The structure of Tiers in the supply chain can be complex, with multiple levels or “tiers” of suppliers, manufacturers, and distributors working together to bring products to market. Understanding these tiers is essential for effective supply chain management. In this blog post, we’ll explore the concepts of first, second, and third-tier suppliers and discuss how to minimize the bullwhip effect, a common challenge in supply chain management caused by delays in information sharing. This is a basic level blogpost.

Understanding Tiers in Supply Chain

First-tier suppliers

First-tier suppliers are those that directly provide goods or services to a company. They are the primary point of contact for purchasing raw materials, components, or finished products. Examples of first-tier suppliers can include manufacturers, wholesalers, or service providers, depending on the specific industry and supply chain structure.

Second-tier suppliers

Second-tier suppliers provide goods or services to the first-tier suppliers. They are one step removed from the primary company and typically supply raw materials, components, or sub-assemblies to the first-tier suppliers. These suppliers are crucial for ensuring that first-tier suppliers have the necessary inputs to produce the goods or services required by the main company.

Third-tier suppliers

Third-tier suppliers are those that supply goods or services to second-tier suppliers. They represent an even further step removed from the primary company and are responsible for providing the materials and components required by the second-tier suppliers. While the main company may not interact directly with third-tier suppliers, their performance and reliability can still have a significant impact on the overall supply chain.

Tiers in Supply Chain: The Bullwhip Effect and How to Avoid It

The bullwhip effect refers to the phenomenon where small fluctuations in consumer demand can cause significant variations in inventory levels and order quantities throughout the supply chain. This effect is often exacerbated by delays in information sharing between different tiers in supply chain, leading to inefficiencies, increased costs, and potential stockout or overstocking.

To minimize the bullwhip effect and its consequences, companies can adopt the following strategies:

• Improve information sharing: Enhance communication and collaboration between different tiers of the supply chain by sharing real-time data on sales, inventory levels, and demand forecasts. This can help to reduce delays in information flow and enable more accurate decision-making at each stage of the supply chain.
• Implement demand-driven planning: Shift from traditional forecasting methods to demand-driven planning approaches, such as demand sensing or collaborative forecasting. These techniques allow companies to respond more quickly to changes in consumer demand, reducing the impact of fluctuations on the supply chain.
• Streamline order processes: Simplify and standardize order processes across the supply chain to minimize delays and inconsistencies in order placement and fulfillment. This can help to reduce lead times and improve overall supply chain responsiveness.
• Encourage supplier collaboration: Foster close relationships with key suppliers and encourage collaboration on demand planning, inventory management, and product development. This can help to align expectations and improve visibility throughout the supply chain, reducing the potential for the bullwhip effect to occur.
• Adopt inventory management best practices: Implement inventory management strategies such as just-in-time (JIT), vendor-managed inventory (VMI), or consignment stock to reduce inventory holding costs and improve responsiveness to demand fluctuations.

Conclusion – Tiers in the Supply Chain

Understanding the different tiers in a supply chain is essential for effective management and collaboration. By implementing strategies to improve information sharing, streamline processes, and encourage collaboration, companies can minimize the impact of the bullwhip effect and create a more efficient, responsive, and cost-effective supply chain.

Learn more about the Operative buyer responsibility in the bundle Basics for an Operative Buyer. EFFSO introduces the Procurement function and recent years’ changes in procurement. The courses is based on Arjan van Weele’s definition of operational and tactical Procurement and on Gadde / Håkansson’s description of what a buyer purchase. What is procured influence the operative buyer’s way of working. The applicability of the introduced operational processes varies depending on the characteristics of purchased products / services. 

The most basic ability for a buyer is the knowledge to create a contract, often in the form of a purchase order (PO). The course gives you an introduction to the content and purpose of a PO. In order to create a PO, input from the tactical procurement role is needed. But what kind of information does the operating buyer need? The course provides the answer. Both the tactical and the operational buyer need to understand the general terms and conditions of their own organization (and supplier) in order to manage the commercial risk. The course provide some real life examples.

Note: Illustration to blogpost “Tiers in Supply Chain and Bullwhip” was created by Chat GPT on Sept 8, 2024.

Information about LHTS Online Procurement courses in Swedish.