Economic Order Quantity - How EOQ is useful for SME Businesses | TranZact

Dec 6, 2021 in Production



There are many concepts involved when we talk about Inventory Management. Further, every business needs to manage its inventories to fulfill its customer’s needs. So, in maintaining these inventories, the activity of re-ordering the raw materials you all use takes place. And in this particular situation, many small businesses make the mistake of ordering only that much quantity of products they need at that time. Instead of doing this, you all can use the Economic Order Quantity formula (EOQ) to enhance the way you order and pay for these goods.

Now, before talking more about the benefits and usage of the Economic Order of Quantity formula. Let’s take a glance at what it means.

What is Economic Order Quantity (EOQ)?

Economic Order Quantity | TranZact

The term EOQ (whose full form is Economic Order Quantity) is an optimum order quantity (or in some case levels) of goods that the organization needs to consider while purchasing the products to minimize their inventory holding costs, order costs, and inventory costs.

So, to make it clearer, the EOQ is a formula for calculating the optimum quantity of raw materials a company needs to purchase while giving the order for that requirement. With its help, the cost of warehousing or stocking the materials, logistics costs, and the purchase price all get reduced to a minimum level. And this happens because of a particular order quantity size.

EOQ = Square Root of ((2*S*D)/H)

S stands for Setup costs (per order).

D stands for Demand Rate (goods quantity sold in this year).

H stands for Holding costs (per year, per unit).

Read More about - Inventory Management: Ultimate Guide for SMEs

Why you all must use EOQ?

Apart from helping you all out in managing your purchase time order quantities. The EOQ formula aids businesses in many other ways. So here are some advantages which the Economic Order of Quantity formula provides to companies.

1. Reduces Inventory Costs.

If you use the old way to give the order of goods, you may order and hold goods that have low velocity for sale. And due to this, they occupy your storage space and involve maintenance and many other costs. But with the help of EOQ, you can remove this type of error while you are ordering. Further, it will help in improving your Capital situation. And these additional funds can get a better utilization in some other way in the business.

2. Reduces Stockout Situation.

With the help of the Economic Order of Quantity formula, the business can easily manage its inventory levels. Further, they can decide the re-order points. And with the optimum quantity, it will help to remove the possibility of a stockout situation in the organization.

Read More about - What is the Significance of Accurate Inventory Levels?

3. Progress in Customer Happiness.

In the event when the customer has made an order, he doesn't get his product at the promised time. It becomes the most terrible experience for the customer. But with the help of the EOQ formula, the companies maintain proper inventory levels. So they can fulfill these customer orders at a time which improves the customer's experience with the organization.

4. Enhances Overall Performance.

With the help of EOQ calculations, the organization can manage all its product lines easily. Further, they can more efficiently handle their Capital needs and make better business decisions. Because all their decisions will be based upon the essential data facts generated with EOQ and its calculation process.

Way Forward

With the above discussions, you all may now understand the importance of Economic Order Quantity in a company. So if you are a very small business dealing with only one product, you may consider calculating the EOQ manually. But if you are dealing with multiple products calculating the EOQ for each product every time you order is a very difficult task. And that is why you need a software application to do this task for you. It will do all these calculations quickly with no errors, and you can make efficient decisions on the basis of this data.

Read More about - 6 ‘Must Haves’ Features For Your Inventory Software

So to help you in this, there are many software applications in the market. Further, while choosing between the different software available in the market, you should opt for the one that is solving all your problems. And is perfect for your business nature and size. And TranZact is also one such software that will help you. 

TranZact is a zero-effort Digital Transformation tool that helps digitize the entire business process right from Inquiry to Sales & Dispatch. Plus, it is very suitable for small businesses and manufacturing concerns. And it will help you all in your Economic Order Quantity calculations easily.


TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.