Supplier diversity programs have been the driving force for diversity, innovation, and compliance with corporate and government initiatives. The two major components of supplier diversity include Tier 1 and Tier 2 supplier diversity; both these involve direct and indirect relations with diverse suppliers and both are integral components.
This detailed article will point out the major differences between Tier 1 and Tier 2 supplier diversity, and their relevance to competent spend oversight within both tiers of diversity.
What is Tier 1 Supplier Diversity?
Tier 1 supplier diversity is the direct procurement spend with diverse suppliers. Your company has a has a direct contractual relationship with these suppliers—which means that it is typically a business that is owned, operated, and controlled by individuals from underrepresented groups, such as minorities, women, veterans, LGBTQ+ individuals, and people with disabilities.
Here are some things to remember:
- Direct Spend: Your organization buys goods or services directly from a diverse supplier.
- Direct Impact: Tier 1 suppliers have a direct impact over your supplier diversity goals, as they are part of your direct procurement environment.
- Visibility and Reporting: Tracing and reporting spend with Tier 1 suppliers is easier because of the clear data flow between your organization and the supplier.
Benefits of Tier 1 Supplier Diversity
Immediate Contribution: Because Tier 1 suppliers are part of your supply chain, they directly contribute to your diversity metrics.
Quality and Service Control: With direct access to diverse suppliers, companies can control and oversee product or service quality, delivery timelines, and performance.
Economic Impact at the Local Level: In working directly with various businesses, companies foster economic development in underserved communities.
What is Tier 2 Supplier Diversity?
Tier 2 supplier diversity deals with indirect procurement spend. Here, your business contracts with the Tier 1 suppliers, who then sub-contract or source goods and services from the diverse suppliers. The Tier 1 supplier will take care of the diverse business relationship, but your company can still report the indirect spend with diverse suppliers.
Points to remember:
- Direct vs Indirect Spend: Your Tier 1 supplier utilizes various types of businesses in their supply chain for the goods or services bought or sold to you.
- Indirect Impact: Even though it is indirect, a relationship with your Tier 2 suppliers increases your diversity spend — by expanding diversity footprint across several tiers of the supply chain.
- Visibility Challenges: Relying on Tier 1 suppliers to report their own subcontracting spend with diverse businesses accurately can make tracking tier 2 spend complex.
Benefits of Tier 2 Supplier Diversity
- Deepens Diversity Reach: Tier 2 diversity supplier expands your diversity initiative beyond Tier 1 and encourages a focus on creating more opportunities with more diverse business suppliers deeper within the supply chain.
- Fosters Further Opportunity: It nudges Tier 1 suppliers to start implementing their own diversity initiatives. This promotes innovative ideas that lead to increased opportunities with more diverse suppliers.
- Scalability: Tier 2 diversity programs could increase the overall diversity spend because they involve diverse suppliers further down in the supply chain.
The Impact of Tier 1 and Tier 2 Supplier Diversity on Spend Tracking
Successfully managing Tier 1 and Tier 2 spend helps measure the performance of your supplier diversity program. However, tracking and reporting processes are different in the two tiers. Here are some guidelines on tracking Tier 1 spend, which is relatively easy to do because it is all about direct relationships. Your data on procurement, spend, performance, and compliance is easy to access within your company’s procurement systems. In most organizations, procurement software monitors spend in real time with Tier 1 suppliers to fulfill diversity objectives.
Key Tracking Tools for Tier 1
- Supplier Management Systems: Gainfront provides tools that enable direct tracking of diverse spend with the help of integrated supplier management platforms.
- Automated Reporting: This feature simplifies compliance while ensuring your diversity spend goals are met.
Key Tracking Tools for Tier 2
Tracking Tier 2 spend is more difficult as it involves more insight into Tier 1 supplier’s supply chains. To track Tier 2 spend more effectively, companies need to build a closer relationship with the Tier 1 suppliers so that there is a definite reporting requirement and diverse suppliers a little further down the supply chain are not missed.
Supplier Data Collection: Gainfront is the sole supplier that offers a single, unified platform to manage reporting for both Tier 1 and Tier 2 reports, ensuring seamless data collection throughout your entire supply chain.
Tier 2 Reporting Solutions: Automated Tier 2 spend tracking is a prerequisite for accurate indirect spend reporting. Gainfront’s platform provides suppliers with self-reporting tools and access to accurate data.
Audit and Compliance Tools: Making sure that your Tier 1 suppliers are compliant with diversity reporting requirements is crucial. Gainfront offers audit capabilities to verify supplier data and ensure accurate reporting.
How Tier 1 and Tier 2 Supplier Diversity Drive Business Value
Both Tier 1 and Tier 2 supplier diversity contributions drive value to your program, but they do this in slightly different ways:
Tier 1 Supplier Diversity
Direct control and impact of economic value means Tier 1 diversity relationships are a central element of your program. They bring direct benefits for innovation, quality, and social responsibility.
Tier 2 Supplier Diversity
While being more complex, Tier 2 relationships significantly increase the reach and scalability of your diversity program. This feature embeds diversity into the more pervasive aspects of your supply chain to support underrepresented communities even further down the chain.
The Role of Gainfront in Managing Tier 1 and Tier 2 Supplier Diversity
Managing both Tier 1 and Tier 2 supplier diversity demands strong tools to track, analyze, and report diversity spend. Gainfront is the only comprehensive solution that enables companies to manage both Tier 1 and Tier 2 supplier diversity in a single platform. This unique advantage ensures that you have:
- Complete Visibility: Gainfront gives you clear insight into your entire supply chain tracking both direct and indirect spend with diverse suppliers.
- Automated Reporting: Gainfront’s automation tools simplify the reporting process, ensuring you meet both corporate and government requirements for diversity reporting.
- Global Compliance: Whether tracking Tier 1 or Tier 2 spend, Gainfront ensures compliance with national and international diversity regulations.
Conclusion
While Tier 1 spend easily translates to benefits and is directly accessible to be measured, Tier 2 supplier diversity helps open even larger pockets of economic opportunities in diverse businesses. A platform like Gainfront uniquely manages both Tier 1 and Tier 2 reporting in one solution to ensure your supplier diversity program is comprehensive, scalable, and impactful.
Tier 1 vs Tier 2 Supplier Diversity Comparison
This table represents the differences between tier 1 and tier 2:
| Aspect | Tier 1 Suppliers | Tier 2 Suppliers |
|---|---|---|
| Relationship | Direct | Indirect (through Tier 1 suppliers) |
| Spend Type | Direct Spend | Indirect Spend |
| Reporting Complexity | Low (direct data) | High (requires data from Tier 1) |
| Impact on Diversity Goals | Immediate and Direct | Indirect but extends impact |
| Visibility | High (direct performance and spend data) | Low (relies on Tier 1 data) |
| Control Over Quality | High (direct control over supplier) | Low (limited control) |
| Scalability | Limited (only direct suppliers) | High (broader supply chain reach) |
Rahul Asthana has a PhD in Operations Management from the Anderson School at UCLA. He has 25 years of experience in supply chain management, starting his career in IBM working in supply chain operations. He then moved into product management and product marketing of supply chain software while at SAP and Oracle. He manages product strategy and product management at Gainfront. In terms of hobbies outside of work, he really enjoys tennis. Follow Rahul Asthana on Linkedin!