This research investigates the problems of system design in a hybrid cellular manufacturing (CM) system with loop layout. A hybrid CM system comprises a cellular layout and a functional layout. In labor-intensive industry, the functional layout is organized into production modules. The operator of every module is able to perform different kinds of tasks for one specific function. However, each operator is assigned to only one of the operations. This manufacturing system has emerged due to the high product variety in fashion industry that is usually highly labor-intensive. This study presents a new approach for system design to improve system performance. A three-phased simulation model is derived. The bottleneck machines of a cell are located in the first phase, and the cell workload and system workload are balanced in the second and third phase. Incorporating simulation models and optimum seeking procedure, the appropriate values of controllable parameters are proposed according to the objective of the production. The three-phased method is applied to the hybrid CM system of a footwear factory.