Supplier Tiers: Differences Between Tiers 1, 2, and 3

Getting familiar with suppliers in tiers 2, 3, and beyond may not seem worthwhile on the surface, but it can help with getting ahead of operational or ethical issues. For example, businesses may find a tier 3 supplier promoting unsafe labor practices. This raises both moral and financial risks to the business.

Supplier tiers are also especially crucial for businesses working on managing their GHG Inventory (also known as a carbon footprint) since tier 1 suppliers contribute to a business' scope 3 emissions.

Read this guide to learn about suppliers tiers 1, 2, and 3 and how identifying vendors in each tier can benefit a business.

Tier 1 Suppliers

Tier 1 suppliers are the suppliers that a company directly contracts with. They are closest to the company because the company engages with them directly.

For example, a furniture company might assemble finished furniture products that are produced by a company that manufactures furniture components. If the furniture company purchases those components directly from the supplier, then the supplier is a tier 1 supplier.

Tier 2 Suppliers

Tier 2 suppliers provide resources for tier 1 suppliers. They are the direct suppliers to the tier 1 suppliers.

Following the same example, a tier 2 supplier could be a lumber mill that processes wood that it sells to the tier 1 suppliers who turn it into furniture pieces.

Tier 3 Suppliers

Tier 3 suppliers provide resources to the tier 2 suppliers. These are typically raw materials.

With this example, the tier 3 supplier could be the entity that manages forests where tier 2 suppliers source their wood.

Why Do Businesses Need Insight Into Their Suppliers?

Businesses can benefit from understanding their supplier tiering to better understand potential operational, legal, and financial risks to which they might be exposed by virtue of companies within their supply chains. Sometimes this risk might reside deeper within the company’s supply chain - beyond a company’s tier 1 suppliers.

For example, organizations mandated to follow the Greenhouse Gas Protocol (GHGP) for disclosures should gather data from suppliers to most accurately measure their scope 3 emissions.

Businesses typically pay the most attention to tier 1 suppliers since they have the closest relationship with those suppliers. It can be more challenging to obtain information concerning suppliers deeper in a company’s value chain. However, there can be value in enhancing supplier visibility beyond tier 1 suppliers.

Below are a few ways businesses can benefit from gaining information about suppliers beyond their tier 1 suppliers:

• Improving quality management and operational efficiency across the board with increased visibility into suppliers and their practices.
• Getting ahead of sustainable, ethical, and safety issues in their supply chain, including potential unfair labor practices, environmental degradation, or data security issues of lower-tiered suppliers.
• Enhancing traceability throughout the supply chain to know where and how materials and products are sourced.
• Creating more transparency for stakeholders inquiring about a business’ sustainability.

How Can Companies Use Supplier Tiers To Learn More About Their Vendors?

Companies can use supplier tiers to better understand how their supply chain operates and to understand opportunities to enhance supply chain resilience.

Engaging in supplier tiering is a useful first step to take alongside supply chain mapping to understand how and where suppliers source materials and goods.

The Association for Supply Chain Management CEO, Abe Eshkenazi, noted in an article on supply chain mapping and the COVID-19 pandemic that the lack of essential data and companies’ resulting unsynchronized response worsened the pandemic’s impact on the economy.

He went on to say that “supply chain organizations that had the foresight to map their networks before the crisis emerged has much better visibility into what is really going on with their supply chains.”

Once suppliers are mapped, businesses can more easily find ways to improve their supply chain resilience. Businesses can use these tiers to help visualize suppliers’ impact, for example, revealing what part of their supply chain generates the greatest amount of emissions, is vulnerable to severe weather or other threats, or is responsible for higher costs.

Companies can then start taking action to address potential vulnerabilities in their supply chains. This can include engaging with suppliers to address concerns or collecting feedback to improve the company’s supplier governance program. Mapping and tiering are also helpful during disruptions that need swift action.

Businesses can also turn to initiatives and organizations for further support. For example, the Partnership for Carbon Transparency (PACT) aims to find ways to support organizations in expediting decarbonization efforts and creating transparency with their emissions.

PACT’s efforts include creating methodological guidelines, an open network infrastructure to exchange product carbon data, and a collaborative ecosystem among stakeholders working towards improved emissions transparency.

Visibility is the first step in understanding their suppliers’ overall impact on the company, especially a company’s carbon footprint.

Why Is Supplier Visibility Relevant to a Company’s Carbon Footprint?

Supplier visibility is important for managing a company’s carbon footprint because businesses must account for certain emissions, they generate outside their operations to reduce their impact effectively.

Emissions from a company's tier 1 suppliers are accounted for in a company’s scope 3 emissions. Those tier 1 suppliers' scope 3 emissions include GHG emissions generated from tier 2 and 3 suppliers.

Scope 3 emissions are difficult to measure since they occur outside an organization’s immediate control and beyond its operations. Additionally, reducing emissions is difficult when using industry averages based on spend rather than calculated emissions. For example, purchasing fewer goods or services is effectively the only action companies can take if they calculate their scope 3, category 1 emissions using secondary EF data (spend-based or averaged-based).

Improving supplier visibility can help mitigate some of these difficulties by helping businesses see how suppliers contribute to their scope 3 emissions and determine interventions for reduction.

Engaging with suppliers can also help businesses get closer to using real data and reflect the emissions reduction efforts from suppliers in businesses scope 3 emissions rather than relying on estimates or secondary data. This may involve collaboration with suppliers who don’t have the proper systems in place to accurately measure their emissions.

Accurate emissions information will become increasingly important as carbon disclosure requirements become more prevalent and investors continue to demand increased transparency and action.

PwC’s Global Investor Survey 2022 saw that 44% of surveyed investors and analysts said reducing GHG emissions should be among a business's top five priorities. Three in five respondents want companies to report on the impact they have on society or the environment — now and in the future.

>> Read our eBook about carbon disclosure mandates.

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Persefoni’s Climate Management and Accounting Platform (CMAP) comes equipped to make the carbon accounting process more efficient for businesses at any stage of their decarbonization journey. Persefoni’s solution is GHGP compliant to help businesses complete a full scope 1, 2, and 3 inventory.

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