This paper develops a two-echelon supply chain model with variable setup cost and environmental impact. A single-setup-multi-delivery (SSMD) policy is adopted to increase the efficiency of transportation in the supply chain in which it is assumed that the shipment lot size of each delivery is unequal and variable. Each delivered item goes through inspection process at the buyer’s end. After inspection, defective products are returned to the vendor for reworking process. Due to inspection process, end customers receives perfect quality items. Due to more transportations by SSMD policy, this model assumes carbon emission cost to help the world environment. An investment function is used to reduce total setup cost for the whole supply chain. Stackelberg leadership approach is utilized in this model to optimize the joint total cost of vendor and buyer. Finally, some numerical examples, sensitivity analysis, and graphical representations are given to illustrate more savings from existing literature.