CPO Strategy

Modern SCM: you should know your tier-2 suppliers

The big business corporations, such as Toyota, BMW, Ikea, Nestle, etc. pay a good amount of their attention to participation in managing the entire supply chains. Can it be one of the components of their success? Though tier 2+ suppliers have long been a dark spot for an original manufacturer, your sub-suppliers have much more impact on the advance of your business than it’s generally believed. By working closely with them, you can well contribute to the achievements of your business, improve the experience of your customers and stay competitive in the market. Let’s overview the benefits of such cooperation, identify what tends to deter companies from appealing to it and see how these pain points can be tackled with the right approach and modern vendor management tools. 

How do you know cooperation with sub-suppliers is worth your attention?

To illuminate the need of such involvement, here’re the examples of the positive impact that close cooperation with your tier 2+ suppliers can have on business.

  • Better quality assurance

Being the producer of the final product, you take responsibility for overall quality across the entire supply chain. It means that even if some quality problem appears to have roots in tier 2 / 3 / n suppliers, your company is still the one accountable and the one to sacrifice its reputation.

Relying on your tier 1 supplier is not always the best solution to the problem. Some of them may lack the appropriate focus on quality requirements, don’t have well-established quality control practices or just don’t have the required infrastructure to ensure the suitable level of control. Only rigorous selection and monitoring of the suppliers across all tiers of your supply chain will help to avoid unpleasant consequences ensuring that the materials, semi-finished products, etc. meet all the requirements placed and that there’s no hidden threat to the quality of your final product.

In this case, the support from the manufacturer can cover various activities from professional training of the sub-suppliers’ employees, direct communication for quick feedback and tech help to the installment of dedicated equipment (e.g., IoT sensors) for ongoing process monitoring.

  • Indirect cost reduction

Knowing who your sub-suppliers are, knowing their prices, delivery terms, you get a possibility to monitor and better understand the prices of your direct suppliers. This increased visibility will allow you to reduce prices of your tier 1 suppliers (e.g., helping them to order components and materials on more favorable terms, organizing bulk purchasing for several Tier 1 suppliers) and thus also lower the price of a finished product. 

  • More sustainable supplies

Direct communication with sub-suppliers allows you to timely identify the potential source of supply disruption and proactively introduce needed changes, anticipate missed or late shipments, plan your company’s processes accordingly, etc. Moreover, you can share trusted practices in logistics and inventory management with tier 2+ suppliers to increase the quality of your supplies.

  • Enhanced R&D

As one of the examples, your sub-supplier has a much deeper knowledge of the specifics of their products and its characteristics. Sharing this insider info (e.g., an innovative metal processing technique), they help to streamline your R&D and accelerate the introduction of new products.

  • Shared values

Today’s world poses new requirements for the businesses of various types and industries with regard to environmental, sociopolitical and ethical concerns. To manage them successfully, you need to follow the same direction across the entire supply chain.   

Environmental concerns

The requirements on the environmental-friendly manufacturing process can be both imposed (by governmental or international organizations) or broadcasted as brand value. In any case, supporting green initiatives across the entire supply chain is of great importance. For example, taking an active part in the Carbon Disclosure Program (CDP), the BMW Group managed to significantly lower its overall CO2 emissions introducing improvements across their entire supplier network.

Having got the info on the engagement of its suppliers in deforestation practices, Nestle has managed to save its reputation of an environment-caring company. The business quickly identified the vendors that didn’t follow their environmental policy and excluded them from their supplier list. In addition, Nestle required the rest of suppliers to map out their ‘interest’ zones and introduced satellite monitoring to proactively eliminate any potential danger to their company’s reputation.  

Ethical concerns

Even the indirect or unintentional use of conflict resources, children labor, etc. can raise a lot of questions to your company. Via closer cooperation with all-tier suppliers, you allow for their thorough pre-assessment, ongoing monitoring of their existing practices and can immediately perform a common mitigation campaign in case of detected risks (e.g., requiring constant reports on working conditions, working hours, recruitment activities, etc.).    

What holds you back from closer cooperation with sub-suppliers?   

Despite the varied benefits of closer communication with Tier 2+ suppliers mentioned above, there’re reasons why companies are not that enthusiastic about rushing deep into the tiers of their supply chain. At least two things that no one is immune to make companies unwilling to do so. First, the overall management complexity gets exacerbated with the involvement of tier n suppliers as you get an increased number of documentation, compliances, and communications to handle. Secondly, the new responsibilities (looking for the appropriate sub-suppliers that answer your and your suppliers’ needs, continuous sub-supplier monitoring, etc.) are very time-consuming.  

How to engage with your sub-suppliers if you want to make a difference?  

  • Learn who your critical sub-suppliers are.

Begin with identifying the critical links across your tier n supplier network (e.g., the vendors of your top Tier 1 suppliers) and develop communication with them. The important point is that this cooperation should be explicit and bidirectional and involve constant feedback from sub-suppliers in the form of direct reports, questionnaires, personal chats, phone/video calls, etc.    

  • Provide a convenient environment for management, co-work, and monitoring.

The modern digital vendor management tools can become of a great help in managing increased number of diverse suppliers with relative ease and speed. For example, employing online procurement solutions you can structure and organize multiple vendor data, ensure its consistency, streamline the data flow, encourage and facilitate closer cooperation with your sub-suppliers and more. Among additional variants are IoT-based monitoring of your Tier 2 vendors, online collaboration platforms and media screening.

Heads up – finale

There are good reasons to suspect that the fight for advanced business efficiency is incomplete without looking deeper inside the network of your sub-suppliers. The closer cooperation with tier n suppliers promises such important improvements as decreased prices for your suppliers and consequently the lower cost of your final product, streamlined R&D, reduced concerns over environmental and ethical problems, etc.

However, this approach is often associated with management complexity, significantly increased data volumes, and its time-consuming nature. To tackle the pain points, start improving communication with critical links in your supply chain and consider the processes automation and digitalization introduced by modern tech solutions.

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