Year

Standard Operating Procedures

Policies, Controls and SOPs for Inventory Management

Saad Khan
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

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 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

1. Process Overview:
a. Process Summary: This SOP covers procedures and guidelines to be followed for the management of
inventories other than capital goods. All the goods are stored at the main store under the custody of
the Inventory Manager. These goods are issued based on an approved Material Requisition in ERP.
Mandatory Physical Verification is conducted for all items in presence of personnel other than the
inventory custodian team as per the pre-determined plans. Further, Perpetual Inventory Controls
are enabled for certain categories of inventory.
The SOP also covers procedures for the identification of non-moving and slow-moving Inventory. An
Operation Committee Meeting is called upon and appropriate measures are taken for such
inventory.
Apart from the above, the process for inter-department transfers, inter warehouse transfers, and
disposal of inventory are also covered in this SOP.
After the material is inward, the qualitative and quantitative aspects are checked as per the laid
specifications for the material received. All technical details/results of quality checking for the
specified items are recorded and maintained in Quality Module integrated with ERP.
The objective of these procedures is to ensure correct and timely inward of materials received at the
plant and adequate documentation of supporting documents to facilitate accurate bill passing.
b. Sub-Processes:
i. Receipt of Material
ii. Issue of Material
iii. Material Sent on Returnable Basis
iv. Warehouse Transfer
v. Physical Verification
vi. Perpetual Inventory Control
vii. Inventory Monitoring
viii. Receipt of By-Products in Stores
ix. Disposal of Inventory
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

2. Material Receiving Process:

Trigger: The arrival of material at the gate

Document set (Invoice, delivery challan, QA slip, waybill, GRN) forwarded to accounting
End:
for payment processing
Frequency: Each time material arrives at premises

a. Process Workflow:

Allow loaded vehicles to enter

Security the plant on the basis of initial
screening

Record basic details in

Security Material Inward Register

Verify the material received

Inventory with the accompanied
documents

Outward Movement of
Inventory Vehicles/Person delivering the
Material

Inventory GRN Process

QC QA Process

Inventory Post GRN

Documents sent to finance for

Finance payment
•Waybill, PO, delivery challan, Invoice
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. Security:
1. Collect waybill from the delivery truck
2. Verify the name of the vendor, and match it with the delivery register provided by
PPC
3. Instruct delivery van to proceed towards designated unloading area
ii. Inventory:
1. Physically verify the quantity with PO, and match with delivery challan
2. No unauthorized material (material not having adequate documents, suspicious
items, damaged goods, etc.) should be allowed for unloading without the approval
of the concerned authority.
3. Ensure vehicle is properly parked and no other material, item, or article is left inside
the delivery vehicle
4. Highlight any discrepancy on DC before acknowledging it, and returning the driver’s
copy to him
5. After completing the above process, issue clearance to the delivery vehicle for out
movement
6. Initiate GRN process and advice QC for quality assurance
iii. Quality Control:
1. QC will provide recommendation after careful inspection of received goods:
2. In case of rejection, goods should be marked for return, and the purchase dept
should pursue the return of goods or required remedy as per the approval of
management
3. In case of approval, partial approval, only material that has been approved should
only be posted in the system.
iv. Inventory:
1. GRN should be posted of approved material
2. Forward below specified original documents to finance for processing of payments:
a. Waybill
b. Purchase Order (utilized for verification)
c. Delivery challan (highlighting material returned if any)
d. Goods received note
e. Invoice
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

3. Material Issue Process:

Trigger: Material Requisition/Order By User
End: Issue Of Material With Acknowledgement Of Receipt By User
Frequency: Each Time Material Requisition Is Raised By The User

a. Process Workflow:

User Material Order/ Requisition

Confirm if material is available

in other departments (excess)
Inventory • If yes, then proceed towards making
in/out movement after confirmation
from floor incharge

Confirm material availability

in warehouse as per MO/MRN
Inventory • If no, initiate purchase requisition
• If yes, verify material with BOM

After confirmation with BOM,

Inventory proceed towards issuance, as
per daily issuance time

Inventory Generate in/out movements

in system/ ERP

Prepare handover documents

Inventory and obtain acknowldegement
after material is handed over

User Acknowledge receipt of

material
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. User:
1. As per the job description, review BOM from the system, and raise material order,
requisition note.
2. MOs should be raised as per the production plan issued by PPC, and at least 3 days
in advance, so that inventory can take necessary steps to verify, confirm and issue
the required material in time.
1. MO should be issued for the entirety of the project, to reduce material consumption.
MO should have the following:

