J. Eng. Technol. Manage.

29 (2012) 22–33

Contents lists available at SciVerse ScienceDirect

Journal of Engineering and

Technology Management
journal homepage: www.elsevier.com/locate/jengtecman

Linking long-term capacity management for manufacturing

and service operations
Jan Olhager *, Pontus Johansson
Department of Management and Engineering, Linköping University, SE-581 83 Linköping, Sweden

A R T I C L E I N F O A B S T R A C T

JEL classification: For firms that combine manufacturing and service operations in one
M11 – Production Management system, the task of managing capacity is not straightforward. New
Keywords: goods and services may not have the same set of competitive
Capacity management priorities, and the models and concepts available in the literature
Industrial services
for service operations differ from those for manufacturing opera-
Operations strategy
Sales and operations planning
tions. We address this problem and review the concepts and models
Servitization for capacity management in the long term in both streams of
literature, i.e. manufacturing and services, to develop a unified
framework for manufacturing and service operations. The frame-
work creates transparency between new goods manufacturing and
service operations, since the same long-term capacity management
structure is used for both product types, as well as between capacity
strategy and planning strategy, since new goods and services are
treated simultaneously. In the framework, the concepts of chase
and level strategies are redefined for service operations to allow for
integration with manufacturing operations. A case study demon-
strates the usefulness of the integrated approach for long-term
capacity management.
ß 2011 Published by Elsevier B.V.

Introduction

More and more corporations throughout the world are adding value to their core corporate
offerings through services. The trend is pervading almost all industries and is perceived by
corporations as sharpening their competitive edges. Modern corporations are increasingly offering
fuller market packages or ‘‘bundles’’ of customer-focussed combinations of goods and services. This

* Corresponding author. Tel.: +46 13 281000; fax: +46 13 288975.

E-mail address: jan.olhager@liu.se (J. Olhager).

0923-4748/$ – see front matter ß 2011 Published by Elsevier B.V.

doi:10.1016/j.jengtecman.2011.09.003
 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33 23

concept has been coined servitization by Vandermerwe and Rada (1988), and has gained recognition
as the term describing the innovative services that have been bundled with goods by firms that had
previously been known strictly as manufacturers (Neely, 2008; Baines et al., 2009; Schmenner, 2009).
Schmenner (2009) found that servitization has antecedents that stretch back 150 years; already in the
late 1800s there were examples of firms that bundle services with manufactured goods in an effort to
reach out to customers in new ways. Baines et al. (2009) provided a review of the modern literature on
servitization. Neely (2008) found that firms with servitization are not necessarily more profitable than
firms with only goods manufacturing. Consequently, the ways to servitization has to be considered
carefully and managed comprehensively.
When the industrial after-sales services are supplied through the same manufacturing system as
the new goods, the management of capacity is not trivial. How should capacity levels be managed to
support new goods manufacturing as well as after-sales service if these share the same resources? This
is the research question that is addressed in this paper. One of the authors has worked for two years at
the case study company that initiated this research. The company has an integrated manufacturing
and service operations environment in that some major components of the finished goods are serviced
in the same production system as the manufacturing of new goods.
Since both service and goods characteristics have to be accounted for when designing the system,
theories from both manufacturing and service operations management need to be considered. In
reviewing the concepts and models available for service and manufacturing operations, we noticed a
discrepancy in the approaches to long-term capacity management and in the definitions of some key
terminology. Consequently, the purpose of this paper is to explore the literature on long-term capacity
management for manufacturing and services, and develop a unified framework that can be used for
long-term capacity decision-making in integrated manufacturing and service operations.
We first review long-term capacity management issues for manufacturing operations and service
operations separately. Then, we combine the approaches for integrated manufacturing and service
operations. We differentiate between how much capacity to make available (setting the capacity
levels that are owned by the firm), and how to utilize the existing capacity (long-term planning
strategies within these capacity limits). We then return to the case study company to illustrate the
applicability and managerial implications of the framework for long-term capacity management of
integrated manufacturing and service operations management. We hope that this framework
contributes to the understanding of the relationships between manufacturing and service operations
as well as between capacity strategy and planning strategy, and that managers will find it useful when
managing capacity in the long term in integrated manufacturing and service operations.

