Optimizing the warehousing operation is a compelling objective in all types of industries. Having correct stock information delivered at the right time is one of the key factors to achieve an optimized warehouse. This is evident, for example, in the outbound shipping operation.

Delays caused by “out-of-stock” situations from inaccurate stock figures may have severe consequences, including financial penalties for unfulfilled customer orders, extra cost for transportation delays, and problems in the manufacturing and planning systems because you must accommodate orders in a rush mode for the missing products. The inventory count strategy can help you avoid these types of situations.

First, I’ll help you select the inventory count method that is most suited to your environment by providing an overview of how SAP addresses inventory count processes. Second, based on my experience, I’ll provide advice about the choices for running the transactions required in the process and performing the configuration in the system. I’ll guide you through the process to complete an optimum configuration for the standard inventory count options for SAP Warehouse Management (WM) centralized with SAP Materials Management (MM) in SAP ERP Central Component (ECC 6.0). However, the process I describe also applies to previous versions of WM.

Options for Managing Inventory Count

The main three inventory count methods in SAP are:

• Annual inventory
  
  
• Continuous inventory (including physical inventory for the first putaway and zero stock check)
  
  
• Cycle counting (including the newer dynamic cycle counting)

Annual inventory. Usually you perform this task at fiscal year end when it is compulsory to have a full reconciliation of the stock in the warehouse. The annual inventory count fulfills the minimum financial and auditing requirements, but concentrates all of the workload in a critical season. This may require additional staff to run the inventory while coping with the ongoing operation.

The annual inventory strategy also creates a risk of delays in the inbound and outbound processes because you need to minimize the internal warehouse transfers. An annual count does not help to reconcile the stock figures in a timely manner. Finally, an annual count may require you to block a large amount of warehouse bins at a given time, which may affect shipping and receiving activities during the count.

You usually run an annual inventory count for areas that you do not count using other methods during the year. In reality, an annual inventory count is a complementary option to the continuous inventory and the cycle counting methods to ensure that you complete the bin counting by fiscal year end.

Continuous inventory. This is the process of counting a certain number of bins in a storage type. The user selects the bins to count. The key advantage over the annual inventory is that you can run it during the year in parallel with the shipping and receiving operations, taking advantage of low activity periods. A continuous inventory also updates the stock information more often during the year, so you can take ongoing corrective actions, which makes reconciling the results more effective. You use continuous inventory counts mainly in locations in which stock is easy to access, such as in high racks.

Cycle counting. In this case, the counting takes place based on predefined material classes allocated at the material master level. (I’ll explain material classes in detail in the “Configure Cycle Counting in WM” section on page 13.) This allows you to count some materials more than others based on factors such as turnaround speed and value or importance of the stock accuracy for the operation.

However, this option requires a more complex setup than continuous inventory. You use cycle counting when it’s easy to access the bins to count the stock. Cycle counting also offers the chance to perform the inventory at the quant level, rather than at the bin level. These features could be plant, batch number, stock category, or special stock indicator. Counting on a quant level allows you to optimize your inventory efforts because you do not need to count all of the items in a bin.

Table 1 provides further insight into the use of each WM inventory count method. Depending on specific operation factors, the suitability factor is allocated to guide you in the selection of the method that fits best with your warehouse requirements.

A subset of inventory methods exists for the continuous inventory method — physical inventory for the first putaway and zero stock check. They integrate the count process with the usual user activities. On their own, these two methods may not allow you to effectively count all of your bins during the same year, but they add value from the inventory control perspective. Additionally, they may help in situations in which you do not often rotate stock or when the stock is not easily accessible for the count, such as with bulk storage types.

Physical inventory for the first putaway. This method consists of counting the warehouse bins the first time stock is placed during the fiscal year. At this point, WM prompts the operator to perform a bin count. In this case, the system is not expected to count the bins again during the year, so for audit purposes, you should archive all transfer orders affecting the bin.

Zero stock check. This is an alternative process to the continuous inventory count that requires an inventory check when the system finds that a bin will be empty when a stock removal transfer order is confirmed for that bin. The zero stock check is restricted in that it is not available for mixed storage and for bulk areas managed by storage units.

