This paper deals with the development of an algorithm for concurrent formation of part-families and machine-cells in group technology. The acronym ZODTAC stands for zero-one data: ideal seed algorithm for clustering. The present algorithm is an expanded and improved version of the earlier ideal seed method. The formation of part-families and machine-cells has been treated as a problem of block diagonalization of the zero-one matrix. Different methods of choosing seeds have been developed and tested. A new concept called ‘relative efficiency’ has been developed and used as a stopping rule for the iterations. The ZODIAC procedure and its theory are given in detail. Test results with a 40 × 100 matrix are shown.