Long-term capacity management for manufacturing operations

Capacity can be defined in two different ways for manufacturing (Swamidass, 2000): ‘‘Capacity is
the maximum possible output over a specified period of time. In cases where the output is non-
homogeneous, capacity may be measured in terms of the available machine hours’’. The first definition
makes it difficult to accurately account for setup times. Typically, the time that capacity is available is
reduced with respect to the average proportion of time that is used for setups. This is a standardized
approach, which means that all deviations from ‘‘normal’’ operations lead to erratic capacity
calculations and plans. Since setup times are non-negligible in most manufacturing operations, these
must be taken into account explicitly. The second definition of capacity is concerned with the available
(work) time per (calendar) time unit; e.g. hours per day. This measure is then compared with the total
capacity requirements, which are composed of both setup times and processing times per batch; the
latter is calculated as the unit processing time multiplied by the lot size.
For manufacturing operations, the long-term capacity management problem is typically divided
into two parts (Olhager et al., 2001). One part is related to capacity as a decision category within a
manufacturing strategy, dealing with the strategic acquisition (or reduction) of capacity relative the
long-term demand. The other part is related to sales and operations planning, which concerns tactical
decisions on how to utilize the available capacity relative demand. The extreme strategies in the
former part are labeled lead and lag, and the latter part chase and level. The latter terms coincide with
24 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33

the ones typically used for service operations, as described in the following section. In this section we
present the view from manufacturing operations on how to deal with long-term capacity.

Lead or lag demand

One of the structural decision categories in a manufacturing strategy is concerned with capacity
and specifically addresses the timing and amount of capacity acquisitions relative demand; cf. Hayes
and Wheelwright (1984). Whereas the amount of capacity that can be added at a specific point in time
largely depends upon whether the operations are manual or machine-based, the timing of acquisition
relative an increase in demand deserves strategic attention. There are two extreme capacity
strategies: lead demand and lag demand (Hayes and Wheelwright, 1984). A ‘‘lead’’ demand strategy
implies that capacity is acquired in advance of any demand increase. Thus, there is always some
overcapacity, and no need for subcontracting. A ‘‘lag’’ demand strategy implies that capacity is never
added if it cannot be fully utilized with new demand. Using a lag strategy implies that market demand
patterns have to be carefully monitored and/or that subcontractors or contract manufacturers are
needed. Hayes and Wheelwright (1984) also include a ‘‘track’’ demand strategy, which implies that
capacity should follow the demand evolution closely. Olhager et al. (2001) extended this concept by
allowing for falling demand; a lead strategy maintains a cushion of capacity, i.e. a capacity surplus,
when adding as well as when reducing capacity levels. A lag strategy assures high capacity utilization,
a demand surplus, in both increasing and decreasing modes of operation. Finally, a track strategy
implies that over- and under-capacities alternate over time.
Capacity strategies are also needed in situations with stationary but fluctuating demand. A lead
strategy corresponds to the situation where the capacity is large enough to cover even the highest
level of demand in a given period. A lag strategy corresponds to setting the level of own capacity to the
lowest level of demand over time, such that we can always maintain full utilization of our own
resources. However, temporary capacity must be used to satisfy all demand. Finally, a track strategy
corresponds to setting the capacity level to the average demand over time. If products can be stored
we can produce to stock in periods of low demand to cover for high demand periods.

Chase demand and level capacity

The terms ‘‘chase’’ and ‘‘level’’ are treated as planning strategies in the manufacturing literature,
and are applied at the sales and operations planning level (APICS, 2004; Vollmann et al., 2005). Sales
and operations planning are concerned with the long-term utilization of manufacturing resources
relative the sales plan, typically covering monthly planning periods over a planning horizon of 15–18
months. APICS (2004) provides definitions of chase and level strategies; a chase strategy ‘‘maintains a
stable inventory level while carrying production to meet demand’’ and a level strategy ‘‘maintains a
stable production rate while varying inventory levels to meet demand’’. These definitions are clearly
developed with manufacturing operations in mind, since inventory is assumed to be allowed. Also, the
definitions do not comment upon the level of capacity per se; instead it is the setting of production
rates relative demand that is central to the definition.
The realization of chase and level strategies differ somewhat between make-to-stock and make-to-
order environments. In the former, finished goods inventory can be built, whereas in the latter
everything is built to customer order, and hence keeping inventory of finished goods is not an option.
Consequently, cumulative production plus initial inventory must equal or exceed cumulative demand
in make-to-stock situations, whereas cumulative production must be less than or equal to cumulative
demand plus the initial backlog in make-to-order situations. For some manufacturing firms both
alternatives may be possible, wherefore they can alternate between keeping inventory and having
backlogs.

Linking capacity and planning strategies for manufacturing

There are certain manufacturing environments where a certain capacity and planning strategy
provide a better fit than others; see Hayes and Wheelwright (1984), Hill (2000), and Olhager et al.
 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33 25

(2001). This can be related to issues such as automation (Lindström and Winroth, 2010), flexibility
(Zhang, 2005), leanness (Bayou and de Korvin, 2008), and product modularity (Antonio et al., 2009). In
particular, it can be noted that lag and level strategies are preferable for high volume, standardized
products, whereas lead and chase strategies are preferable if the demand volume per individual item is
low and highly customized, i.e. one-of-a-kind products. The former type of product typically competes
on price to a large extent, whereas the profit margin is higher for the latter group. Considering the type
of manufacturing process, lag and level strategies typically apply to line production and continuous
processes, and lead and chase strategies to project manufacturing and to some extent to job shops. In
line production and continuous processes large steps of capacity are added, wherefore the capacity
acquisition is vital and typically delayed such that the utilization can be high once the capacity is
available. In project manufacturing it is quite possible to allocate and add resources to the project as
they are needed. Finally, in job shops there is typically one production stage that limits the output of
the facility, which is prioritized with respect to capacity utilization and other complementary
resources may well have high levels of over-capacity.

