This blog was originally published on 6/1/2013 and updated on 12/30/2019.
When considering strategies to increase engagement and spend with diverse suppliers, supplier diversity programs must be willing to be moved to tiers. (Sorry, we couldn’t resist the obvious pun!) Tier 1 and Tier 2 are important terms to know when describing suppliers, especially diverse suppliers, and the supplier diversity Tier goals that companies set and strive to meet. Tier 2 suppliers are of special note because these businesses offer the potential to partner with more diverse suppliers and grow your diversity initiatives.
What Is Tier 1?
Tier 1 suppliers are the business partners who directly provide goods and services to the parent company. For example, if your organization needs a key component to manufacture a product, a Tier 1 supplier provides that component to you. Or your company sells goods produced by a Tier 1 supplier in your stores. Or you directly contract a technician to perform services at your facilities. Tier 1 refers to a direct relationship, and therefore it is easier to determine if a supplier qualifies (and is certified) as a diverse-owned company.
What Is Tier 2?
Tier 2 suppliers are the vendors your Tier 1 suppliers contract—think of this as your supplier’s suppliers. From the examples above, the companies your Tier 1 supplier partners with to produce the components you use for the production of the goods you sell in your stores would be Tier 2, as would the businesses the service technician relies upon to be successful. Your supply chain has supply chains of its own, which provides you with an incredible opportunity to increase diverse spend.
What Is a Tier 2 Program?
A Tier 2 supplier diversity program is designed to grow and sustain diverse suppliers that lie beyond direct supplier relationships (Tier 1). For many reasons, growth opportunities for these suppliers are generally further down the supply chain and therefore require a different type of initiative and different resources to succeed. When you establish a Tier 2 program, your key suppliers are required to create and/or maintain their own supplier diversity programs and report their spend to you.
Why Are Tier 2 Programs Important?
The Billion Dollar Roundtable identifies a Tier 2 program as an essential best practice of a mature supplier diversity program, offering opportunities for greater impact throughout the supply chain. According to figures released at the 2017 BDR Summit, consolidated Tier 2 diverse spending among corporate members for 2016 was $22 billion. Actively working with Tier 1 suppliers to improve their supplier diversity programs ultimately boosts your own supplier diversity success. For starters, the number of suppliers your company can partner with is finite, but once you get to Tier 2, the potential is almost unlimited.
In general, diverse-owned businesses are also small businesses, so they don’t have the capability to provide Tier 1-level products and services. If your supplier diversity program focuses solely on Tier 1 suppliers, you are missing out on a huge pool of potential suppliers that could add innovation and competitive advantage to your supply chain.
How to Build Tier 2 Diversity Programs
The most prudent way to build a Tier 2 program that moves you toward your supplier diversity goals is to focus much of your effort toward those Tier 1 partners who do not yet have a supplier diversity program in place. Be ready: The initial dollars reported might be minimal, and your supplier diversity team might need to help suppliers get their own programs off the ground. The process may be slow, and though some suppliers with established supplier diversity programs might already be reporting significant spend, this Tier 2 approach may not break records out of the gate. That’s OK; this is part of a long-term strategy to strengthen not just your supplier diversity initiative but your entire supply chain and positively impact your bottom line.
How to Measure Success of a Tier 2 Program
Just like your supplier diversity program as a whole, your Tier 2 program’s success can be measured in a variety of ways. It’s up to you to decide which metrics to track and to set goals for those metrics. The most common metric, of course, is Tier 2 spend. How much are your Tier 1 partners spending with diverse companies? What are your Tier 2 goals and how can you help your partners reach those goals? Success can also be measured through economic impact. How many jobs are being created and/or sustained through your requirement that Tier 1 partners create an inclusive supply chain? How are the communities where those diverse suppliers are located being strengthened as a result?
You might also want to track market share and reputation or customer loyalty metrics. Has incorporating more diverse suppliers in your supply chain resulted in products or services that engage emerging markets or increase your competitive edge in the marketplace? Has highlighting your company’s supplier diversity efforts in marketing and promotional materials had a positive effect on customer loyalty? Meeting Tier 2 spend goals is important, but don’t forget the other ways an inclusive supply chain can help your company succeed.
What kind of Tier 2 supplier diversity program does your organization have in place?