In this paper, an integrated model of cellular manufacturing systems (CMS) is developed using a new design methodology. The methodology consists of two stages called Cell Design and System Design. In the first stage, parts and machines are grouped into part families and machine cells resulting in a feasible layout with an appropriate material handling system (CMS). The feasibility of this design is evaluated dynamically by simulating each cell independently. Even though each cell might be feasible, the entire CMS with all cells put together might not be feasible. Hence, the design of CMS cannot be implemented until the feasibility of the entire system has been evaluated. This brings in the second stage that involves combining all the cells from the first stage, evaluating their layout or relative allocation in the manufacturing system, and selecting a MHS to transport parts from cell to cell and from buffers to cells. The output of this stage brings to light the exceptional elements in the machine-part grouping such as bottleneck machines and parts which have processing requirements in more than one cell. These exceptional elements lead to inter-cellular movement (ICM). The layout and MHS selection is dependent on the frequency of ICM and must be considered in the design stage. This complicates the analysis and hinder the effort of developing an integrated system. Therefore, to achieve this objective, the paper will provide a systematic approach to the new methodology in an intelligent environment illustrating its applicability through a case study.