Long-term capacity management for service operations

In the service operations management literature, an accepted way to define capacity is that of
Johnston and Clark (2005): ‘‘the maximum level of value-added activity over a period of time that the
service process can consistently achieve under normal operating conditions’’. Similar definitions are
given by Fitzsimmons and Fitzsimmons (1998), Hope and Mühlemann (1997), and Haksever et al.
(2000). In order to utilize the capacity available efficiently, there is a basic set of strategies that can be
adopted (Sasser, 1976). The terms ‘‘level’’ and ‘‘chase’’ are used, but are given other meanings when
compared to the planning strategies for manufacturing operations. In a ‘‘level capacity’’ strategy for
service operations, capacity is kept at a constant level irrespective of demand pattern. A ‘‘chase
demand’’ strategy allows capacity to be varied in order to fit the demand pattern as closely as possible.
A third strategy is ‘‘demand management’’, which aims at influencing the demand pattern to suite the
available capacity rather than focusing on the operational capacity per se. Thus, long-term capacity
decision-making is basically a choice between level capacity and chase demand. Textbooks such as
Johnston and Clark (2005) and Hope and Mühlemann (1997) use the chase-level typology to describe
the long-term capacity choices.
Sasser (1976) introduced the notion of level and chase strategies. He describes the level strategy as
fitting an operation requiring high labor-skill, job discretion, and compensation rates, and low labor
turnover, hire-fire costs and amount of supervision. This strategy is exemplified by situations ‘‘where
more highly skilled people perform jobs for high pay, with some or a lot of discretion in a relatively
pleasant environment’’ (Sasser, 1976, p. 137). Opposite requirements are given for operations suitable
for the chase strategy, which ‘‘require more employees, and those employees exhibit a higher rate of
turnover because of the job characteristics’’ (Sasser, 1976, p. 137).
Armistead and Clark (1994) exemplify level as applicable ‘‘when demand is more visible before the
time of use’’, whereas chase is the strategy of choice ‘‘when customers will not wait long for the
service’’ (Armistead and Clark, 1994, p. 7). Kellogg and Nie (1995) exemplify level as being used in
instances that ‘‘require specialized knowledge, expertise and skills’’, a kind of service labeled ‘‘expert
service’’ (Kellogg and Nie, 1995, p. 329). Chase on the other hand is used when ‘‘tasks are rationalized
to the point where procedures could be easily and quickly mastered’’, which is described as applicable
in a ‘‘service factory’’ environment (Kellogg and Nie, 1995, p. 329). The strategies in Crandall and
Markland (1996) can be interpreted as capacity management strategies even though they use the term
demand management strategies. Four strategies are proposed and investigated. These are ‘‘provide’’
(sufficient capacity to meet peak demand), ‘‘match’’ (anticipate demand patterns, and use
subcontractors), ‘‘influence’’ (change customer demand patterns), and ‘‘control’’ (demand variation
is kept to a minimum); cf. Crandall and Markland (1996, p. 114, Table 4).
Betts et al. (2000) investigate 12 different call centers in the UK. They identify four main capacity
strategies, including a level strategy ‘‘which keeps resource allocation generally constant’’ and a chase
strategy that ‘‘adjust capacity to match demand’’ (p. 186). They consider organizational buffering (e.g.
through queuing) as a third alternative, and demand management as a fourth capacity strategy.
26 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33

Klassen and Rohleder (2001) state that chase is to ‘‘plan capacity to meet whatever demand occurs’’,
and level is to ‘‘maintain a constant capacity level, and either schedule demand to be constant or cause
customers to wait in busy periods’’ (Klassen and Rohleder, 2001, p. 5). They acknowledged that there is
a difference between how service management and manufacturing management have treated the
capacity management topic.
In conclusion, there is no general agreement on a framework or definitions for long-term capacity
management for service operations. The concept of chase and level strategies dominate the discussion
on capacity management in service operations. However, the perspectives on chase and level differ
somewhat. The definitions in Sasser (1976) and Kellogg and Nie (1995) are based on the perspective of
the ease with which capacity levels can be changed, while Klassen and Rohleder (2001) base the
definition on the relationship and interaction between capacity and demand.

A new approach to describe long-term capacity management decisions for service operations

Based on the review of the literature on service operations as well as on manufacturing concerning
the management of capacity in the long term, two major concerns can be noticed. First, the concepts of
chase and level are defined differently. Second, the framework for long-term capacity management in
manufacturing is more developed. It distinguishes between the manufacturing strategy aspects (i.e.
the capacity strategy) and the sales and operations planning aspects (i.e. the planning strategy).
Therefore, we base the framework on the ideas from manufacturing and adapt them to service
operations, but take the special characteristics of services into account. We map the manufacturing-
based framework on two existing capacity frameworks for service operations; i.e. Kellogg and Nie
(1995) and Crandall and Markland (1996) to illustrate how these relate to a differentiation between
capacity strategy and planning strategy.