How the Inventory Count Process Works

Next I’ll describe how you execute the inventory count process at a high level. To illustrate this, I’ll use a scenario in which I selected the continuous inventory count method in ECC 6.0 for bins belonging to a non- storage-unit managed storage type. This is a typical warehouse scenario. The steps are as follows:

Step 1. Create the inventory document

Step 2. Enter the inventory data

Step 3. Clear the differences in WM

Step 4. Clear the differences in Inventory Management (IM)

The main difference between the continuous inventory count process and the annual inventory or cycle counting methods is that you create an inventory document. The rest of the steps are the same for all three inventory count strategies.

Step 1. Create the inventory document. The inventory document allows you to plan the physical inventory. Depending on the counting method you select, several transactions are available. The most flexible one for the continuous count method, from a selection field point of view, is transaction LX16. Alternatively, you can follow menu path Logistics>Logistics Execution>Internal Whse Processes>Physical Inventory>In Warehouse Management>Physical Inventory Document>Create>Continuous Inventory (Figure 1). In this screen, you can either directly enter the bins you want to count or use the selection fields under the Program parameters section to filter the proposed range of bins.

Figure 1

Inventory count document creation screen (transaction LX16)

I would recommend you limit the selection further, as in Figure 1, by selecting the Only bins not yet counted check box in the Program parameters. This helps if you plan to count the bins only once during the fiscal year. In this case, it allows you to track any bins that you might have missed in previous count processes if you follow a chronological order based on the storage bin number. It also helps you avoid double counting. Select the Only bins that can be counted check box to allow the system to display bins that you cannot process at that moment for inventory counting, but could be available at a future stage.

After the system populates the required fields, execute the transaction to get the system to display the bins available for the count based on the selected parameters (Figure 2). You can then further select the bins to count by checking the check boxes located to the left of the bin numbers. When you finish, activate the inventory count document by clicking on the activation icon at the top of the screen. When you activate the document, the system blocks the selected bins for placement and retrieval. This ensures that no stock transfer happens while the count takes place.

Figure 2

Activate the inventory count document

Step 2. Enter the inventory data. After you create and activate the inventory document the next step is to proceed with the physical count of the stock. You can record the results by using transaction code LI11N or following menu path Logistics>Logistics Execution>Internal Whse Processes>Physical Inventory>In Warehouse Management>Count Results>Enter (Figure 3).

Figure 3

Record the physical count of the stock

Enter the stock quantities in the Counted quantity column. By default, the system uses a base unit of measure that it obtains from the material master. However, you can enter an alternative unit of measure in the AUn column as long as you previously maintained a conversion factor. An example of this is when you ship your product in inches, but you manage it in your warehouse in centimeters. Check the check box in the Zero column to let the system know that the bin is empty. You don’t need to enter any quantity if you select this box.

Step 3. Clear the differences in WM. After you count the required bins, you can evaluate the results by using transaction code LI20 or following menu path Logistics>Logistics Execution>Internal Whse Processes>Physical Inventory>In Warehouse Management>Clear Differences>Warehouse Management (Figure 4).

Figure 4

Evaluate the results of your inventory count

The system displays the differences in stock and value between the count results and the previous information available in the system for each bin. If the difference is physically confirmed as valid, you can select the box allocated to the bin and save the transaction to acknowledge it to the system. In Figure 4, you can see that the stock difference is 100%. In this case, the stock in the bin was zero before the count, but you found stock in it during the inventory count.

When you click on the Write Off button, the system creates a transfer order in the background to transfer the stock difference between the counted bin and the interim storage type 999, which is the standard storage type used to handle stock differences in WM. The system leaves positive stock in storage type 999 for stock losses and negatives for gains. With this storage type, the system places the stock in a bin that it creates dynamically with the same number as the inventory count document.

Step 4. Clear the differences in IM. Until this moment, the count has not created any variances at the inventory management level, so it has no financial impact yet. After the required authorizations are granted by the warehouse management based on company standard operating procedures, the stock controllers can proceed to clear the differences in IM by using transaction LI21 or following menu path Logistics>Logistics Execution>Internal Whse Processes>Physical Inventory>In Warehouse Management>Clear Differences>Inventory Management (Figure 5). This shows the bin referred to in step 3. After you clear the differences in IM, the system sets the inventory document to the Counted status and unlocks the bins included in it. This completes the inventory process.