Requested Qty Issued Qty Balance Delivery time

xx (xx) xx dd-mmm-yyyy
xx (xx) xx dd-mmm-yyyy

ii. Inventory:
1. Check pending material balances in dept. floors against MOs from closed projects. If
material is left over, relevant dept. the head should be informed of the idle material
and should be returned to inventory immediately, along with corresponding entries
to be made accordingly.
2. On receipt of MO, verify and confirm with the BOM in the system, any quantity over
the BOM should have relevant approval from the Dept. HOD.
3. Once the MO has been verified, check whether the requisite material is available in
other departments.
4. In case material is not available in any other department, check the material
available in the warehouse. If material is not available, raise a Purchase Requisition
to the Purchase Department.
5. Issue the Material available in Store to the User. For issuing materials, select Item,
Quantity, Department, and other requisite details in the Movement Journal in ERP
and Issue the Materials.
6. Take a printout of the Material Issue Note and get it signed by the user for record
purposes.
iii. User:
1. Acknowledge the receipt of material
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

4. Material Sent on Returnable Basis:

Trigger: Identification of the need for sending material on a returnable basis
End: Receipt of Material with the Gate Pass
Frequency: As per the requirement
a. Process Workflow:

The the material to be sent on

User/ PPC returnable basis

Indentify whether the material is

User/ PPC being sent for repair or further
processing

Procurement Raise PO for requisite work

Inventory Prepare returnable gate pass

HOD/ PPC Approval by HOD

Material dispatch with returnable

Inventory gate pass, DC

In/Out movements should be

Inventory recorded once acknowledge of
receipt of material has been received
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. User/ PPC:
1. Identify the Requirement for Material to be sent outside the premises and obtain
approval from the respective HOD.
2. Material can be sent outside the plant in the following three situations basically:
a. Material sent for further processing: such as brass work
b. Material sent for Repairs: any damages caused during shipment, or during the
work processing
c. Material sent for other reasons: material to be returned due to quality,
quantity, or the wrong material being received
ii. Procurement:
1. In coordination with PPC, procurement should for SOPs for vendor selection from
approved external providers’ list.
2. Such POs should be duly approved by relevant HODs before being sent to inventory
for preparation of gate pass
iii. Inventory:
1. Inventory should ensure that it has received approved PO, before preparing gate pass,
and should specify the reason for a returnable gate pass.
2. Once the approved PO has been received, inventory should then proceed on to
preparing a detailed gate pass, along with the requisite delivery challan for the
items/ material being sent
3. In/out movements should be generated within the system, once the delivery challan
has been received by the inventory.

Dispatch Exp. Date

S# SKU# Description Purpose Qty
Date of Return
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

5. Warehouse Transfer:
Trigger: Requirement of material & identification of idle materials lying with the other location
End: Acknowledgment of the materials received from the other location
Frequency: As per requirement

a. Process Workflow:

Raise a request for trf of

User material from one WHS to
another (reasons specified)

Inventory should check the

Inventory reason for trf; and approve
or rejected with reasoning

The user should then

User ammend the transfer note,
as per advice of HOD, and
inventory

User/ PPC Prepare a transfer note, and

send it to inventory with
HOD requisite approval

End User Acknowledge receipt of

material and transfer note

One the approved and

acknowledged transfer note
Inventory has been received, inventory
should approve the in/out
movements in relevant WHS
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. User:
1. On a need basis (identification, or intimation from the store), identify the idle
material available on the floor.
2. Transfer the material to the store through the inventory movement journal.
3. Obtain approval from the approving authority.
4. Once approved by the approving authority, prepare a material return note with the
item, quantity, reasons for the transfer, etc.
5. Return the material to the store team and obtain acknowledgment. File a copy of the
acknowledged return note and give another copy to the store - executive.
6. Transfer note should have the following information, additional information can be
added on a need basis:
Date Date
S# SKU# Description Purpose Qty
Received Returned

ii. PPC/HOD:
1. PPC/ HOD should review the reasons for transfer of material/ goods, and approve.
2. Any unforeseen circumstances should be reviewed, and planned for in the future.
iii. End-User:
1. End-user (whether inventory or any other department) should acknowledge the
receipt of goods on a transfer note
iv. Inventory:
1. Upon receipt of approved and acknowledged transfer notes, inventory should
approve the movement of goods between WHS.
a. Inventory can reject the transfer note, at any given stage, with proper
comments highlighting the reasons for rejection.
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

6. Physical Verification:
Trigger: Physical verification plan
Appropriate action for inventory adjustments, if any, and approval of the accounting
End: transactions
Frequency: Annual
a. Process Workflow:

Stock take plan should be drafted,

with cut off dates for inventory,
and relevant HOD should approve/
or reject with recommendations

After adj with HOD

recommendations, schedule should
be communicated with all the
relevant departments

