This paper deals with a Direct-Input-Output Manufacturing System (DIOMS) which has a number of machine centers placed along a built-in automated storage/retrieval system (AS/RS). During its operations, the storage/retrieval(S/R) machine picks up a pallet from the pickup/deposit port of a machine center and then moves it either to an empty rack opening of the AS/RS for temporary storage or to place it on the port of another machine center for subsequent operation. The machine layout problem in DIOMS is formulated as an integer mathematical programming whose objective is to minimize the total expected distance of the loaded S/R machine during a production period. Recognizing the limit of the exact solution procedure(the Branch and Bound method), two improvement-type heuristics are proposed. One is based on the simulated annealing method and the other the pairwise interchange method. The validity of the heuristics is examined with example problems.