The performance of cellular manufacturing systems is intrinsically sensitive to demand variations and machine breakdowns. A cell formation methodology that addresses, during the shop design stage, system robustness with respect to product demand variation is proposed. The system resources are aggregated into cells in a manner that minimizes the expected inter-cell material handling cost. The statistical characteristics 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 resource capacities, are determined. Subsequently, the shop partition that results in near optimal inter cell part traffic is found. The applicability of the proposed approach is illustrated through a comprehensive examples.