Why Managing Your Tier II Suppliers Is Critical

Tier II Supplier Management Is Critical To Supply Chain Optimization

Tier II Suppliers
Tier II Suppliers. Getty Images

Your Tier II suppliers are the suppliers who supply components and other raw materials to your suppliers.  It’s a full time job (and often the full-time responsibility of entire departments) to manage your supply chain from just your Tier I suppliers, through the cost and flow of goods (inventory control, materials management, etc.) and on to your customers.  Managing Tier II suppliers is a project that’s sometimes dropped into a procrastination pot and nestled on a back burner.

  It’s often considered more of a nice-to-have dessert, as opposed to a dish served with the main course. 

But let me make the case for bringing that Tier II supplier pot onto the front burner and bringing it to a full boil.  How often are you managing your own customer delivery challenges because of an issue with your suppliers?  Your suppliers are your customers’ Tier II suppliers.  How many supply chain issues would your customers want to be resolved at their Tier II level?

Tier II suppliers impact your suppliers’ costs, delivery schedules and quality.  And therefore have a direct impact on your own costs, schedule and quality.  But what can you do?

Case Study #1 – Imagine a supply chain manager, let’s call him Roscoe.  Roscoe has three suppliers that make the same highly technical, composite metal component for him.  All three suppliers have recently increased their price to Roscoe.  And Roscoe learns it’s because each of his suppliers purchase a proprietary raw material from one of Roscoe’s Tier II suppliers.

 

Roscoe reaches out to the Tier II supplier and learns, 1) yes, it has increased its price to each of Roscoe’s 3 suppliers, 2) because of markets and geography, each supplier pays a different price to the Tier II supplier, 3) the Tier II supplier manufactures the proprietary raw material upon receipt of purchase orders from Roscoe’s 3 suppliers, and 4) Roscoe's suppliers buy varying quantities of the proprietary raw material (the backup supplier buys small quantities while the two primary suppliers buy more).

 

What Roscoe negotiates with the Tier II supplier is a rebate (paid directly from the Tier II supplier to Roscoe’s company) based on the volume purchased from all 3 of Roscoe’s suppliers.  The Tier II supplier gets to maintain its variable pricing in the marketplace but gains production/cost efficiencies from consolidated production of all of Roscoe’s demand.  Roscoe gets to offset the 3 suppliers’ price increases with the Tier II supplier’s rebate check.

Case Study #2 – Roscoe’s company produces neoprene sleeves for smart phones, tablets and other portable electronic devices.  Rumors explode across the internet that Roscoe’s customer is going to launch a next generation smart phone.  No details, but it looks like the new phone will have different dimensions than the existing phone.  So – none of the existing neoprene sleeves will fit the new phone. 

Roscoe reserves production capacity at his cut-and-sew facility, but the neoprene supplier (Roscoe’s Tier II supplier) is overcharging Roscoe’s cut-and-sew facility for the latest hot colored neoprene.  Roscoe contacts the Tier II supplier and finds out that the smaller launch quantities that the cut-and-sew facility ordered drove the price up.

 

Roscoe makes a bulk buy of the hot color neoprene at a lower price.  He now owns the hot color neoprene and uses it over the life of the hot color usefulness.  The price break at the lower cost offset the carrying costs of the larger buy – and Roscoe drove savings and guaranteed neoprene availability.

Is it critical to manage all your Tier II supplier relationships?  No.  But can doing so drive savings and optimize production schedulesAn optimized supply chain says yes.  Believe it or not, managing upstream can optimize delivery, time and costs downstream to your customers.