Figure 5

Clear the WM inventory count differences

Configure the Inventory Count in WM

Having described the process at a high level, the next step is to identify the key configuration points for optimum results. Follow these five steps to complete the configuration:

Step 1. Set up the default values

Step 2. Define the inventory method by storage type

Step 3. Control the inventory by warehouse number

Step 4. Define IM movement types for clearing inventory

Step 5. Define the inventory number ranges for each warehouse number

Step 1. Set up the default values. Follow IMG path Logistics Execution>Warehouse Management>Activities>Physical Inventory>Define Default Values (Figure 6). Here you control the warehouse and storage type parameters to define the inventory count data entry process. The key parameters to set in this screen are:

Figure 6

Set the default inventory count values

PrintMat: Controls whether the system prints certain parameters, such as the material code, on the warehouse inventory list. This box is usually selected.

No.Bins: Manages the display of the storage bins in the inventory count data entry screen. This box is usually selected to allow the storage bins to show up on the screen, avoiding the need for the user to enter this value.

No.Mat: Toggles the display of the material numbers in the inventory count data entry screen. This box is usually selected to allow the material numbers to display so the user does not need to enter this parameter.

Entry: Controls the data entry method. This allows you to enter the results sequentially from a given value, such us storage bin (A), page by page (S), or via a list of items or storage bins (P). Usually value A is used.

DblLn: If selected, this check box allows the user to enter the inventory count data in two lines for transactions LI11, but not LI11N. Usually this is not selected.

Diff.: This setting allows you to set up a percentage of tolerance for the differences between the data entered for the count and the information in the system. If the difference goes above the percentage configured, such as 2% or 5%, the system displays a warning message. When you set this up on a storage type level, it results in a lower tolerance level to warehouse areas where critical or high cost materials are located.

Next pag: Check this check box when the system creates a large number of lines for counting one bin — for example, when mixed storage is allowed for the storage type. This is usually not selected.

Step 2. Define the inventory method by storage type. Follow IMG path Logistics Execution>Warehouse Management>Activities>Physical Inventory>Define Types per Storage Type (Figure 7). This is the core transaction for the inventory count configuration because it sets the inventory count method that the system applies for a given storage type. The key parameters to set in this screen are:

Figure 7

Inventory count configuration by storage type

Invent.: Defines the inventory count method. You can set this field to PZ (continuous inventory), ST (annual inventory), or leave it blank (no inventory).

Plcmntlnv: If you select this check box, the system activates the method of physical inventory for the first putaway as a complement to the continuous inventory method.

ZeroCkln: By selecting this check box, the system activates the zero stock check method as an addition to the continuous inventory method.

ZeroCheck: With this check box, if a zero stock check is in progress, the storage bin can accept the placement of new stock when the check is closed. You cannot use this option for bulk storage types managed by storage units.

Cycle counting: Select this check box when you want to use the cycle inventory method for the storage type. With this process it’s possible that not all bins would be counted during a fiscal year, which is usually required for audit purposes. That is why usually an annual inventory (ST) is also set up for this storage type to catch up with any uncounted bins by fiscal year end.

Step 3. Control the inventory by warehouse number. Follow IMG path Logistics Execution>Warehouse Management>Activities>Physical Inventory>Define Differences and Document Limits (Figure 8). This screen defines at the warehouse level the WM movement type used to post positive (Post Inventory Differences) and negative (Clear Inventory Differences) differences. The standard WM movements are 712 for the stock gains and 711 for the losses. In the Document Items column, you set the number of inventory count items that the system can use in a single posting.

Figure 8

Inventory count control by warehouse number

Step 4. Define IM movement types for clearing inventory. Follow IMG path Logistics Execution>Warehouse Management>Activities>Physical Inventory>Clear Differences (Interface to Inventory Management) (Figure 9). This transaction provides a quick way to define the IM movement types the warehouse should use and the stock status for stock gains (Post Inventory Differences) and losses (Clear Inventory Differences).

