This paper presents a mathematical model. The model is used to integrate the design of cellular manufacturing systems with the design of a production network. The objective of the model is to minimize the sum of production and supply-chain costs. The model selects production (facility) locations and forms cells in the selected locations. Two heuristic procedures are presented to solve the model. These procedures are used to generate solutions for several test problems. The test shows the heuristic procedures generate solutions in a reasonable time frame. The results also show that the best solutions were generated by a tabu search procedure. The proposed approach is also compared with an approach that independently selects locations and then forms cells. This second test shows that reduced costs can be obtained using the integrated model.