Manufacturing industries are under intense pressure from the increasingly competitive global marketplace. Shorter product life cycle, time-to-market and diverse customer needs have challenged manufacturers to improve the efficiency and productivity of their production activities. Manufacturing systems should be able to adjust or respond quickly to adopt necessary changes in product design and product demand without major investment. Traditional manufacturing systems, such as, job shops and flow lines are not capable of satisfying such requirements. Although a cellular manufacturing system (CMS) provides great benefits, the design of CMS is complex for real life problems. Existing design methods employ simplifying assumptions, which often deteriorate the validity of the models used for obtaining solutions. In this paper, a method of flexible CMS has been discussed and a case study is presented in a reputed gear manufacturing industry, which converted functional layout into CMS. There was reduction of Rs 1 05 234.84 in the total cost per week after converting functional layout into CMS. The CMS worked successfully with two different machines-parts combinations.