In the classical vendor-buyer inventory models, the common unrealistic assumption is that all the items manufactured are in good quality. However, in reality, it can be observed that there may be some defective items produced and then delivered to the buyer. Thus, the existence of defective items would consequently give significant influence to system behavior. In addition, a manufacturing flexibility such as the capability to adjust production capacity becomes a key success factor for increasing system flexibility as well as reducing total cost. Here, we investigate how a quality improvement program and adjustable production rate can help the supply chain to reduce the total cost. This paper studies the effect of quality improvement and controllable production rate in joint economic lot size model consisting of single-vendor and single-buyer under stochastic demand. The model gives allowance to the vendor to adjust production rate and also to invest an amount of capital investment to reduce the defect rate. The lead time is comprised of production time and setup and transportation time. The model also considers a situation in which the shortages in buyer side are assumed to be partially backordered. To solve the model, an iterative algorithm is proposed to determine simultaneously safety factor, delivery lot size, delivery frequency, production rate and process quality for minimizing total cost is proposed. The result from this study shows that allowing the vendor to both adjust the production rate and reduce the defective product by adopting quality improvement policy can reduce the individual and total cost. In the example given, the proposed model gives significant total cost saving of 45.9% compared to the model without controllable production rate and quality improvement.