---

In this study, a two-echelon supplier-manufacturer system with finite production rate and lead time is proposed. It is assumed that shortage is not permitted and the lot size of manufacturer (second echelon) is m-factors of the lot size of supplier (first echelon) and supplier can supply the manufacturer’s lot size in several shipments in each cycle. So, the production rate of supplier is greater than manufacturer’s. The proposed model aims to determine the optimal lot-size of each echelon such that the total cost of system is minimized. First, the problem is studied regardless of lead time and the optimal value of the lot sizes and the number of shipments is determined through analytical relations. Then, an exact solution algorithm for the problem is presented for the case with non-zero lead time. Finally, the performance of the proposed algorithm is reviewed by solving some numerical instances of the problem.