An example method is provided in one example embodiment and may include configuring a measurement indication for a packet; forwarding the packet through a service chain comprising one or more service functions; recording measurement information for the packet as it is forwarded through the service chain; and managing capacity for the service chain based, at least in part, on the measurement information. In some cases, the method can include determining end-to-end measurement information for the service chain using the recorded measurement information. In some cases, managing capacity for the service chain can further include identifying a particular service function as a bottleneck service function for the service chain; and increasing capacity for the bottleneck service. In various instances, increasing capacity for the bottleneck service can include at least one of: instantiating additional instances of the bottleneck service; and instantiating additional instances of the service chain.