Theorizing the governance of direct and indirect transactions in multi‐tier supply chains

Abstract An outsourcing decision does not equate to the outsourcing of a sourcing decision. Many indirect transactions with lower tier suppliers are embedded in transactions with first‐tier suppliers. Building on the identification of a transaction as the fundamental unit of analysis, this study proposes that transactions comprise bundles of intertwined direct transactions at the firm level and indirect transactions at the supply chain level. These indirect transactions require separate but not independent sourcing decisions. Using a buyer's decision to control or delegate the governance of indirect transactions for an externally sourced product, this study demonstrates that disaggregating the transaction advances theory by extending the range of outcomes, refining the calculus of the make‐or‐buy decision, and providing a coherent theoretical framework for multi‐tier supply chain management. This study considers the theoretical, managerial, and societal implications across various contingencies involving inter‐firm relationships.