What is Physical Inventory?
Physical inventory is a process of determining that the inventory quantities are exact, or if there are differences in quantity mentioned physically present and that mentioned in the SAP system. Basically, after you are finished with physical inventory, your system and physical stock levels must be the same.
It is mandatory for legal reasons, and in the most of the times it is conducted once a year.
To simplify the process, check the below diagram, these are the most common steps for doing physical inventory (not only in SAP ERP).
Besides the legal reasons it is extremely helpful having the correct stock quantities in the system matching the physical stock. Management can have the correct information on the value of stock materials. ATP for sales is correct. MRP is done using the correct input parameters (material stock quantities).
Not having the correct stock levels in the system means quite the opposite. Management has the wrong picture on the financial aspect of the stock in possession. ATP uses the wrong data (sales might not be able to sell something physically on stock but not existing in the system, or system might allow selling something that isn't physically present in the warehouse). MRP is inaccurate (production planning and other material planning processes might be in a big problem as they are required to calculate the needs for production/procurement based on stock levels and several other information).
Now you see that having a clear and correct stock levels is of immense importance for a lot of processes in a company. Now you will see how physical inventory is done in MM module.
Types Of Physical Inventory
The following physical inventory procedures can be used in SAP system:
- Periodic inventory
- Continuous inventory
- Cycle counting
- Inventory sampling
Periodic inventory Most of the time companies use this kind of inventory. In most cases, it is done once a year, and this kind of inventory is called annual physical inventory. That means that material stock is counted once a year. Most of the times at the end of the year or after the season ends (in seasonal industries).
Continuous inventory All materials are counted at some point in the year, but that can be at any day appointed for. So we can count some material in February, others in April and so on. A single material can be counted on a single date. This type of inventory is mainly utilized in warehouse management based warehouses, but it can be done in inventory management too.
Cycle counting This type of inventory allows us to set a period for regular intervals for physical inventory on the material level. So a fast moving and high value material can be counted four times a year while slow moving and low value material can be counted once a year. The indicator for this is set in material master in the Plant/Storage Location 1 View, in the field
CC phys. Inv. Ind. Inventory sampling Only a number of randomly selected materials are counted on the balance sheet key date, and if those materials show small enough differences, the other materials can also be considered to have a correct stock levels. Not really used that often, as it is essentially an approximation, but in some cases it can be used if material and warehouse structure imply that.
We will explore the most common – annual inventory option in the following topic.
Creating Physical Inventory Document
The following procedure can be used in creating and processing of the physical inventory document.
- Execute the transaction MI01.
- Enter document date and planned date for counting (leave the default for today).
- Enter Plant/Storage location/Special stock indicator.
- Choose if you want Posting Block (if there is a possibility that someone will do a posting while physical inventory is in progress enable this – material level), Freeze book inventory (current book inventory balance will be recorded in the physical inventory document if this option is enabled), and if you want to count batches with deletion flag (self explanatory). Press ENTER.
- Enter the material number(s) you want to include in this physical inventory document.
- Save the transaction data.
You will be informed of the newly created physical inventory document number.
- Execute the transaction MI02 to make changes to the document (if needed).
- Double click the item if you want to check if the counting has already been done.ž
- If you need to delete the document, you can set the deletion indicator.
- You can see in the item level that our material has not yet been counted.