Redefining chase and level

The definition and treatment of chase and level strategy in the service operations literature (Sasser,
1976; Armistead and Clark, 1994; Kellogg and Nie, 1995; Crandall and Markland, 1996; Klassen and
Rohleder, 2001) incorporates aspects of both capacity levels relative demand and the utilization of the
capacity. Borrowing the idea from manufacturing operations that these are actually two decisions –
although interrelated – can provide some precision to the strategy formulation for service operations.
This means that the setting of capacity levels relative demand, when demand increases, decreases, or
is stable with some fluctuations, is one strategic decision. Should we have a positive capacity cushion
(lead strategy), a negative capacity cushion (lag strategy) or a compromise (track strategy)? The other
strategic decision is concerned with the planning strategy given the amount of capacity for the
resources we own. Should we follow the demand as closely as possible (chase strategy) or should we
maintain a level utilization of our resources (level strategy)? In this context, chase and level strategies
need to be redefined, borrowing from the manufacturing literature. Furthermore, the capacity level as
such is considered as a given. A chase strategy can now be defined as: a planning strategy where
production follows and meets demand. The result of this strategy is a stable customer delivery lead-time,
no backorders, and a stable inventory level if goods are produced (possibly at zero level in case of
make-to-order). A level strategy can be defined as: a planning strategy that maintains a stable
production rate. The result of such a strategy is varying customer delivery lead times, or keeping
varying levels of queues or inventory to decouple the operations from demand.

Differentiating between capacity and planning strategies

The separation of the strategy capacity decision-making into two parts, i.e. (i) setting the level of
capacity relative long-term demand (lead, lag or track) and (ii) setting the level of production relative
medium-term demand, given the level of capacity (chase or level), can provide some useful insights
concerning service frameworks. In Table 1, the models by Kellogg and Nie (1995) and Crandall and
Markland (1996) are interpreted in terms of a capacity strategy and a planning strategy.
 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33 27

Table 1
Differentiating long-term capacity management decisions into capacity strategy and planning strategy, for two frameworks in
the service operations literature.

Long-term capacity decisions

Capacity Planning
strategy strategy

Kellogg and Nie (1995)

Expert service. ‘‘High degree of customer influence’’, ‘‘layout targeted at Lead Chase
flexibility’’, ‘‘requires specialized knowledge, expertise and skills; it is
difficult to augment service capacity with temporary labor or fixed
automation’’.
Service shop. ‘‘Medium degree of customer influence’’, ‘‘minimization of n/c n/c
customer travel distance between functions’’.
Service factory. ‘‘Low degree of customer influence’’, ‘‘balances tasks among Lag Level + chasea
work stations to achieve high utilization’’, ‘‘temporary employees or
cross-training of employees can be effective, as only moderate to minimal
levels of training are required’’.
Crandall and Markland (1996)
Provide. ‘‘We attempt to always have sufficient capacity to meet peak demand. Lead Chase
While this means we often have excess capacity, we believe this is more
important than taking the chance of losing business’’.
Match. ‘‘We attempt to anticipate demand patterns so that we can change Lag Level + chasea
capacity levels as needed. This means we have to schedule our work force
carefully and may have to use subcontractors or make other temporary
arrangements’’.
Influence. ‘‘We attempt to change customer demand patterns in order to obtain Track Chase
good utilization of resources. This requires careful planning of marketing
programs, which are closely coordinated with operations.’’
Control. ‘‘We have developed unique services and need high-cost resources in Track Level
order to provide the level of service expected. As a result, we attempt to
make sure that our demand variation is kept to a minimum’’.
n/c, not clear; no guidance is provided for a distinction between capacity strategy and operations planning strategy.
a
Level for own capacity (full utilization); chase for temporary capacity.

