Supply Chain Tiers: A Guide to Increased Visibility

Tiers are the levels within your supply chain that describe a supplier's relationship to your business. Knowing the pieces of your supply chain tiers can help you identify and mitigate risks throughout the process and keep sustainability and compliance in check. 

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Improved visibility into supply chain tiers can also allow your company to verify ethical practices, manage quality more effectively, and strengthen business relationships. In this post, we’ll explore the differences between tier levels, why visibility is critical to your success, and practical, actionable tips for improving your process.

Differences Between Tier 1, 2, and 3 Suppliers

Each tier within your supply chain plays a crucial role in your operation. The higher a tier is, such as tier 1, the more direct a relationship your company has with the supplier. Visualizing and understanding these relationships are known as n-tier mapping or multi-tier mapping. As you explore tier 1 vs. tier 2 vs. tier 3, you’ll be able to identify the impact on your business.

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According to the Business Continuity Institute, only 17.1% of organizations mapped their suppliers beyond tier 3 in 2024, allowing for potential gaps in visibility. Let’s explore the differences between the top-tier levels that may be present in your supply chain.

Tier 1 Suppliers

Tier 1 suppliers directly provide goods or services to your company. They represent the most immediate layer in your supply chain. Generally, your company will have a direct business relationship with a tier 1 supplier, placing purchase orders and interacting with them regularly. You have the most direct control and insight into your tier 1 suppliers, making them easily identifiable.

Example: For a car manufacturer, a tier 1 supplier might be a company selling fully assembled seats or engines directly to you.

Tier 2 Suppliers

Tier 2 suppliers provide goods and services to your tier 1 suppliers. In most situations, your company will not have a direct relationship with the tier 2 supplier. However, having insight into this tier can help you better manage costs and efficiency.

Example: A tier 2 supplier might provide the fabric for the car seats or pistons for the engines.

Tier 3 Suppliers

Tier 3 suppliers provide goods and services to your tier 2 suppliers. As you progress further up the tier chain, it becomes more challenging to maintain adequate multi-tier visibility. However, even tier 3 suppliers can severely impact a tier 1 supplier's delivery ability.

Example: Tier 3 suppliers might supply yarn to the fabric manufacturer or produce aluminum alloy for the piston maker.

Tier 4+ Suppliers

Supply chain tiers progress upward until they lead back to the source of basic raw materials. Cost fluctuations and disruptions in these tiers can trickle down, affecting your product or service's final cost.

‍Example: Tier 4+ suppliers might include the farm growing cotton for the yarn or the mining company extracting ore for aluminum.

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5 Reasons Supply Chain Visibility is Critical

Greater visibility within your supply chain is critical to an efficient operation. While you're probably aware that visibility allows for better adaptation to delays and provides planning insights based on material locations, the benefits go even further. Proper visibility can improve compliance and quality and address a major C-suite priority: supply chain resilience.

1. Compliance and Regulatory Requirements

By creating deeper visibility into your supply chain, you can ensure compliance throughout your network. To avoid violations stemming from sub-tiers, it's important to ensure compliance with relevant local and international laws, regulations, and industry standards throughout your supply chain. 

2. Cost Management and Optimization

Business is competitive, and having visibility into your supply chain costs is a powerful tool. You can uncover hidden costs by identifying opportunities to reduce waste and improve efficiencies, such as excessive inventory buffers at sub-tiers and inefficient shipment logistics. Additionally, you can minimize margin pressure by preventing budget overruns resulting from emergency spending.

3. Improved Quality Control

Keeping tabs on your supply chain tiers can also enable your company to improve overall quality control. Better visibility allows for faster detection and resolution of issues, minimizing costs associated with reworking, warranty claims, and product recalls. With n-tier visibility, you have a higher chance of tracing a faulty component through your map to the affected supplier and addressing the defect.

4. Risk Management and Resilience

By mapping your supplier network and obtaining insights, your company can work to anticipate, mitigate, and respond to supply chain disruptions. By remaining aware of geopolitical trends that could disrupt your supply chain, you can address the potential risks of single-sourcing materials. Staying on top of risk mitigation provides a better customer experience and can increase stakeholder confidence.

5. Sustainability and Ethical Sourcing

Sustainability and ethical sourcing aren't fads. A study from OpenText discovered nine out of ten consumers prefer purchasing products manufactured through sustainable practices. In addition to meeting market demands, ensuring sustainability and ethical sourcing throughout your supply chain can help improve brand reputation and avoid potential consumer boycotts or investor divestments.

