Reconfigurable manufacturing systems are complex systems that are prone to malfunctions and performance decay. Thus, such systems need to be safeguarded against quality issues and decline in production efficiency to ensure the optimal health of machines. The product quality and health of a reconfigurable manufacturing system can be analyzed by using the diagnosability characteristic. This study examines the diagnosability characteristic in a multi-stage reconfigurable manufacturing system. The aim is to understand the impact of time-based diagnostics on the functionality performance of a reconfigurable manufacturing system and the level of inventory used during production. The diagnosability is analyzed regarding product variation and system diagnosability. A mathematical model is proposed, and it is subsequently applied in deterministic and stochastic settings. The deterministic setting is examined through a set of two problem-specific heuristics. The stochastic setting, subject to the gamma process, is examined by using a simulation-based optimization approach. The results suggest that the use of line replacement units can restore a reconfigurable system to optimal functionality, reduce the level of inventory, and complete production in minimum time at the expense of additional cost. Finally, a conclusion and future research avenues are provided.