The performance of cellular manufacturing systems is intrinsically sen
sitive to demand variations and machine breakdowns. A cell formation m
ethodology that addresses, during the shop design stage, system robust
ness with respect to product demand variation is proposed. The system
resources are aggregated into cells in a manner that minimizes the exp
ected inter-cell material handling cost. The statistical characteristi
cs of the independent demand and the capacity of the system resources
are explicitly considered. In the first step of the proposed approach
the expected value of the feasible production volumes, which respect r
esource capacities, are determined. Subsequently, the shop partition t
hat results in near optimal inter-cell part traffic is found. The appl
icability of the proposed approach is illustrated through a comprehens
ive example.