How To Identify Your Supply Chain Tiers

When mapping your supply chain, you can ensure a solid foundation by beginning with tier 1 or direct suppliers. Information about tier 1 suppliers is generally available through procurement systems or contract records. Once you have listed your tier 1 suppliers, you can explore techniques for identifying sub-tier suppliers:

• Ask: Reach out to your tier 1 supplier and request that they identify their suppliers (your tier 2 suppliers) for products or services they provide.
• Partner: Work with companies like Tradeverifyd to gain multi-tier visibility into your supply chain and ensure suppliers align with company goals.
• Research: Analyze public databases and trade data, seeking import/export records for your tier 1 suppliers.
• Survey: Send questionnaires to tier 1 suppliers requesting information about supplier names and locations.

While some tier 1 suppliers may be hesitant, citing confidentiality concerns, being persistent and communicating why visibility is important can help you succeed. Some companies have begun to include visibility clauses within their contracts for critical tier 1 suppliers.

Identifying suppliers past tier 1 can be challenging, but you can use similar techniques to continue mapping your chain. Contact tier 2 suppliers directly to ask about their suppliers (your tier 3) or use technology platforms that have already mapped these supply connections.

Tips for Improving Your Supply Chain

You can constantly improve the efficiency and resiliency of your supply chain. Even after you've mapped your suppliers, ongoing sourcing and deals can change, shifting sub-tier suppliers. Keep your information up-to-date and improve your supply chain with these tips:

• Build resilience proactively: Instead of reacting to disruptions, proactively design and manage your supply chain to anticipate and withstand shocks by diversifying your supplier base and mapping your supply chain.
• Conduct deeper risk assessments: Move beyond evaluating only direct tier 1 suppliers and surface-level risks. Identify and assess potential threats throughout your entire supply chain.
• Extend compliance diligence: Ensure adherence to regulations within your company, tier 1 suppliers, and deeper within your supply chain, where many risks originate.
• Holistically analyze your costs: Understand the total cost associated with your supply chain by examining total landed, inventory holding, and downtime costs.
• Trace quality issues: Map your supply chain tiers to quickly find the root cause of quality problems and require supplier transparency when quality issues arise.
• Turn insights into strategy: Use the data from visibility, risk assessments, cost analysis, and compliance checks to inform your supply chain strategy and drive competitive advantage.

Supply Chain Tiers FAQ

Here are answers to some of the most frequently asked questions about supply chain tiers:

What Is a Tier 4 Supplier?

A tier 4 supplier is a company that provides services or goods to your tier 3 supplier. As you progress up the supply chain and beyond tier 3 suppliers, you will get closer to suppliers harvesting raw materials. For example, if you are a suit manufacturing company, your tier 4 suppliers might be wool or cotton farmers.

How Do You Categorize Suppliers?

Categorizing and identifying suppliers can be challenging, but not impossible. Begin with tier 1 suppliers — companies that directly interact with and supply components or services to your company. After that, you can further explore sub-tiers and their connections to your business. For example, the difference between tier 1 and tier 2 suppliers is their relationship to you. Each supplier supplies to the tier above them.

What Is Supplier Hierarchy?

Supplier hierarchy describes the structure of your supply chain. A common form of hierarchy is supply chain tiers, which help showcase the flow of goods and services from raw materials to finished products. Hierarchy visibility can enhance your business, increasing efficiency and compliance and decreasing risk.

What Is a Supplier Matrix?

A supplier matrix is an analytical tool for classifying and analyzing suppliers. It can provide a helpful visual aid to support decision-making, usually in the form of a grid or chart. The standard Kraljic matrix plots suppliers based on supply risk and profit impact to help adjust purchasing strategies. Risk matrices can help identify which supplier risks will most significantly impact your business.

Improve your multi-tier visibility with Tradeverifyd

Don't operate in the dark; put a spotlight on your supply chain tiers and get better insights into the flow of goods and services. Focusing on visibility within your supply chain can help avoid compliance violations, identify hidden costs, and more easily detect faults for remediation. 

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Mapping and maintaining your supply chain can be tricky, but Tradeverifyd is here to help as a standard for global trade. Discover how Tradeverifyd can keep you in control of your supply chain, optimizing efficiency and maintaining a competitive edge.

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