Download inventory list without

qts

Phycial verifcation of downloaded

stock

There could be either:

1. No Variance
2. Excess: Should be investigated
3. Shortage: Should be investigated

Obtain reasons for variances and

take appropriate actions

Calculate the impact of variance on

profitibality, and seek
management's approval for
adjusting entries

Pass the requisite adj entries in the

system, after management's
approval
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. Accounting & Finance:
1. Planning Physical Verification:
a. Extract the stock statement from ERP as per ABC categorization.
b. Prepare a plan and schedule the physical verification in consultation with the
respective HOD.
c. Make necessary changes if any are required in the physical verification plan
as per the comments of the approving authority.
d. Define the cut-off date for movement of stock at the time of the physical
verification activity.
e. Intimate the schedule to the PPC, inventory teams, and concerned HODs.
f. Download the inventory list after ensuring that all the pending entries are
recorded in ERP.
2. Carrying Out Physical Verification:
a. Receive inventory list for physical verification and conduct physical
verification as per the schedule.
b. Mention the count of the stock on the physical verification sheet and obtain
acknowledgment of the respective HOD.
c. Record the physical count in ERP.
3. Inventory Reconciliations:
a. Receive inventory physical verification sheet, evaluate the variances, if any
between ERP inventory and inventory physically verified.
i. In case of no difference, the process ends here.
ii. In case of shortage, identify the criticality.
iii. If major deviations, re-count and re-verify the inventory level of
critical items. In case of non-critical variances:
1. Seek appropriate reasons for variances from concerned
departments.
2. Assess the impact and evaluate reasons provided by
departments.
3. If shortages are reconciled, record appropriate explanations,
obtain approval from appropriate authorities and prepare
necessary details for making accounting adjustments in
books.
iv. In case of minor deviations, adjust the inventory in ERP through the
inventory journal.
v. If there is excess inventory:
1. Identify material accounting documents to verify issues not
recorded or receipt accounted more than actual in ERP if
any.
2. If no reasons are identified for excess stock, prepare a note
for updating stocks in ERP.
b. Pass inventory adjustment entry in ERP and obtain approval from approving
authority.
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

7. Perpetual Inventory Control:

Trigger: Inventory report from ERP
End: Inventory adjustment in ERP
Frequency: Annual/ quaterly/ monthly
a. Process Workflow:

Inventory Export the stock report with ABC

classification

Inventory Identify and classify items for

perpetual count

Inventory Conduct physical verification

There could be either:

1. No Variance
Inventory 2. Excess: Should be investigated
3. Shortage: Should be investigated

Obtain reasons for variances and

Inventory/PPC take appropriate actions; after
approval from HOD

Send adjusting entries to

Inventory accounting/finance

Obtain reasons for adjusting

entries, and pass the entries as per
Accounting/Finance management's approval
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. Inventory:
1. Carrying out physical verification:
a. Download the stock statement and identify the inventory requiring
perpetual control.
b. Conduct physical verification and record the physical count.
c. Obtain approval from respective HODs.
d. Find out the variances in stock as per the ERP and stock as per the physical
count.
e. Forward physical verification sheet along with variance statement to the
store manager for approval.
2. Evaluation of Variances:
a. Receive inventory physical verification sheet along with the variance sheet
from the store – executive. In case variances are critical, identify the reasons
and decide whether the stock adjustment is required in ERP.
b. In case the stock adjustment is required, forward the list of inventories
requiring adjustment to the accounts department.
ii. Accounting/Finance:
1. Inventory Reconciliation:
a. Take appropriate actions for variances and adjust inventory in ERP.
b. If shortages are found:
i. Seek appropriate reasons for variances from departments
ii. Assess the impact and evaluate the reasons provided by
departments.
iii. In case of shortages are reconciled, appropriate explanations should
be recorded and approved by management and prepare necessary
details for making accounting adjustments in books.
c. If there is excess inventory:
i. Identify material accounting documents to verify issues not recorded
or receipt accounted more than actual in ERP if any.
d. If no reasons are identified for excess stock, prepare a note for updating
stocks in ERP
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

8. Inventory Monitoring:
Trigger: Inventory report from ERP
End: Monitoring the status of inventory, and reporting to management
Frequency: Monthly
a. Process Workflow:

