This study presents a new mathematical model for the design of reliable cellular manufacturing systems, which leads to reduced manufacturing costs, improved product quality and improved total reliability of the manufacturing system. This model is expected to provide a more noticeable improvement in time and solution quality in comparison with other existing models. Each part to be manufactured may select each of the predefined manufacturing routes, such that the total reliability of the system is increased. On the other hand, the model adopts to categorize the machines to determine the manufacturing cells (cell formation) and reduce the transportation costs. Thereby, both criteria of system reliability and manufacturing costs will be simultaneously improved. Due to the complexity of cell formation problems, a two-layer genetic algorithm is applied on the problem in order to achieve near optimal solutions. Furthermore, the performance of the proposed algorithm is shown for solving some computational experiments. Finally, the results of a practical study for designing a cellular manufacturing system as a case study in Iranian Diesel Engine Manufacturing Co., Tabriz, Iran are present.