The paper reports on a new methodology for formation of virtual and re-configurable machining cells using generic capability patterns termed "Resource Elements" to uniquely describe the processing requirements of the component mix and dynamically match them to the processing capabilities of the machining shop. The virtual cell formation methodology has two steps: definition of virtual cell capability boundaries and machine tool selection. The capability boundaries of the virtual cells are decided by concurrent clustering of components based on their processing requirements expressed in terms of resource elements. Virtual cells are formed by assigning machine tools to each component cluster utilising different system strategies. The formation process is constrained by a validation procedure for selection of optimum set of virtual cells. The superior performance of the resource elements based virtual cell formation methodology is illustrated using industrial data.