The Perrego algorithm, which forms machining cells based upon the weighted importance of the parts which they produce, is presented. Classification and coding (C&C) and production flow analysis (PFA) were synthesized into one single algorithm using similarity coefficients and a cluster identification algorithm to combine the two methods. The resulting unique algorithm's advantage is the utilization of morphological information, such as manufacturing production quantity requirements, with the technological attributes of the parts: cells were formed with minimal amounts of parts travelling between cells. The algorithm also considers the economics of machine duplication for forming independent cells.