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In this paper, we consider a single vendor single buyer supply chain problem where a single vendor orders raw materials from its supplier, then using its manufacturing processes converts the raw materials to finished goods in order to deliver finished goods to a single buyer. It is a fact that transportation cost is a major part of the total operational cost. However, in most vendor-buyer models, the transportation cost is only considered implicitly as part of fixed ordering cost and thus is assumed to be independent of the size of shipment. In this study we incorporate transportation cost into the model and we develop an integrated lot-splitting model of facilitating multiple shipments in small lots between vendor and buyer. Also we develop an iterative heuristic solution procedure to find the order quantity for finished goods and raw materials, and number of shipments between vendor and buyer. Numerical examples are presented for illustrative purpose.