Kellogg and Nie (1995) outline three types of service processes: expert service, service shop and
service factory. The key characteristic is the degree of customer influence, ranging from high to
medium to low, for the three process types, respectively. An expert service offers unique service
packages (e.g. accounting and consulting), while a service factory offers generic service packages (e.g.
fast food restaurants). They primarily discuss these two extreme forms and let service shop (e.g.
education and healthcare clinics) take on intermediate properties. The expert service process must
have ‘‘all potential service capabilities available’’ (p. 328), and ‘‘it is difficult to augment service
capacity’’ (p. 329), which can be interpreted as a lead strategy. Having a capacity that at all times is
sufficient to cover demand means that a chase planning strategy can be employed. As for the service
factory, ‘‘the investment in facilities and standardized operations procedures are key to increasing
efficiency’’ (p. 331) and ‘‘temporary employees or cross-training of employees can be effective, as only
moderate to minimal levels of training are required’’ (p. 329). This can be interpreted such that a lag
capacity strategy is pursued for the capacity that is owned to keep it fully utilized with a level planning
strategy, and that temporary arrangements are used in a chase fashion to add the capacity necessary at
certain times.
The model by Crandall and Markland (1996) includes four strategies. The provide strategy sets the
capacity level to the maximum demand level over time (p. 110), allowing for a chase planning strategy,
which also is a necessity not to produce more than is demanded. The match strategy ‘‘attempts to vary
capacity to meet varying demand, sometimes possible with employees’’ (p. 109) and ‘‘may have to use
subcontractors or other temporary arrangements’’ (p. 111), such that all resources are fully utilized at
all times, both internal and temporary. The influence strategy ‘‘attempts to reduce the peak demands
by shifting it to the low demand periods, making variable capacity less of a problem’’ (p. 109) and to
‘‘balance the economic trade-offs between the cost of excess capacity and the opportunity cost of lost
28 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33

business because of excess lead time’’ (p. 110). The influence capacity pattern relative demand is such
that average capacity is equal to average demand, alternatively higher and lower, and that capacity
changes are smoothed over time. Thus, a track capacity strategy is used in combination with a chase
strategy, since all capacity is used to deal with demand and that cumulative capacity equals
cumulative demand over the planning horizon. Finally, the control strategy is designed to have
‘‘constant capacity to meet average demand’’ (p. 110), which is a track capacity strategy. A level
planning strategy is then employed, since the control strategy implies ‘‘using waiting lines or some
other means of accommodating excess demand until capacity is available’’ (p. 110).
Table 1 shows that the ‘‘expert service’’ in Kellogg and Nie (1995) corresponds to the ‘‘provide’’
strategy in Crandall and Markland (1996) and that the ‘‘service factory’’ in Kellogg and Nie (1995)
corresponds to the ‘‘match’’ strategy in Crandall and Markland (1996). The ‘‘influence’’ and ‘‘control’’
strategies by Crandall and Markland (1996) can also be positioned as certain combinations of capacity
and planning strategies. Thus, the differentiation of the long-term capacity management decision into
capacity strategy and planning strategy provide a structure for analyzing and comparing different
service capacity models.

Linking capacity and planning strategies in services

When combining three capacity strategies with two operations planning strategies, six
combinations are possible. The question then arises if all six are plausible combinations, from a
practical service operations point of view. The mapping of the two decision areas on the frameworks in
Kellogg and Nie (1995) and Crandall and Markland (1996) resulted in five of the six combinations; cf.
Fig. 1. The last potential combination, i.e. using a lead capacity strategy in combination with a level
planning strategy, is an unlikely and undesirable combination, from both a capacity strategy and a
planning strategy point of view. If a lead capacity strategy is employed, a level planning strategy would
imply that some orders are delayed or some customers have to wait as soon as the flow of orders or
customers becomes irregular. Very few, if any, operations in manufacturing or services have a
completely steady flow of demand, with no variability. A lead capacity strategy always allows for a
chase planning strategy, which would then be preferable to a level strategy; i.e. if we have the capacity,
why not use it when there is demand? If a level planning strategy is pursued, a track capacity strategy
is possible from a capacity point of view relative demand, since capacity equals demand on average.
Then, a lead strategy would be unnecessary and would only lead to higher costs.
The concept of decoupling can be related to these strategies. Chase and Tansik (1983) refer to
decoupling as to physically or organizationally separate activities of an organization and that these
should be placed under separate supervisions. They distinguish between low-contact and high-
contact systems, also known as back office and front office operations, respectively (Metters and
Vargas, 2000; Safizadeh et al., 2003). The potential benefits of decoupling include matching each
organizational unit to the task at hand, more effective use of productive facilities, and limiting the
effects of disruptions or breakdowns to the unit of the organization where they occur (Chase and
Tansik, 1983), as well as focus on building appropriate capabilities for future products (Fowler et al.,

Lead Track Lag

Expert service (KN) Service factory (KN)

Chase Influence (CM)
Provide (CM) Match (CM)

Service factory (KN)

Level – Control (CM) Match (CM)

CM = Crandall and Markland (1996); KN = Kellogg and Nie (1995)

Fig. 1. Framework for combining capacity and planning strategies for service operations, with reference to the literature.
 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33 29

