Companies that supply original equipment manufacturers with sub-assemblies, components and materials are sometimes structured into tiers that reflect their commercial distance (level of direct access and accountability) to the OEM. Tier One suppliers provide their products directly to the manufacturer, while Tier Two (and lower) suppliers provide their products and services to the supplier at the next higher level in the chain.
This tiered supply chain model is especially prevalent in the automotive, aerospace and computer industries where the final product consists of many complex components and sub-assemblies that must comply with strict quality, manufacturing and business standards, according to the Houston Chronicle. Original equipment manufacturers are the companies that make the final product for sale to the consumer: an automobile, an airplane, a computer or another product. Tier One suppliers provide components (e.g., seats, electronic modules, windows, etc.) directly to the OEM, meeting the required specifications and state of completion. Tier Two suppliers provide their goods and services (outputs) to Tier One suppliers, not directly to the OEM, and Tier Three outputs are directed to Tier Two suppliers. Lower tiers (such as three and four) provide decreasingly finished sub-assemblies, components and/or materials, eventually arriving at suppliers of raw materials: steel, glass, rubber, plastics, etc.
According to Tier1parts.com, suppliers covet Tier One status because it conveys the credibility and commitment required by manufacturers of their closest business partners who are “trusted to design, develop and validate the products, systems and services needed for their products." Some suppliers are Tier One with one company and Tier Two with another, or even Tier One for a given product and Tier Two for a second output. Regardless of tier status, all suppliers must meet the rigorous quality and production standards of their customers – standards which are ultimately set by the original equipment manufacturer.