By Nicole LaMarco Updated January 31, 2019
In reference to business, the terms Tier 1 and Tier 2 usually refer to the manufacturing industry. The relationship between the original equipment manufacturer (OEM) and its tiers is crucial to the goal of creating, and in some cases, selling its products. There can be multiple tiers, and all are connected in a supply chain of command to the OEM – from the largest to the smallest number in the chain.
In other words, Tier 2 companies supply Tier 1 companies with the products needed. Every step of each company must go through rigorous quality assurance tests, as well as compliance with federal and company-based business standards.
Why the Supply Chain?
It is far more cost effective for several companies to specialize in making certain components than for one company to generate and market products end-to-end. With Tier 1 or Tier 2 companies zeroing in on one aspect, they can make sure to get the best experts and equipment for that job. Government regulations also exist that mandate using tiers – in the sense that each company is sanctioned for the product it produces and knows best how to adhere to federal or local regulations for it.
What Is Tier 2?
Tier 2 companies are the suppliers who, although no less vital to the supply chain, are usually limited in what they can produce. These companies are usually smaller and have less technical advantages than Tier 1 companies. If they are the first link in the supply chain, they start the ball rolling for the OEM’s final product, which means they really are vital to the speed of production. Tier 2 companies also must be rigorous in safety and standards compliance, because if something isn’t right, then it cannot go on to Tier 1.
What Is Tier 1?
Typically, Tier 1 companies offer the most advanced processes in the supply chain. This is the final step before the product reaches the OEM who may complete the product or simply get it ready for distribution by organizing shipment, marketing the products, or whatever is needed to get the product to the end user.
A Tier 1 company eliminates the middleman for the OEM. Such companies have the strongest credibility with the OEM, as they companies must have proven themselves to be a company that can generate reliable components on time and with strict adherence to safety and standards procedures.
An OEM may have many more tiers than this, but the relationship between Tier 1 and Tier 2 companies shows how all of them operate – Tier 2 generates and supplies Tier 1 with the products it needs to generate and supply the OEM with what is needed for the final products. The supply chain is only as strong as its weakest company link, so having healthy business practices is important for every tier to keep in operation.