2000). A main advantage of de-coupling is that while front office labor levels must be set at peak
demand, back-office labor levels can be set at average demand and backlogging is used to reduce costs
(Chase, 1981). High-contact subsystems should seek to maximize effectiveness goals, whereas low-
contact subsystems seek to maximize efficiency goals (Chase and Tansik, 1983).
Relating these insights to the model by Kellogg and Nie (1995), we find that the ‘‘expert service’’ has
the characteristics of the front office, and the ‘‘service factory’’ has the characteristics of the back office.
The ‘‘provide’’ and ‘‘influence’’ strategies in the typology by Crandall and Markland (1996) are front-
office oriented in that they focus on fulfilling the customer service objective, whereas the operational
aspects are secondary. The other two strategies, ‘‘match’’ and ‘‘control’’ have a stronger focus on the
resources required. This is especially true for the ‘‘control’’ mode, in that extra capacity for unique and
high-cost resources cannot be acquired. Thus, the capacity level is set to the average demand level, and
then production is leveled over time. In the ‘‘match’’ mode work force scheduling, subcontractors and
other temporary arrangements can be used to adapt the production levels to demand.
In general, we find that certain combinations of capacity and planning strategies are linked to
either front office or back office operations. The basic choices for front office operations are lead and
chase with a strong focus on effectiveness and quality in high-contact services (and track and chase
can be pursued for temporary capacity if this is an option from a quality perspective). For back office
operations, the baseline is lag and level with a strong focus on low-contact efficiency for the resources
that the firm owns. This can be used together with a lag and chase combination for temporary
capacity. Alternatively, a track and level combination would allow the firm to satisfy the average
demand from the own resources. Fig. 2 summarizes these different approaches to capacity and
planning strategies for decoupled service operations.

A framework for long-term capacity management integrated manufacturing and service

operations

The choice of the appropriate capacity and planning strategies for both manufacturing and service
operations should be based on the market and product characteristics for the goods and services,
respectively. It should be noted that the demand volume per item for goods does not have to translate
to the demand volume per item for services; the demand volume per item and time period for a service
item can be both higher and lower that the demand volume for the corresponding goods (Johansson
and Olhager, 2006). The capacity and planning strategies for manufacturing should therefore be based
on the product and market characteristics for the new goods manufacturing, while the strategies for
the service operations should be based on the product and market characteristics for the service. Each
type of operation will consequently arrive at a capacity and planning strategy from its own
perspective.
However, for the efficient and effective utilization of capacity when new goods manufacturing and
service operations share the same operations facilities, the strategies for manufacturing and services
should be analyzed jointly. Four basic combinations can emerge, as illustrated in Fig. 3. Lead and chase
strategies for both manufacturing and service provides a strong focus on capacity availability and
flexibility, while lag and level strategies for both types of operations creates a strong focus on capacity
utilization and cost efficiency. In these situations, there is no need for any type of compromise

Lead Track Lag

Chase Front office

Level X Back office

Fig. 2. Framework for combining capacity and planning strategies for front-office and back-office operations.
30 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33

New goods manuf acturing operations

(Track +
Lead + Lag +
Chase or
Chase Level
Level)
Rate-based manufacturing and
time-phased services; priority is
Service operations

Lead + Combined focus on resource

given to services, since new goods
Chase availability and flexibility.
can be produced in advance and
kept in inventory.
(Track +
Chase or
Level)
(Time-phased manufacturing
Lag + Combined focus on resource
and rate-based services;
Level utilisation and efficiency.
Unlikely in practice)

Fig. 3. Illustration of the effects of combining capacity and planning strategies for manufacturing and services.

between manufacturing and service operations. One of the remaining two basic alternatives is
unlikely in practice. Lead and chase strategies for new goods manufacturing in combination with lag
and level strategies for service is not really viable. This would correspond to a situation where the
demand is stable for services but not for new goods; e.g. make-to-order of new goods while producing
services to stock. The fourth and last combination represents a realistic situation in which the task for
new goods manufacturing is to provide low-cost operations, while the demand for service items is
more volatile and would prefer some excess capacity for flexibility. This combination is the most
interesting, since it combines two different strategies, and this is also the situation for the case
company, which is described in the next section.

Case study

The case company develops, manufactures, and provides industrial after-sales service on industrial
turbines, for power plants and various industrial applications. One of the researchers had two years
work experience at the case company, and was pivotal in identifying the need for improving
operations strategy in general and capacity management in particular at the case company. The issues
of product profiling and process choice for the case company are described in Johansson and Olhager
(2004, 2006). Some parts, e.g. turbine blades, are serviced in the same production system (and using
the same equipment) as the manufacturing of new goods. The industrial services include
remanufacturing, reconditioning, and in some cases replacing old parts with new before reassembling
the subsystem in the product.
The competitive priorities differ between new goods and services. New goods compete to a large
extent on price and design capability as order winning criteria, while delivery reliability and quality
conformance are qualifiers. The dominating order winner for industrial services is delivery speed, and
quality conformance is a qualifier. Price is not considered a major issue for such services. Since the
criteria on which the products compete differ, it would be appropriate from a strategic perspective to
split new goods manufacturing and service operations into two separate production systems.
However, the investments in some production resources are large, prohibiting a doubling of resources
that would allow for a separation of manufacturing and service operations. Thus, budget constraints
force the manufacturing of new goods and the servicing of industrial goods into one and the same
process.
The manufacturing of new turbines is basically rate-based, on an annual basis, even though the
production is entirely driven by customer orders; the delivery lead times for new orders is always a
matter of negotiation. As a consequence, the variability in long-term production plans is very small,
minimizing the need for a capacity cushion. Thus, a combination of lag capacity strategy and level
planning strategy is appropriate for this product. The demand for services on turbines that are in
operation at customer sites is more volatile and since quick response operations are of the utmost
importance, sufficient levels of capacity are needed to fulfill the customer requirements in a timely
fashion. For these products, lead and chase strategies are more relevant.
 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33 31

