Physical Inventory is more than just SAP – Legal Background and Preparation
In many discussions the physical inventory process is just reduced to a sequence of SAP transactions.
I often miss the reference to the reality, what in reality has to happen to make a physical inventory a success instead of a show stopper for the business.
There is actually much more work outside SAP than with SAP.
And in this blog I would like to tell you how we used to organize a physical inventory to keep the impact on the daily business as minimal as possible.
The legal background
Why do we need to take a physical inventory?
It is a legal requirement in Germany (German commercial code §240 HGB) to do a physical inventory when you start a new business, then with each end of a fiscal year and when you shut down your business. Similar laws can be found in other countries too.
How often do we need to take a physical inventory?
The law just requires to count the materials once at the end of a fiscal year.
But do you really only count your inventory because of the law, or do you benefit yourself by having an accurate quantity in your system?
Accurate quantity is needed for almost all activities in SAP to get better results in e.g. material requirements planning, in availability checks and less interruptions when fulfilling the demand.
Hence companies with low accuracy decide to count more often than legally required and use Cycle Counting to count important items more frequently than less important materials to reach a higher accuracy, while companies with high accuracy want count less and minimize the interruptions of usual business for the physical counts.
What inventory methods are allowed?
Even this is ruled by law. In general you have to count on the financial statement date, this method is known as annual inventory.
As this is not always practical some exceptional methods are allowed too.
Timely annual inventory allows to count the stock within 10 days before or after the financial statement date.
Advanced/postponed physical inventory allows to conduct the count within 3 months before or after the financial statement date. The value at financial statement date is then calculated based on the movements happened between counting date and financial statement date.
Continuous inventory is allowed if each movement is properly maintained in a stock ledger.
Whatever method you use, you have to ensure that each item is counted once per year.
What to count?
in general the stock you own, raw materials, spare parts, operating supply, intermediates, work in process and finished materials.
Preparation of a physical count
The head of the physical inventory has to develop the physical inventory manual. The date(s) for the physical count has to be nominated. The auditors have to be informed and invited for those dates. The counting areas have to be identified and allocated to the counting teams. The inventory documents have to be prepared, will be filled with the counted quantities by the counting team, finally being signed by the counter and the auditors and kept for 10 years.
Determine Materials and Locations to count
Existing inventory reports like MB52 in inventory management and LX02 in Warehouse Management module are helpful to get an overview about the locations and materials that you have to count. So an estimate about the effort and needed resources can be made early.
In case of Cycle counting method you can use the ABC classification to assign counting intervals to your materials.
Schedule Physical Inventory
In case of annual inventory the date for the count is almost given with the legal requirements. In case of continuous inventory you are more free to decide about the counting dates yourself. So you probably count more in periods where you know from experience that you have less business, e.g. time of Summer holidays. However the schedule need to be communicated to auditors and all affected parties like Sales, Purchasing and Production etc. Sales and Purchasing departments may want to insert a standard text on orders informing customers and vendors about a plant shut down or possible delay because of physical inventory activities. All people who post movements have to be informed that all postings have to be as current as possible for an accurate inventory, you have to think about outstanding goods receipts, goods issues and stock transfers. This helps to minimize the inventory differences and of course the time for their analysis.
Before performing the count you have to prepare and organize the resources. Plan sufficient time for this activity.Think about the availability of personnel and equipment. The resources needed may vary from the type of count and the materials to be counted.
About what resources we are talking here?
- People: to create and print inventory documents, counters, re-counters, auditors, people to enter the count, difference approvers
- Safety Eqipment: helmet, saftegy glasses, shoes, gloves, first aid kit
- Tank specifications, conversion tables
- Thermometers, Gauge poles,
- tapes to mark materials/locations to be excluded from count (e.g. vendor consignment stock, already sold but not shipped materials)
- tags to lable the counted materials to avoid double counting
- pens, calculators to fill out the counting sheet
- Scales to weigh e.g. partially filled drums who show an obviously wrong weight on the lable
As you could read there is a lot to be managed before you even start with creating physical inventory documents.
In a next blog I will specifically talk about organizing the count: Physical Inventory is more than just SAP – Strategic counting