All About Physical Inventory

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 samplingPeriodic 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.

Step 1)

1. Execute the transaction MI01.
2. Enter document date and planned date for counting (leave the default for today).
3. Enter Plant/Storage location/Special stock indicator.
4. 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.

Step 2)

1. Enter the material number(s) you want to include in this physical inventory document.
2. Save the transaction data.

You will be informed of the newly created physical inventory document number.

Step 3) Optional step.

1. Execute the transaction MI02 to make changes to the document (if needed).
2. Double click the item if you want to check if the counting has already been done.ž
3. If you need to delete the document, you can set the deletion indicator.

Step 4) Optional step.

1. You can see in the item level that our material has not yet been counted.

Step 5) Optional step.

1. On header level, you can edit the data entered during the creation of the physical inventory document.

You are now finished with creating (and changing the physical inventory document). You can display the document with MI03 transaction code.

Entering the Counting Results
In the following topic, I will show you how you can enter the counting results in the physical inventory document.

The process is fairly easy, but it needs to be accurately executed because the error in entering the counting results in poor stock balances later. So, there is high need that the counting process as well as entering process both be accurate.

Step 1)

1. Execute the transaction code MI04.
2. Enter physical document number and fiscal year.
3. Enter the counting date if it differs from the one suggested.
4. Enter the variance percentage. This means that if you had 100 pcs on stock before the physical inventory process, and you enter 107 pieces as a counting result, you will be informed with a warning message of the difference between the previous stock quantity and the counted quantity.
   Press ENTER.

Step 2)

1. Enter the quantity that is counted for this material.
2. Press ENTER.

You will be informed that there is a quantity difference of 20 pcs, if you haven’t made a mistake while entering the quantity, you can bypass the warning by pressing ENTER. If you made a mistake while entering the quantity, you can correct the entry (124 pcs in my case) and hit ENTER again.

If you get the warning message, and you think that there might be a mistake in the counting process, you can recount the item again and correct the results (check out MI05 transaction code, and MI11 if needed).

After I have corrected my entry to 124 pcs, I will save the transaction data.

Posting the Differences
After you have possibly recounted and reentered quantity information for problematic materials, you can post the differences by using the transaction MI07.

Step 1)

1. Execute the transaction MI07.
2. Enter your physical inventory and fiscal year.
3. Enter posting date. Goods posting will be done according to this date. Some companies use 31.12. In the annual physical inventory as the last day of fiscal year.
4. You can use the threshold value to enter the maximum allowed differences value in local currency. If you don’t want a limit leave this field blank. In order for this to work, materials need to have the standard or variable price maintained.
5. Press ENTER.

Step 2)

1. You can see the difference quantity. This means that we have found 4 pieces more than it was previously stated in the system.
2. Value isn’t shown as our controlling/accounting department didn’t yet release the prices for this material. This needs to be done in a production environment. You cannot post a difference of 4 pieces with the respective value of 0,00 Eur.

We can see that our posting is done by creating the resulting material document 4900547510.

Step 3) Optional.

We can check the material document in MB03.

1. We can see a quantity of 4 pcs in the material document.
2. Movement type used for goods receipt from physical inventory difference posting is 701.

This means that 4 pieces are added to the inventory.

For a reference of standard movement types, used for physical inventory, see the below table.

• 701 – Goods Receipt for unrestricted stock
• 702 – Goods Issue for unrestricted stock
• 703 – Goods Receipt for quality inspection stock
• 704 – Goods Issue for quality inspection stock
• 707 – Goods Receipt for blocked stock
• 708 – Goods Issue for blocked stockYou are done with physical inventory. You can now continue with regular warehouse activities.