In many multistage manufacturing supply chains, transportation related costs are a significant portion of final product costs. It is often crucial for successful decision-making approaches in multistage manufacturing supply chains to explicitly account for non-linear transportation costs. We have explored this problem by considering a two-stage production-transportation. A two-stage supply chain that faces a deterministic stream of external demands for a single product is considered. A finite supply of raw materials and finite production at stage one has been assumed. Items are manufactured at stage one and transported to stage two, where the storage capacity of the warehouses is limited. Packaging is completed at stage two (that is, value is added to each item, but no new items are created) and the finished goods inventories are stored, which is used to meet the final demand of the buyers. During each period, the optimised production levels in stage one, as well as transportation levels between stage one and stage two and routing structure from the production vendor to warehouses and then to buyers, must be determined. Copyright © 2009, Inderscience Publishers.