This framework creates awareness for the managers concerning the differences between
manufacturing and service operations, and helps to address long-term capacity management in a
simultaneous and integrated approach. The fundamental questions are: (i) how much capacity to
have, and (ii) how to utilize the existing capacity, in a single production system incorporating two
distinctly different types of products. In general, two paths of approaching the long-term capacity
management problem can be identified: sequential or integrated. Historically, a sequential approach
has prevailed; i.e. first setting the capacity levels, and then deciding upon how to utilize the existing
capacity. An integrated approach would combine on the one hand capacity and planning strategy
decisions, and on the other hand, new goods manufacturing and services. Thus, integration is pursued
in two dimensions. Since services have to be produced near the time of demand, while new goods can
be stored and thus produced in advance, the integrated approach can combine these perspectives
(different demand profiles and consequently different capacity requirements) and design a production
system with a lower total capacity level than that of a sequential approach. In essence, combining a
lead and a lag capacity strategy results in a track strategy, and combining a level and a chase planning
strategy results in a mix strategy. Capacity is used for new goods slightly in advance of plans if the rate
of service orders is low, and service orders are prioritized once they arrive. The peak capacity
requirements are reduced in this case, since the capacity requirements can be leveled and balanced
with active planning of the manufacturing of new goods. Thus, the framework creates a transparency
between (i) new goods manufacturing and service operations, since the same long-term capacity
management structure is used for both product types, and (ii) capacity strategy and planning strategy,
since new goods and services are treated simultaneously.

Discussion and implications

Efficient long-term capacity management is vital to any manufacturing or service firm. It has
implications on competitive performance in terms of cost, delivery speed, dependability and
flexibility. Operations strategy and sales and operations planning provide two perspectives on long-
term capacity decisions, raising and treating different issues. In this paper, we compared these two
perspectives and related them to service operations in general and to integrated manufacturing and
service operations in particular.
The literature on long-term capacity management in the service operations literature has basically
been restricted to a choice between chase and level strategies. However, based on the content and
process of long-term capacity decision-making for manufacturing operations we propose that service
operations will benefit from a distinction between a capacity strategy and a planning strategy. The
capacity strategy deals with the setting of the long-term capacity levels (that are owned by the firm),
whereas the planning strategy deals with how to use this capacity relative demand. Such a distinction
creates a broader capacity terminology that allows for a more detailed discussion on long-term
capacity decisions in service operations as well as in integrated manufacturing and service operations.
For such firms, the separation of capacity decisions into two areas proves quite important. Still, these
two capacity decision areas are related and should therefore be considered simultaneously. This
distinction adds detail to the integrated framework for capacity management in manufacturing and
service operations.
The case study illustrates the importance of taking such an integrated perspective rather than using
a sequential process. The integrated framework allows for the simultaneous consideration and
balancing of capacity requirements for manufacturing operations and service operations.

Limitations and further research

This framework is based on one case study. In this integrated manufacturing and service operation
setting, the structure helped to provide new insights. A particular feature of the case study was that
the service operations were carried out in the same production system as the manufacturing of new
goods. However, in other companies, the relative priorities between new goods manufacturing and
services may be different and lead to others combination of integrated capacity and planning
strategies. Still, the framework offers a structural approach to managing long-term capacity. We have
32 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33

not been able to detect any drawbacks of the proposed framework, wherefore we hope that it can be
useful in integrated manufacturing and service operations in general.
Capacity is not the only operations management issue of concern when considering joint service
and manufacturing operations. Therefore, further research is needed on integration of other strategies
and issues that emerge when joint service and manufacturing operations are considered.

Conclusions

The long-term capacity management is modeled in a framework with two strategic dimensions. A
capacity strategy is concerned with setting the overall capacity level, and a planning strategy is
developed for the utilization of capacity. Having a uniform structure and a coherent terminology for
manufacturing as well as service operations facilitates a concurrent approach for long-term capacity
management of such integrated operations. The contribution of this paper lies in the framework and
the case study that illustrates the use of the framework and provides support for its usefulness.

References

APICS, 2004. APICS Dictionary, 11th ed. APICS, Alexandria, VA.

