Abstract: This study considers a two-level supply chain system consisting of one warehouse and a number of identical retailers. In this system, we incorporate transportation costs into inventory replenishment decisions. The transportation cost contains a fixed cost and a variable cost. We assume that the demand rate at each retailer is known and the demand is confined to a single item. First, we derive the total cost which is the sum of the holding and ordering cost at the warehouse and retailers as well as the transportation cost from the warehouse to retailers. Then, we propose a search algorithm to find the economic order quantities for the warehouse and retailers which minimize the total cost.