The impact of supply chains on climate change is significant, with emissions stemming from different supplier tiers. Understanding the roles of tier 1, tier 2, and tier 3 suppliers is essential for accurate carbon accounting. Each tier contributes differently to a company’s overall carbon footprint, making it crucial for businesses to engage with their suppliers effectively.
What is a Tier Supplier?
Understanding the tier supplier system is essential for effective supply chain management, risk assessment, and sustainability efforts. This hierarchical structure categorizes suppliers based on their proximity to the final product or service, allowing businesses to manage relationships better, assess performance, and conduct supply chain traceability, ultimately leading to improved operational efficiency.
Tier 1 suppliers
Tier 1 suppliers are the direct providers of goods or services to the business producing the end product. They have the most immediate impact on a company's operations and are typically the focus of direct communication and collaboration. Their performance and reliability directly affect the final product's quality, cost, and delivery. For example, Tier 1 suppliers might provide major components like engines, transmissions, or electronic systems directly to the car manufacturer in the automotive industry.
Tier 2 suppliers
Tier 2 suppliers are one step removed from the end product, supplying components or services to Tier 1 suppliers. Although they may not have direct contact with the end-product manufacturer, their role is crucial in the supply chain. Tier 2 suppliers often specialize in specific components or processes that enhance the products made by Tier 1 suppliers. Their performance can significantly impact the quality and efficiency of Tier 1 suppliers and, consequently, the final product. In the automotive context, a Tier 2 supplier might produce specialized parts, such as bearings, gaskets, or electrical components, which are integrated into larger systems by Tier 1 suppliers.
Tier 3 suppliers
Tier 3 suppliers are even further removed from the end product, typically providing raw materials or basic components to Tier 2 suppliers. These suppliers form the foundation of the supply chain, often dealing with the most basic elements of production. While they may seem distant from the final product, their role is fundamental. The quality, availability, and cost of raw materials from Tier 3 suppliers can have far-reaching effects throughout the supply chain. In the automotive supply chain, a Tier 3 supplier might be a business that processes raw materials like steel, rubber, or plastics, which are then used by Tier 2 suppliers to create more complex components.
Understanding supplier tiers: A solar panel company example
To illustrate how supplier tiers operate in practice, let’s consider the solar energy industry. A solar panel company designs, manufactures, and sells solar panels for residential and commercial use. This organization relies on a network of suppliers and sourcing partners to produce its final product. Let’s examine each tier of suppliers involved in this process:
Tier 1: The solar panel manufacturer assembles and delivers complete solar panels. They manage production and logistics, ensuring the final product reaches customers for installation on roofs or in solar farms.
Tier 2: Moving one step back in the supply chain, we find the solar cell producer. This supplier provides the photovoltaic cells that are the core resource in solar panels, converting sunlight into electricity.
Tier 3: At the foundation of the supply chain is the silicon wafer supplier. They provide the essential raw material—silicon wafers—that is used to create the photovoltaic cells.
This tiered structure illustrates how each level of supplier contributes to the final solar panel product, with each tier playing a crucial role in the overall manufacturing and logistics process.
Tier suppliers and scope 3 emissions: A critical connection
Understanding supplier tiers is essential for managing scope 3 emissions effectively and achieving accurate carbon accounting. Achieving effective management of scope 3 emissions requires businesses to start with a thorough understanding of their supplier tiers. Each tier plays a distinct role in a company's overall environmental impact and carbon footprint. Tier 1 suppliers, being closest to the business, often provide the most accessible data and are the easiest to engage with for sustainable initiatives. However, while further removed, Tier 2 and Tier 3 suppliers can significantly impact a company's indirect emissions and overall sustainability performance.
The significance of this connection cannot be overstated. According to the Global Supply Chain Report 2022 by the Carbon Disclosure Project (CDP), supply chain emissions are 11.4 times higher than direct emissions on average. This means that for many companies, over 90% of their total emissions footprint lies within their supply chain. Furthermore, the Science Based Targets initiative (SBTi) reports that for two-thirds of companies across most sectors, more than 70% of emissions come from their supply chain.
By mapping and engaging with suppliers across all tiers, companies can identify emission hotspots, implement targeted reduction strategies, and achieve more meaningful sustainability goals. This multi-tiered approach is essential for addressing the full scope of supply chain emissions and achieving comprehensive carbon accounting.
How technology can help companies measure carbon footprints across supplier tiers?
Carbon management platforms and carbon accounting software are crucial for businesses aiming to understand and reduce their overall emissions across the supply chain, including data from supplier tiers, such as Tier 1, 2, and 3 suppliers. These tools can help them collect and analyze emissions data effectively.
For Tier 1 suppliers, who typically have closer relationships with the business, platforms can offer portals where they can directly input their emissions data. For Tier 2 and 3 suppliers, simplified forms or surveys make it easier for them to share their information. These platforms may also include data-sharing features, allowing suppliers to securely upload relevant documents, like energy bills or production reports, which can automatically populate the company’s carbon accounting software. This approach saves time and helps improve data accuracy across all supplier tiers.
Advanced platforms can integrate with existing systems, such as ERP software, to automatically gather relevant data. By leveraging these features, companies gain a clearer understanding of their supply chain emissions and can collaborate more effectively with suppliers at every level to achieve sustainability goals.
Conclusion
Effectively managing emissions across the supply chain is crucial for achieving sustainability goals. Supplier tiers, from direct Tier 1 providers to indirect Tier 2 and 3 suppliers, each play a vital role in a company's carbon footprint. Companies that actively engage their entire supplier network are better positioned to meet regulatory requirements and contribute to global climate initiatives.
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