Lean manufacturing is a simple concept: eliminate waste, cut costs and increase your bottom line. While the concept is simple, there are many ways to execute the process. One strategy is to make use of qualified suppliers, who in turn, make use of other suppliers until a tiered supply chain is born.
A great example of this system at work can be found in the automotive industry. In the past, car manufacturers would manufacture most every component and then assemble each car. To facilitate this process, they maintained an inventory of hundreds of thousands of parts. Today, those parts are distributed amongst several suppliers, each of whom maintains their own inventories.
A Tier 1 supplier provides complete systems and assemblies directly to the car manufacturer. A tier 2 supplier provides parts and components to the Tier 1 supplier. For example, a tier 1 supplier may provide a complete braking system to a car manufacturer, while a tier 2 supplier would supply the tier 1 company with brake components used on the final brake system.
This provides many cost saving advantages to manufacturers. Warehousing fees are eliminated because no inventory is kept. Cash flow is not greatly impacted since parts are paid for only when they’re delivered and parts are delivered only when they’re needed. Utilizing a tiered supply chain also provides a quicker turnaround of finished products, as well as a safety cushion in cases of spikes in demand. If an unexpectedly large order comes in, material is readily available and is only a phone call away from your tier 2 suppliers. As soon as the urgent demand is filled, these suppliers immediately start manufacturing parts to replenish their inventory, thereby restocking your parts cushion.
Lastly, this system allows manufacturers to take advantage of economies of scale. Instead of placing separate orders each day or each week, manufacturers will place six or twelve month orders that are then kept in supplier inventories. These large order volumes result in lower costs for all parties while strengthening the tier 1 manufacturer’s bottom line.