Unit 8: Physical Inventory

Lesson 1 · Conducting Physical Inventory

Key concepts

Why count?

Most jurisdictions require a periodic physical count to substantiate the inventory values reported as current assets. Internally, wrong stock figures produce wrong availability information, which in turn leads either to shortages or to excess safety stock.

Stock management unit

Inventory is counted per stock management unit – the smallest stock segment that has its own book quantity. Each unit is counted separately and its difference is posted separately. A stock management unit is identified by:

Note: material group, warehouse number or base unit of measure are not criteria. In warehouses managed with Warehouse Management/EWM the count is done per quant and storage bin instead.

The three phases

The physical inventory document

A document contains the plant and storage location, the planned count date, the materials (with batch or valuation type where relevant), the stock types to count, and a status for each item and the header. Documents are created per plant/storage location – for special stocks additionally per special stock and supplier/customer/project. Storage bin or material group can be used as further grouping criteria.

Each item has an inventory history showing which steps have been done. Document statistics show how many items are open, counted, posted, recounted or deleted.

Entering the count

The count date entered with the first result has two effects: it determines which book quantity is compared (current stock if the count date is in the current period; stock at last period-end closing if it is in the previous period), and it fixes the posting period of the difference posting. E.g. a count dated 30 December is posted in December; if posted in January, posting to the previous period must be allowed. A percentage tolerance can be entered on the initial screen to get a warning if count and book quantity deviate strongly. A count of zero cannot be entered as "0" in the GUI transactions – use the Zero Count indicator (per item or for all uncounted items).

Difference list and posting

When an item is counted its status becomes Counted and the difference is calculated. The difference list (MI20) shows counted quantity, book quantity, difference quantity and difference value across many documents and allows you to enter or change counts, post differences, change documents and flag recounts. Posting the difference creates a material document (movement types 701/702 unrestricted, 703/704 quality inspection, 707/708 blocked) and an accounting document. Differences must be posted for every item, even with a zero difference – only then is the stock management unit's physical inventory complete. Items with status "recounted" can no longer be posted (the new recount document is posted instead).

Tolerance groups (OMJ2) limit the maximum difference value a user may post per document and per item. If the document total exceeds the user's limit, nothing can be posted; if only some items exceed the item limit, the remaining items can still be posted.

The fiscal year comes from the planned count date; all postings for a document must happen in that fiscal year (or in the first period of the next year if backposting is allowed).

Accounting effects

Differences are valued at the current valuation price of the material, so posting them never changes the price.

Posting block, freezing and adjusting book inventory

Example of adjustment: document created with book stock 31 PC; count 35 PC → difference +4. Later a GR of 5 PC is posted with a posting date before the count date → book quantity in the document becomes 36, difference +1 → only 1 PC is posted as surplus.

Process flow

System steps

1. Create a physical inventory document with MI01 (plant, storage location, planned count date, optional posting block/freeze, PI number); change with MI02, display with MI03.
2. Print the count list with MI21.
3. Enter the count with MI04 (count date, optional percentage tolerance, Zero Count indicator where needed); correct with MI05.
4. Analyze with MI20; if needed create a recount document with MI11.
5. Post differences with MI07 (or from the difference list) and display the resulting material document (MB03) and accounting document.

Configuration (IMG)

Lesson 2 · Simplifying Physical Inventory

Key concepts

Combining phases

Note: there is no function to copy a new document from an old physical inventory document.

Fiori app: Create Physical Inventory Documents

The app finds stock that is due for counting and creates documents directly from the result list. Standard filters are plant, storage location and "Not counted since"; further filters such as material type, material group or the key figure "goods issues since last count" can be added, and the search field accepts material, batch, customer or supplier IDs. Only materials with at least one material document are listed, and periods already moved by data aging are not evaluated. As in MI01, documents are generated per plant and storage location; extra options are: split by storage location, material or material group, maximum number of items per document, document date, planned count date, PI number, posting block and freeze book inventory.

