hasn’t demonstrated success in sustainability before – it isn’t guaranteed that they will be dedicated towards success in sustainability in the future. 

If this is too daunting a task, to measure and track the previous and future data of a supplier’s sustainability goals – a safe bet is to seek suppliers that have acquired certifications proving their green efforts. Examples of these certifications include a LEED certification, be labeled as Energy Star, or having an ISO 14001, ISO 37101, or ISO 26000. Moving forward, requiring that future suppliers have or are seeking to hold one of these certifications may be the most surefire way to ensure sustainability amongst your supply chain. 

Finally, it’s important to monitor the sustainable efforts of all three supply tiers: including tier 2 and tier 3 suppliers. As explained before, customers are more and more interested in how their favorite face wash ended up in the bottle they bought. It’s important to clearly illustrate to your customers the entire manufacturing process, which means the sustainability efforts from your tier 2 and tier 3 suppliers are just as important as your tier 1 suppliers. 

At the end of the day, sustainability is important to everyone involved in the manufacturing of a product these days – as suppliers won’t have business, and businesses won’t have customers if they can’t ensure their efforts to be sustainable. Everything has to be built from the ground up, and given materials provided by suppliers is where it all starts – it’s important to understand how tier 1, tier 2, and tier 3 suppliers source their materials, so that you can be sure you provide both an eco-friendly and trustworthy product to your customers. 

If reading this article on four tips to become a green company has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company and your supplier produce.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint. 

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