Suppliers are external providers to the activity, while subcontractors are part of the consortium.
Developments which are considered key for the activity shall be done by the prime or its subcontractors (they should not be done by suppliers / external providers). For example, if you are developing a satellite and a new instrument is needed, the development of the instrument shall be done by a consortium member and not by an external provider. Less important developments (e.g. the GUI of a software) may be outsourced to external providers. This rule does not prevent the prime or the subcontractor to procure COTS of any type that are needed for the success of the activity.
Moreover, any entity responsible for one or more work packages of the activity shall be treated as a subcontractor. In the ESA PSS forms (ESA Procedures, Specification and Standards Forms), all hours quoted shall be those worked by the Prime and its Subcontractors (partners in the activity). It is not allowed to quote hours of external providers of any kind, those costs shall be only listed in exhibit A to PSS-A2.