Machine cell formation in design of cellular manufacturing systems has traditionally ignored the issues of reliability. As such, the machine cell formation methods have been developed without the explicit considerations of system reliability and maintainability and the systems designed by these methods may have poor reliability and maintainability and hence result in low availability and productivity. In this paper, we discussed how the reliability issues should be incorporated into solving machine cell formation problems. A new formulation for machine cell formation with reliability considerations in cellular manufacturing systems was developed. The formulation is based on multi-attribute utility theory and represents the tradeoff the designers are willing to make between reliability and other design attributes in design of cellular manufacturing systems. An example was used to illustrate the application of the formulation for machine cell formation with reliability considerations. An algorithm for determining the optimal machine cell size in design of cellular manufacturing systems is also proposed.