Group technology is a management philosophy capable of jointly simplifying management control and improving productivity. This paper proposes a heuristic approach to the economic determination of machine groups and their corresponding component families for group technology. The procedure considers costs of work-in-process and cycle inventory, intra-group material handling, set-up, variable processing and fixed machine costs. The three stage procedure initially reorders part types based on routing similarity. An attempt is then made to combine adjacent part types to reduce machine requirements. Finally groups are combined where economic benefits of utilization offset those of set-up, work-in-process and material handling. Examples illustrating the procedure and potential savings are included.