Supplier Tiering Management
At any company, there are meaningful scopes of management responsibility that should not be exceeded. Dividing responsibility over a corresponding number of tiers allows even very large firms (100,000 employees and more) to be managed efficiently. Many companies also apply a similar tiering principle to managing suppliers.
Supplier tiering originated in the auto industry and can be best understood in the context of automakers`s changing priorities over the past 50 years:
1970s: The typical automaker was still characterized by strong vertical integration, making practically all key vehicle components itself.
1980s: Under the pressure of recession and the oil crisis, automakers sought to reduce volume risk and embarked on large-scale outsourcing of parts production to external suppliers.
1990s: The large number of suppliers—some automakers had 2,000 or more—became almost unmanageable. Supplier tiering was therefore introduced, thereby automakers deliberately assigned responsibility for modules and systems to so-called “1st tier suppliers.” The latter acted as integrators, with the task of managing 2nd tier suppliers and improving quality and efficiency.
For procurement, supplier tiering means finding the best structure in each particular case. In situations with a highly complex supplier landscape, it makes sense to follow the same path as the auto industry. On average, 20 percent of suppliers are responsible for 80 percent of spend; an initial solution may be to make these 20 percent 1st tier suppliers.
However, it is also possible to go the other way by actively managing 2nd tier suppliers of major modules or systems.