What are the benefits of supplier tiering?
It's hard to talk about supplier tiering without mentioning the automotive industry, a sector that's no stranger to supply chain innovation.
A single automobile can contain 30,000 parts. Can you imagine handling 30,000 suppliers?
Well, neither could the manufacturers, which is why they came up with a tiering system. By only dealing directly with the most critical suppliers, car makers were able to free up time and resources significantly. But is this practice right for your business?
What exactly is supplier tiering?
Supplier tiering is a concept used by businesses to achieve efficient supplier base management. Suppliers may be tiered differently depending on the size and complexity of the buying company. You might, for example, organise your tiers by size (expenditure), complexity or risk - whatever matters most to your organisation.
Tiering your supply chain is an exercise in sitting down and saying, 'Here's everyone who provides goods or services. What's the best way to organise them?’ The whole point of going through this exercise is to gain an understanding of your supplier profile in order to manage it more effectively. Once an organisation tiers their suppliers, they can begin developing standardised contract management strategies within each tier.
Typically, tier 1 suppliers would be those your organisation categorises as high-value, high risk or critical to operations or the delivery of a given project. Tier 1 suppliers are - for one reason or another - essential to your organisation. From the second tier onwards, suppliers are denoted by less spend, risk or criticality.
When developing a tiering system, understanding business-critical contracts is key. If you fail to weigh the risks of losing or mismanaging such a contract, your operations could suffer considerably. In supplier tiering, spend is not always synonymous with contract importance. There are some very valuable contracts that don't necessarily require close management due to the nature of the goods or services being delivered.
It's evident that tiered supply chains aren't only useful in manufacturing. Any organisation can increase efficiency by analysing their suppliers and formulating strategies to best manage them. To get started, think about the objectives of your organisation or the project goals you're trying to achieve. What are the specific requirements to your success?
The importance of focusing on your most critical suppliers
Without supplier tiering, you risk spending too much time on suppliers that don't support overall business performance.
Tiering ensures that the most business-critical contracts are managed and supported, fostering collaboration, innovation and even improved financial outcomes. It gives businesses a method for understanding where risk or spend is - and where it isn't.
When implemented and used correctly, supplier tiering is a decision making tool organisations can use to:
- Drive internal management costs lower by reducing the number of suppliers an organisation must engage with,
- Reduce business risk by allowing the right amount of effort to be placed on critical suppliers,
- Enable engagement and negotiation with key suppliers by improving supplier relationships,
- Improve the way resources are deployed by allocating the right amount to key suppliers.
If you haven't examined supplier data recently, start there. Supplier tiering needs to be based on up-to-date analysis or else you risk paying too much attention to contracts that might not be as important as they once were. If your organisation is lacking maturity and doesn't have sufficient data to perform a supplier analysis, hold off. At this point, tiering your suppliers could be haphazard. Undertaking a review of the supply chain systems and processes is likely a better step.
Supplier tiering with Procurement Co
It's important not to rush into supplier tiering. If you do, you risk mismanaging your business-critical suppliers in a big way.
At Procurement Co, we have extensive experience helping organisations improve operations and outcomes by implementing a tiered supply chain. Not only that, we also help come up with actionable points around the standardised contract management strategies used at each tier. We can even handle implementation.
To lean more, reach out to our team today.