Antonio, K.W.L., Richard, C.M.Y., Tang, E., 2009. The complementarity of internal integration and product modularity: an
empirical study of their interaction effect on competitive capabilities. Journal of Engineering and Technology Management
26, 305–326.
Armistead, C.G., Clark, G., 1994. The ‘‘coping’’ capacity management strategy in services and the influence on quality
performance. International Journal of Service Industry Management 5 (2), 5–22.
Baines, T.S., Lightfoot, H.W., Benedettini, O., Kay, J.M., 2009. The servitization of manufacturing: a review of literature and
reflection on future challenges. Journal of Manufacturing Technology Management 20 (5), 547–567.
Bayou, M.E., de Korvin, A., 2008. Measuring the leanness of manufacturing systems – a case study of Ford Motor Company and
General Motors. Journal of Engineering and Technology Management 25, 287–304.
Betts, A., Meadows, M., Walley, P., 2000. Call centre capacity management. International Journal of Service Industry Manage-
ment 11 (2), 185–196.
Chase, R.B., 1981. The customer contact approach to services: theoretical bases and practical extensions. Operations Research 29
(4), 698–705.
Chase, R.B., Tansik, D.A., 1983. The customer contact model for organization design. Management Science 29 (9), 1037–1050.
Crandall, J.A., Markland, R.E., 1996. Demand management – today’s challenge for service industries. Production and Operations
Management 5 (2), 106–120.
Fitzsimmons, J.A, Fitzsimmons, M.J., 1998. Service Management – Operations, Strategy, and Information Technology, 2nd ed.
McGraw-Hill, Singapore.
Fowler, S.W., King, A.W., Marsh, S.J., Victor, B., 2000. Beyond products: new strategic imperatives for developing competencies in
dynamic environments. Journal of Engineering and Technology Management 17, 357–377.
Haksever, C., Render, B., Russell, R.S., Murdick, R.G., 2000. Service Management and Operations, 2nd ed. Prentice Hall, Upper
Saddle River, NJ.
Hayes, R.H., Wheelwright, S.C., 1984. Restoring our Competitive Edge – Competing Through Manufacturing. Wiley, New York,
NY.
Hill, T., 2000. Manufacturing Strategy – Text and Cases, 2nd ed. Palgrave, Houndmills, Hampshire.
Hope, C., Mühlemann, A., 1997. Service operations management – strategy, design and delivery. In: Financial Times, Prentice
Hall, Harlow, Essex.
Johansson, P., Olhager, J., 2004. Industrial service profiling: matching service offerings and processes. International Journal of
Production Economics 89 (3), 309–320.
Johansson, P., Olhager, J., 2006. Linking product–process matrices for manufacturing and service operations. International
Journal of Production Economics 104 (2), 615–624.
Johnston, R., Clark, G., 2005. Service operations management – improving service delivery. In: Financial Times, 2nd ed. Prentice
Hall, Harlow, Essex.
Kellogg, D.L., Nie, W., 1995. A framework for strategic service management. Journal of Operations Management 13 (4), 323–337.
Klassen, K.J., Rohleder, T.R., 2001. Combining operations and marketing to manage capacity and demand in services. The Service
Industries Journal 21 (2), 1–30.
Lindström, V., Winroth, M., 2010. Aligning manufacturing strategy and levels of automation: a case study. Journal of Engineering
and Technology Management, doi:10.1016/j.engtecman.2010.06.002.
Metters, R., Vargas, V., 2000. A typology of de-coupling strategies in mixed services. Journal of Operations Management 18 (6),
663–682.
Neely, A., 2008. Exploring the financial consequences of the servitization of manufacturing. Operations Management Research 1
(2), 103–118.
Olhager, J., Rudberg, M., Wikner, J., 2001. Long-term capacity management: linking the perspectives from manufacturing
strategy and sales and operations planning. International Journal of Production Economics 69 (2), 215–225.
Safizadeh, M.H., Field, J.M., Ritzman, L.P., 2003. An empirical analysis of financial services processes with a front-office or back-
office orientation. Journal of Operations Management 21 (5), 557–576.
Sasser, W.E., 1976. Matching supply and demand in service industries. Harvard Business Review 54 (5), 133–140.
 J. Olhager, P. Johansson / Journal of Engineering and Technology Management 29 (2012) 22–33 33

Schmenner, R., 2009. Manufacturing, service, and their integration: some history and theory. International Journal of Operations
and Production Management 29 (5), 431–443.
Swamidass, P.M. (Ed.), 2000. Encyclopedia of Production and Manufacturing Management. Kluwer Academic Publishers,
Boston, MA.
Vandermerwe, S., Rada, J., 1988. Servitization of business: adding value by adding services. European Management Journal 6,
314–324.
Vollmann, T.E., Berry, W.L., Whybark, D.C., Jacobs, F.R., 2005. Manufacturing Planning and Control for Supply Chain
Management, 5th ed. McGraw-Hill, New York, NY.
Zhang, M.J., 2005. Information systems, strategic flexibility and firm performance: an empirical investigation. Journal of
Engineering and Technology Management 22, 163–184.