Fiori app: Manage Physical Inventory Count

Select documents by planned count date, plant, storage location, PI number etc., open a document and enter or change counts. Items are grouped as Uncounted and Counted. Unlike the GUI transactions (MI04, MI05, MI08, MI09, MI10), a zero count is entered simply as quantity 0 – no Zero Count indicator exists, and an empty field means "not counted". A user-specific deviation percentage can be set via the user action menu to receive a warning on save. Serial-number items are displayed only and cannot yet be processed.

Scanning: the app supports the device camera or an external barcode scanner (set in the user action menu; requires a touch device with SAP Fiori client); manual barcode entry is a fallback. Scanning a document number opens that document; scanning a material number lists all open documents containing it so you can jump to the item. The counted quantity is always entered by hand.

Batch input sessions

Batch input simulates dialog entry so that all transaction checks run, which makes it suitable for mass processing. A session is first generated, then processed (usually in the background) via SM35.

A test run is required before importing a sequential file (test data is maintained in Customizing). Default values for the reports (session name, planned count date, stock types…) are set in OMCN.

System steps

1. In the Fiori app Create Physical Inventory Documents, filter plant/storage location and "not counted since", select rows and create documents with posting block.
2. Open Manage Physical Inventory Count, find the document, enter quantities (0 for empty bins), save.
3. Alternatively use MI10 to count and post in one step for a quick spot check.
4. For mass postings, generate a batch input session and process it in SM35.

Configuration (IMG)

Lesson 3 · Using Situation Handling in Physical Inventory

Key concepts

Many problems stay invisible until someone happens to look: documents not counted on time, differences not cleared, stock in transit overdue, contracts expiring. Situation Handling is an S/4HANA framework that detects such exceptional situations automatically and brings them to the right people – defined via teams and responsibilities – so that they can act early.

Key users with business role SAP_BR_BPC_EXPERT create object-based situation types in Manage Situation Types and message-based types in Manage Situation Types – Message Based. Recipients are determined through Responsibility Management (Manage Teams and Responsibilities). Object-based instances are created whenever the conditions are met; message-based instances depend on the run settings of scheduled application jobs.

Users are informed through: a list entry in My Situations / My Situations – Message-Based; a situation message inside the business app; a Fiori launchpad notification; optional e-mail. The last three channels exist only for object-based situations. Business owners track occurrences with Monitor Situations.

Process flow

System steps

1. In Manage Situation Types, tab Situation Templates, copy MAN_PHYSICAL_INVENTORY_MONITOR.
2. Maintain admin data (ID, name, display sequence when several types exist for the same object).
3. Define the conditions (filters, thresholds) and select Send Notification if launchpad notifications are wanted.
4. Schedule the detection batch job (time zone, start time) where required.
5. Adapt the in-app texts and notification texts; choose single or aggregated notifications and whether updates re-notify.
6. Define recipients via teams/responsibility rules (create teams in Manage Teams and Responsibilities).
7. Optionally flag Monitor Instances; create and enable the situation type.

Lesson 4 · Applying Cycle Counting (Optional)

Key concepts

Cycle counting counts selected materials several times per fiscal year – fast-moving or valuable items more often than others – while still guaranteeing that every stock unit is counted at least once a year (it is a complete inventory method). Unrestricted, quality inspection and blocked stock can be included.

Materials are grouped per plant by the cycle counting indicator (material master, plant data). Customizing (OMCO) defines per plant and indicator:

The interval (not the count frequency) is what document creation uses. If the factory calendar changes later, the interval is not recalculated automatically – re-enter the indicators.

Setting the indicator

The CC indicator can be maintained manually or by the ABC analysis report RMCBIN00 (MIBC), per plant and material type, based either on consumption (corrected total consumption × valuation price) or on requirements (independent requirements, sales orders, dependent requirements, STO requirements × price). The report lists new and old indicator, value, share and cumulative share, and can update the material masters. An indicator fixed in the material master (shown highlighted in the report) cannot be changed by the report – only manually in the material master.

Example from the handbook: with A = 12 counts (56 % of value), B = 6 (28 %), C = 3 (14 %), D = 1 (2 %), 200 pumps split into 9 A-items (+1 fixed A-item), 21 B, 51 C and 118 D, totalling 517 counts per year.

