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Tier 1 in the Automotive Supply Chain

The Basics of Tier 1 in the Automotive Supply Chain

by Gloria Louden
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The automotive industry works with complex and highly-developed supply chains. Instead of constructing all their components in one place, automotive manufacturers buy individual parts from specialized companies. Those are called Tier 1, Tier 2 and Tier 3 suppliers. Here we talk about the basics of Tier 1 in the automotive supply chain.

Most people aren’t aware of this, but car companies get around 70% of a car’s components from suppliers. Hence, when it comes to innovation, creativity and development, the majority of the new ideas comes from the supplier industry.

Perfect timing as well as a reliable and continuous flow of goods are crucial to the workflow. That is why employees are required to be meticulous when performing their tasks. A single problem in the chain can cause enormous losses, so any mistakes are unacceptable.

How it Works

Tier 1 companies supply the OEMs directly. They are followed by Tier 2 and Tier 3 suppliers in a supply chain.

Essentially:

  • Tier 3 supplies the raw, or close-to-raw materials (i.e. metal and plastic).
  • Tier 2 provides the individual components (i.e. control units, windows, radio units, handles, etc.).
  • Tier 1 assembles modules and systems (i.e. light modules, door systems, etc.).

What separates Tier 1 from Tier 2 and 3 suppliers is that they offer ‘automotive-ready’ hardware. This means that their products meet all of the quality and legal demands of the OEMs.

Usually, these suppliers work with many different car companies. However, they often have close relations with one or two OEMs and do more of an arm’s-length business with the rest.

Tier 1 suppliers are the final step before a product reaches the OEM. For this reason, they must have proven themselves to be reliable, extremely attentive to detail, and to have a strict adherence to federal and local regulations.

The OEM may then complete the given product or directly prepare it for distribution by taking care of marketing, shipment, etc.

Furthermore, a company can be a Tier 1 supplier to an OEM and a Tier 2 supplier to a different company. Having in mind the various products they manufacture, they can also be a Tier 1 supplier for one specific product and a Tier 2 supplier for a different piece of equipment.

The Takeaway

This article aims to paint an overall picture of the automotive supply chain and give you a general idea of how things work.

Needless to say, there are more steps to get to the finished product. As we already mentioned, companies have established relations with hundreds of different suppliers, scattered all around the world. For this reason, many of the processes are strictly individual to every manufacturer.

Having read the presented information, however, you should feel confident that you understand the basics of the production process. Business is constantly changing directions, but the fundamentals always stay the same.

We hope that the article was helpful and that you learned something new. Now you are aware of the essential role Tier 1 suppliers play in the chain and can share your knowledge with your car-enthusiast friends.

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