What is a Tier 1 Company or Supplier?

In today’s world, it’s hardly likely that your company is capable in making all parts for the end products all on its own, starting from raw materials to the finished goods. A supply chain is the more realistic and ideal way to get your product made.

In the network of the supply chain, you may need to reach out to a manufacturing company, who is responsible for making and assembling your product. We call it the OEM.

The OEM needs to buy parts and components from another supplier, which is referred to as tier 1 supplier. And the more complicated your product is, the more tiers of suppliers you can see in the supply chain.

In this post, we’ll show you why such working mechanism is necessary for your business and what you need to know when it comes to tier 1 suppliers.

What is an OEM?

OEM, short for original equipment manufacturing or original equipment manufacturer, is the go-to option when you have excellent product idea and just need a manufacturer to help you with the mass production.

Your brand name will show in the final product, but the process between the product concept and the finished goods are the fruit of your corporation between you and your OEM.  For instance, Foxconn is the OEM for Apple in manufacturing iPhone at a large scale.

But for the OEMs to actually make a product, they still need support from tier 1 suppliers.

If you’re interested in knowing more about OEM, feel free to click: Contract Manufacturing: OEM v.s ODM.

What are tier 1 suppliers?

As the most important component in the supply chain, a tier 1 supplier provides what the OEM needs in making the product and setting up the chain. In other words, tier 1 suppliers work directly with OEM companies.

That said, tier 1 suppliers usually provide product devices that are almost close to the end products. Devices provided by tier 1 suppliers plus the assembling and manufacturing process by the OEM companies, viola, your product is successfully made.

Suppliers structure

Tier 1 suppliers need their sub-suppliers to provide them with materials to make the devices. This brings out tier 2 suppliers.

Tier 2 suppliers are the key suppliers to tier 1 companies in the same supply chain. They don’t have direct contact with OEM companies, and they are usually limited in what they can produce. But they usually have more rigorous safety and standard compliance, because if they don’t, they can’t move on to tier 1.

To better illustrate it, here is an image showing you how the supplier structure usually work:

As you can see from the image, each tier of the suppliers gradually increase the added value to the end product, and the OEM will influence sourcing decisions made by their suppliers and sub-suppliers.

Tier 1 supplier capabilities

So what can tier 1 suppliers help you with? Well, just to name a few:

  • Reduce costs for supplier management. OEM companies only need to manage well tier 1 suppliers, rather than all suppliers in the supply chain. Tier 2 suppliers are usually managed by tier 1 suppliers, and so forth. In this way, there will be no middlemen in between, and the overall cost for supplier management can be well under control.
  • Quality control made easier. For an OEM, tier 1 suppliers are the only ones they need to manage. Rigorous quality control standards by tier 1 suppliers can ensure that a disqualified part or component can be traced back to the appropriate supplier.
  • Faster time-to-market. Suppliers in the supplier tier system usually have close relationships with each other, and they understand well one another’s way of operation and capabilities, which can help to reduce the time-to-market for the product.
  • Reduce risks. As mentioned in the image, tier 1 suppliers usually have strong credibility because of their technical expertise, capabilities, and their commitment in getting things done well.
  • Build core competencies. With less costs, better product quality, shorter lead time and less risks, your product’s core competencies will surely come along.

Shift among different roles

It’s quite normal that a tier 1 supplier work with various companies in the industry, but they usually have close relationships with only one or two OEMs, while stay more of an arms-length relationships with the others.

In addition, a tier 1 supplier to a company can be a tier 2 supplier to another, or even the OEM for their own product, especially when the tier 1 supplier is a rather big. Samsung is such an example. Their parts can be found in iPhones, and they themselves is a giant OEM.

That concludes what we have for tier 1 supplies. If you’re interested in knowing more, or want to know how to find a trustworthy tier 1 supplier, feel free to let us know. Leave a comment and we’ll be in touch.

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