Cellular Manufacturing Systems (CMS) have provided significant increase in manufacturing productivity over the last two decades. This has been achieved because CMS can overcome the problems due to frequent setups, high in-process inventories, long throughput times and complex planning and coordination commonly associated with a batch-type manufacturing operation. The underlying concept of CMS is the grouping of parts into part families and the machines that process these parts into machine cells in order to achieve manufacturing efficiencies. Creating machine cells which can perform all operations of a part without requiring the part to visit one or more cells other than its own is hard to achieve, if not impossible. Hence, in the design of CMS, one tries to minimize the material handling costs incurred due to the movements of parts to other cells. Duplication of "bottleneck" machines that process parts assigned to other cells into the appropriate cells and subcontracting of "bottleneck" parts that require one or more operation on machines assigned to another cell are two important methods utilized to form disaggregated manufacturing cells in order to minimize the material handling costs. A mathematical model and a solution algorithm is developed to simultaneously deal with the issues of duplicating bottleneck machines and subcontracting bottleneck parts. Because there is a cost associated with the process of duplication and subcontracting, the benefits attained are analyzed for different budgetary constraints encountered by a firm. The algorithm was tested on three different problem structures for a range of budgetary restrictions. The results obtained show that the algorithm could be used by the industry to solve problems encountered in the design of CMS. / Graduation date: 1994