In this paper, a capacity allocation problem is discussed based on a more complex supply chain than has been typically considered in previous quantitative modelling studies. This study analyses an integrated supply chain operation from raw material purchasing to final product distribution. The aim is to optimize the allocation of capacities among different facilities and product items. In this paper, a mixed integer programming model with dynamic characteristics is presented first, and then alternative solution procedures are introduced. The solution procedures include the development of a decomposition heuristic and an integrated heuristic algorithm. A computation study compares the solution procedures and uses sensitivity analysis to show that the heuristics work well. Thus, by adequately modelling a more realistic sized supply chain problem, this study represents an important advance in supply chain modelling research.