We present an algorithm for tool placement in an automatic tool change (ATC) magazine, such as used in CNC machining centres. Given the sequence of tools used to execute the manufacturing processes in the machining centre, the objective of the algorithm is to allocate the tools to positions in a tool magazine, in such a way that the tool change time is minimized. The problem has been reduced to being described as a travelling salesmen problem (TSP). The suggested algorithm solves this problem using a modified 'nearest neighbour' procedure, with a series of different weight parameters. Extensive testing of the procedure on a large set of randomly generated problems with various characteristics, leads to recommendation of the best set of parameters to be used with the nearest neighbour procedure. The algorithm, when implemented with the best set of parameters, is especially effective for complex problems with large number of tools and low frequency of tool use (up to 15% improvement in comparison with existing methods). The algorithm is very fast and can be executed in real time. As such, it may become part of the controller software of SSMS and FMS, and be used for real-time optimal tool placement in a computer-integrated manufacturing environment.