1, 2, 3 – the tiers of manufacturing
Manufacturers are typically referred to as original equipment manufacturers (OEMs), but that is not exactly accurate. After all, these manufacturers only produce some of the parts that go into their original equipment. Whether the final product are cars, computers, or cabinetry, they get specific parts from Tier 1, 2, and 3 suppliers. Let’s explore at the different tiers.
What is the Tier System?
The Tier system is a pyramid with the OEM at the top and the other Tiers falling in line behind. The OEM is supplied by Tier 1, Tier 2, Tier 3, Tier-n suppliers, depending on their distance from the OEM.
Tier 1 is the largest supplier of the trio. Consequently, they are the most exclusive and supply systems or parts to the OEMs directly. Such suppliers will typically have a relationship with only one or two OEMs in a particular market. Tier 1 manufacturers have the resources, finances, and expertise to take on large-scale, long-term contracts in the price range of millions or billions of dollars.
Tier 2 companies are the suppliers are usually limited in what they produce but remain an essential part of the supply chain. These companies are generally smaller and have less production and workforce resources than Tier 1 companies.
Suppliers of raw or close-to-raw materials, like metal or plastic, are considered Tier 3. Tier 3s supply the entire Tier system, including Tier 1, Tier 2, and some Tier 3s.
This sub-tier works in the various base levels of the supply chain. Because they are not always identified in the chain, they tend to increase the risk to the higher tiers if a disruption in the supply chain process happens.