Creating documents

Report RM07ICN1 (MICN) selects materials due within an interval of planned count dates. Planned count date = date of last count of unrestricted stock + interval of the CC indicator. Example: interval 10 workdays, last count Wednesday last week → due next Wednesday. You can first display a control list, which shows (1) units for which no document can be created, (2) units with an active, overdue inventory (excluded because a document is still open), (3) units due in the planning period, with overdue dates highlighted. The batch input session creates the documents; when differences are posted, the count date becomes the material's new "last count" date.

Process flow

Configuration (IMG)

Lesson 5 · Applying Inventory Sampling (Optional)

Key concepts

Inventory sampling counts only a random sample of stock management units and extrapolates the result to the total stock value. It is acceptable only if the result is as reliable as a full count: the counting error (smaller, because fewer items are counted) plus the extrapolation error must not exceed the total error of an equivalent full inventory. The method works well when values follow a Lorenz curve – roughly 80 % of units make up only 20 % of value. Those many low-value units are sampled, while the few high-value units are counted completely.

Each sampling is created with an area (Inventory Management or Warehouse Management) and an inventory sampling profile (OMCK) providing calculation currency and default parameters aimed at minimizing extrapolation error.

Steps of selection

1. Select stock management levels – a level groups all units with the same material type, plant, storage location and stock type (in WM: warehouse number and storage type). Allowed levels are defined in OMCL; the sampling document chooses which participate. Units already in an active inventory are excluded.
2. Form the stock population – all units of the chosen levels, divided into the complete-count area and the sampling area. A unit goes to complete count if: deletion flag set, book stock zero, certain ABC indicator, price above a limit, or value above a limit. An upper value limit restricts the sampling area; the sampling area is split into up to 1,000 value classes (class interval = upper limit / 1000, rounded up).
3. Form strata – neighbouring classes are combined into strata using the Dalenius-Hodges method (needs number of elements per class and number of strata). Sample size and stratification parameters should be agreed with the external auditor.
4. Random selection – per stratum, using an internal random number generator (linear congruence method). From this point levels, population and strata are fixed. A batch input session is generated (documents are not yet created), covering the sampled units plus all complete-count units.

The documents then go through the usual three phases (create, count, post). A posting block, if used, only applies between document creation and count entry.

Update and extrapolation

Counts and postings are stored in the PI documents; the sampling itself is refreshed only by an update, which reads newly posted counts, determines changes in book quantities/values and proposes follow-up random selections. Because uncounted units may still be moved, sampling is "permanent": a unit can change stratum or even move to the complete-count area (it must then be counted – a subsequent selection is proposed).

The SAP system uses stratified mean-value estimation. The result covers parameters, per-stratum figures, the sampling area, the complete-count area and the overall result; the full printout is the audit evidence.

Process flow

Configuration (IMG)

Unit summary & exam focus

T-codes in this unit

Self-check questions

1. Which criteria define a stock management unit?
   Answer

   Material, plant, storage location, stock type, batch, valuation type and special stock (with partner).
2. What two things does the count date determine?
   Answer

   Which book quantity is compared (current vs. last period-end) and the posting period of the difference posting.
3. Must an item with zero difference be posted?
   Answer

   Yes – only the difference posting completes the physical inventory for that stock management unit.
4. What is the difference between posting block and freeze book inventory?
   Answer

   Posting block prevents goods movements; freezing allows movements but keeps the book quantity for the count fixed. Freezing must be allowed per storage location.
5. Which accounts are posted for a shortage in supplier consignment stock?
   Answer

   The shortage is treated as a withdrawal: debit expense from inventory differences, credit consignment liabilities (KON).
6. How do MI08, MI09 and MI10 differ?
   Answer

   MI08: count + post for an existing document; MI09: count without document (document generated); MI10: all three phases in one step.
7. Can the ABC report change a fixed CC indicator?
   Answer

   No; a fixed indicator can only be changed manually in the material master.
8. Which units end up in the complete-count area in inventory sampling?
   Answer

   Units meeting profile criteria: deletion flag, zero book stock, certain ABC indicator, price or value above a limit (and units above the upper value limit).