A new, efficient clustering method for solving the cellular manufacturing problem is presented in this paper. The method uses the part-machine incidence matrix of the manufacturing system to form machine cells, each of which processes a family of parts. By doing so, the system is decomposed into smaller semi-independent subsystems that are managed more effectively improving overall performance. The proposed method uses Self Organizing Maps (SOMs), a class of unsupervised learning neural networks, to perform direct clustering of machines into cells, without first resorting to grouping parts into families as done by previous approaches. In addition, Latent Semantic Indexing (LSI) is employed to significantly reduce the complexity of the problem resulting in more effective training of the network, significantly improved computational efficiency, and, in many cases, improved solution quality. The robustness of the method and its computational efficiency has been investigated with respect to the dimension of the problem and the degree of dimensionality reduction. The effectiveness of grouping has been evaluated by comparing the results obtained with those of the k-means classical clustering algorithm. Copyright Springer-Verlag Berlin/Heidelberg 2004.