Figure 9

Configure the movement types to clear the inventory

Step 5. Define the inventory number ranges for each warehouse number. Follow IMG path Logistics Execution>Warehouse Management>Activities>Physical Inventory>Maintain Number Ranges (Figure 10). This transaction allows you to create a unique sequence number for the inventory document number ranges in a warehouse (Invent.NR). Then, enter another sequence number value for the transfer orders that you created previously to clear inventory differences in WM (TO Inventory NR). You also can enter an extra sequence number value for the inventory numbers used for cycle counting by quant (INo. NR QI). Leave this field blank unless you’re using cycle counting. The system uses these sequence numbers later in the process to enter the lowest and highest limits in the range, as shown in Figure 11.

Figure 10

Inventory count number ranges per warehouse number

Figure 11

Inventory count number ranges

Configure Cycle Counting in WM

In the previous sections, I described all of the steps required to configure the annual and continuous inventory methods. If you want to use cycle counting, you need to adjust additional settings in the configuration and material master, which you need to activate. Follow menu path Materials Management>Inventory Management and Physical Inventory>Physical Inventory>Cycle Counting (Figure 12). The settings for this process are a little different from dynamic cycle counting, with which you also may be familiar. For more information about this process, see the “Dynamic Cycle Counting” sidebar.

Figure 12

Cycle count configuration

CC phys. inv. ind. (cycle count physical inventory): This indicator places materials in groups with different parameters set up for the cycle count. You can group them by assigning indicators. For example, you can use A to designate the materials you would like to count the most because they are expensive and critical for production or shipping operations. Then, assign B, C, and D to the next critical groups of materials.

No. of phys. inv.: Provides the number of physical inventories the system should carry out each fiscal year for the assigned cycle count indicator. For example, if you know a material is consumed more than others and it is in the bill of materials (BOM) of many of your finished products, you probably want to count it more times than materials with limited consumption assigned. This focuses your counting efforts on key materials.

Interval: The interval of workdays between cycle counts. The system calculates this value automatically by dividing the total amount of workdays in the calendar by the value entered in the previous field.

Float time: Provides a float time to determine how many workdays are allowed to a cycle inventory count from the moment it is due. Usually, the smaller the interval value, the larger this figure is. The float creates windows to execute the inventory counts, which covers the entire working calendar without overlaps between the counts.

Percentage: Only use this field if you are using the ABC analysis for cycle counting report in transaction MBIC. You use ABC analysis to assign materials automatically to the cycle count physical inventory indicators as mentioned previously. For example, in Figure 12, if I set up 56 as the percentage for group A, the system starts adding the consumptions in descending order, starting with the most consumed material until it reaches 56% of the total consumption of the materials. The system automatically changes the cycle count physical indicator to A for all of the material codes included in that addition. The percentage values assigned to the different cycle count physical indicators must add up to 100%. These values are a default and you can modify them with transaction MBIC.

Finally, to use the cycle count process, you must set it up at the material master level. To do this, use transaction MM02 to change the material master and allocate a cycle count indicator to each material in the CC phys. inv. ind. field (Figure 13).

Figure 13

Allocate the cycle count physical inventory indicator

Jose Senra

Jose Senra is a senior solutions architect and project manager (PMP) located in Barcelona, Spain. His focus is on designing and deploying SAP supply chain global business process templates for large international corporations. In his more than ten years of IT experience working for Procter & Gamble and Hewlett-Packard he has covered a wide range of the ERP logistics area. He is certified in SAP Logistics Execution System, Warehouse Management, Production Planning, Plant Maintenance, Project System, and Solution Manager. He also has experience in EDI, Manufacturing Execution Systems (MES), and the design of applications management and development using ITIL principles. He has participated in numerous industry conferences, such as Logistics and Supply Chain Management 2008 in Orlando and the HP SAP upgrade factory event Barcelona 2008.

You may contact the author at jose.senra.jimenez@gmail.com.

If you have comments about this article or publication, or would like to submit an article idea, please contact the editor.