In this paper, an integrated mathematical model of multi-period cell formation and part operation tradeoff in a dynamic cellular manufacturing system is proposed in consideration with multiple part process route. This paper puts emphasize on the production flexibility (production/subcontracting part operation) to satisfy the product demand requirement in different period segments of planning horizon considering production capacity shortage and/or sudden machine breakdown. The proposed model simultaneously generates machine cells and part families and selects the optimum process route instead of the user specifying predetermined routes. Conventional optimization method for the optimal cell formation problem requires substantial amount of time and memory space. Hence a simulated annealing based genetic algorithm is proposed to explore the solution regions efficiently and to expedite the solution search space. To evaluate the computability of the proposed algorithm, different problem scenarios are adopted from literature. The results approve the effectiveness of the proposed approach in designing the manufacturing cell and minimization of the overall cost, considering various manufacturing aspects such as production volume, multiple process route, production capacity, machine duplication, system reconfiguration, material handling and subcontracting part operation.