OEMs: the role of manufacturers in the supply chain

At the top of the supply chain are OEMs (Original Equipment Manufacturers), the companies responsible for designing and manufacturing the final product.

OEMs generally oversee product development, engineering, and production coordination, integrating components and systems sourced from multiple suppliers. Well-known examples include Apple, General Motors, and Boeing, which rely on extensive supplier networks to manufacture their products.

In the automotive industry, for example, a car manufacturer may outsource the production of braking systems, electronic components, and other vehicle parts to specialized companies while retaining responsibility for the overall vehicle design and product integration. This structure is also described in the European Commission's analysis of the automotive supply chain.

To manage these relationships, suppliers are organized into different levels, known as Tier 1, Tier 2, and Tier 3, according to their position in the supply chain and their relationship with the OEM.

Tier 1 suppliers: what are they and what is their role?

Tier 1 suppliers, also known as first-tier suppliers, are companies that supply components, products, or systems directly to OEMs through a direct commercial relationship.

These companies often specialize in manufacturing complex subsystems and advanced technologies that are integrated into the final product. In the automotive industry, for example, they may produce braking systems, electronic control units, powertrain components, or climate control systems.

Examples of companies operating as original equipment suppliers in the automotive sector include Bosch, which manufactures braking systems, sensors, and electronic components, and Panasonic Automotive, which specializes in electronic, infotainment, and audio systems for vehicles.

Collaboration between OEMs and Tier 1 suppliers can begin during the product design and development stages. Suppliers contribute technical expertise and manufacturing capabilities to develop components that meet the manufacturer's specifications.

These relationships may involve multi-year contracts, particularly when production requires dedicated investments, qualification processes, and demanding technical standards.

Tier 1 supplier performance directly affects the OEM's product quality, manufacturing costs, and production schedules. For this reason, suppliers are typically monitored through performance indicators such as on-time delivery rates, defect rates, and compliance with technical specifications.

Tier 1 suppliers may also manage their own supplier networks, outsourcing the production of parts and materials required to manufacture systems supplied to OEMs.

Tier 2 suppliers

Tier 2 suppliers, or second-tier suppliers, are companies that provide components, materials, or manufacturing services to Tier 1 suppliers, indirectly contributing to the final product.

The main difference between Tier 1 and Tier 2 suppliers lies in their commercial relationship with the OEM: Tier 1 suppliers deliver directly to the final manufacturer, while Tier 2 suppliers operate through a first-tier supplier.

Tier 2 suppliers often specialize in specific manufacturing technologies or processes, such as producing high-precision gears, molding plastic components, or manufacturing customized electronic circuits.

These capabilities enable Tier 1 suppliers to integrate specialized components into their systems without having to manage every production process internally.

In the automotive industry, for example, a company manufacturing precision gears for a transmission system manufacturer may be classified as a Tier 2 supplier. Its direct customer is the Tier 1 supplier, which integrates the gears into a transmission system delivered to the automotive OEM.

Compared with Tier 1 suppliers, these companies generally have less direct involvement in the overall design of the final product, although their technical capabilities remain essential to component quality, performance, and reliability.

Importantly, supplier tier classification depends on the specific supply relationship. A company may operate as a Tier 2 supplier for one customer and as a Tier 1 supplier for another if it supplies the OEM directly.

Tier 3 suppliers

Tier 3 suppliers, or third-tier suppliers, generally operate further upstream in the supply chain, supplying raw materials, semi-finished products, or basic components to suppliers at subsequent levels.

These companies may include manufacturers of steel, aluminum, polymers, chemical materials, or standardized components such as fasteners and other parts used in industrial production.

In the automotive industry, for example, a steel producer supplying a company specializing in metal gear manufacturing may be classified as a Tier 3 supplier. The material is processed by the Tier 2 supplier into a component, which is then integrated by the Tier 1 supplier into a system delivered to the OEM.

For these suppliers, pricing, material quality, and delivery reliability are often important selection criteria. Depending on the industry, suppliers may also need to meet specific technical requirements, hold relevant certifications, or provide information about raw material origins.

Although Tier 3 suppliers generally have no direct commercial relationship with the OEM, their performance can affect the entire supply chain. A shortage of raw materials, price fluctuations, or quality issues can disrupt production at Tier 2 and Tier 1 suppliers, eventually affecting the final manufacturer.

Supply chains do not necessarily follow a strictly linear structure: some suppliers serve companies operating at different tiers. In particularly complex supply chains, additional supplier tiers may also exist beyond Tier 3.

Why is understanding supplier tiers important?

Understanding supplier classification helps companies analyze their sourcing networks and identify where the main production, commercial, and operational dependencies are concentrated.

The key differences between the three supplier tiers can be summarized as follows:

These examples are illustrative. A supplier's tier depends on its position within a specific supply chain.

This classification provides a starting point for supply chain analysis, helping businesses map the relationships between companies, components, and manufacturing processes.

For example, a manufacturer may purchase a system from two different Tier 1 suppliers without realizing that both rely on the same Tier 2 manufacturer for an essential component. Identifying this shared dependency helps assess the risk of supply disruptions and determine whether alternative sourcing options are genuinely available.

The same analysis can support climate risk assessment, particularly when multiple suppliers depend on production facilities located in areas exposed to flooding or prolonged drought conditions.

Understanding the different supplier tiers can also support material traceability, when combined with appropriate component identification and recordkeeping systems. In the event of quality issues, these records make it possible to trace materials across the supply chain and identify potentially affected production batches more quickly.

Supplier assessment and supply chain sustainability

Understanding the different levels of the supply chain also plays an important role in environmental, social, and governance (ESG) risk assessment.

Companies generally have more detailed information about their direct suppliers, with whom they maintain commercial relationships and exchange technical documentation. Visibility may decrease further upstream, making it more difficult to identify risks related to working conditions, raw material sourcing, and the environmental impacts of manufacturing processes.

This challenge also affects the calculation of Scope 3 emissions, which include indirect emissions associated with purchased goods and services. The GHG Protocol provides specific calculation methodologies based on supplier data, average data, and emission factors, depending on the information available.

A Tier 3 supplier, for example, may operate in an energy-intensive industry or source raw materials from regions exposed to significant environmental or social risks. These factors may be relevant to a company's supply chain risk assessment even without a direct commercial relationship with the OEM.

For this reason, supplier assessment can consider factors such as industry, geographical location, purchasing significance, and available ESG indicators to determine which suppliers require further investigation.

This approach is also relevant to the Corporate Sustainability Due Diligence Directive (CSDDD), which establishes requirements for managing certain environmental and human rights impacts across the chains of activities of companies within its scope.

The OECD guidelines on responsible business conduct recommend a risk-based due diligence approach that considers the severity of potential impacts and the characteristics of a company's activities and business relationships.

For businesses managing complex supply chains, digital tools such as Metrikflow's supplier assessment software can support centralized ESG data collection, supplier risk analysis, and performance monitoring.

A structured approach to supplier information helps companies prioritize their assessment and monitoring activities while supporting sustainable procurement decisions based on verifiable data.

Conclusion

Classifying suppliers into Tier 1, Tier 2, and Tier 3 helps companies understand how expertise, responsibilities, and commercial relationships are distributed throughout the supply chain.

Identifying indirect suppliers can reveal dependencies that may remain hidden when assessing direct contractual partners alone, improving the evaluation of operational, financial, and sustainability risks.

Integrating this information into supplier management processes enables more informed decisions regarding supplier selection, supply continuity, and ongoing supply chain monitoring.