Obtain inventory ageing report

from ERP

Identify slow/non moving items

Report the items to HOD PPC,

and obtain reasoning for
keeping such SKUs at hand

Consolidate the inforation, and

generate a report for
management

Seek management's approval

for Plan implementation

Implement and monitor the

plan
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

b. Process Description:
i. Inventory:
1. Identification of non-moving / slow-moving inventory:
a. Extract inventory ageing report from the ERP and identify non-moving and
slow-moving inventory as per the defined policy.
b. Prepare a list of non-moving / slow-moving items and forward it to the
concerned HODs.
c. Receive a list of non-moving and slow-moving inventory from the store –
manager.
d. Evaluate and identify reasons for slow and non-moving items along with the
utilization plan.
2. Evaluation and identification of reasons:
a. After incorporating the replies for the utilization plans of the non-moving
and slow-moving inventory, forward the reasons to the store executive.
3. Consolidation and final reporting:
a. Receive the department-wise utilization plan for none/slow-moving
inventories and consolidate the information received from various HODs.
b. Prepare a final presentation in the requisite format.
c. Forward the presentation to the store manager.
4. Discussion and implementation of utilization plan:
a. Present the utilization plan in the management’s meeting.
b. Evaluate the report on slow and non-moving items and finalize the
utilization plan.
c. Circulate the action plan approved in the meeting to the concerned persons
and follow up on previous action plans discussed with the results achieved.
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

9. Disposal of Inventory:
Trigger: Rejections of goods/production waste
End: Outward movement of rejections/ waste from plan
Frequency: Requirement basis
a. Process Workflow:

Items are rejected by

By authorized person:
By quality (examples)
(examples)
1. Raw material
1. Consumables
2. Semi Finished Goods
2. Packing material
3. Finished Goods
3. Spares

The rejected material

should be reviewed by QC,
and approved, marked
tagged as REJECTS by QC.

Disposal by write-off: Disposal through sales:

1. Obtain management's 1. Sales Invoicing
approval and debit P&L 2. Out movements

b. Process Description:
i. Rejection of inventories:
1. On rejection of materials by the quality assurance team/other authorized personnel,
separate the material from other good materials and tag the material as
scrap/rejected.
ii. Segregation of inventories:
1. Move the rejected material to the designated place.
2. Evaluate whether rejected inventories have a sale value.
3. Inventories having sale value will be sold with sales invoices.
4. Inventories having zero sale value will be written-off from ERP with approval of
approving authority and disposed of accordingly.
iii. Write-off of inventory:
1. Write off the material in ERP with the quantity of rejection and charge loss to the p/l
account.
iv. Approval for the write-off of inventory:
1. On receipt of intimation from ERP, review the request for inventory write-off.
Approve the write-off request in ERP.
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

c. Disposal of Production wastage:

i. Process Workflow:

Obtain weight of wastage

Compare wastage qty with

BOM specified, and report
abnormal wastage to PPC

Create write-off entries after

management's approval, and
charge loss to P&L

d. Process Description:
i. Collection of Production Waste:
1. Obtain the weight of total production waste.
ii. Waste Records in ERP:
1. Record waste quantity against the production order in ERP at the time of closure of
production order.
iii. Write-off of Inventory:
1. Write off the material in ERP with the quantity of production waste recorded against
the production order and charge loss to the P&L account.
iv. Approval for Write-off of Inventory:
1. On receipt of intimation from ERP, review the request for inventory write-off.
Approve the write-off request in ERP, as per management’s approval.
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

10. Receipt of By-Products in Stores:

Trigger: Generation of by-products
End: By-products stored in the store
Frequency: Continuous

a. Process Workflow:

Intimate QC for quality

PPC check on generation of
by-product

QC Quality Process

Enter the by-product

Inventory
quantity

Send the by-product to

Inventory stores

Inventory Confirm quantity

Inventory Receipt in Stores

Store by-products at
Inventory designated areas

b. Process description:
i. Sending By-Products to Stores:
1. Refer SOP for production controls
ii. Receiving By-Products in Stores:
1. On receipt of by-products in store, confirm the number, and their respective
quantities, of by-products in ERP.
2. Store by-products at the designated area as per the defined guidelines.
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

Annexure-1

Exceptions & Resolutions

Activity
S# Exception SOP Remarks
Ref
In case the material received at the gate is rejected
Material rejected during the initial screening by the gate security, and
1 while initial screening approval via E-Mail is to be taken from the PPC HOD Section 2
at the gate and only then the vehicle will be allowed to enter the
premises.
In case the material is rejected during physical
Material rejected
verification by the Store, an approval via E-Mail is to be
2 while verification by Section 2
taken from the PPC HOD and only then the material will
the Store
be allowed to be unloaded.
In such cases, generally, the weight is not required. The
Material received by
3 Items will be physically counted by the Store person Section 2 ---
hand, courier, etc.
and accordingly, GRN will be prepared.
The material will be
Material Issue In such a case, the approval will be taken from the PPC issued without raising a
4 Section 3
without Requisition and respective HOD within 1 day. requisition in ERP, only
in case of emergencies.
In such cases, follow-ups will be made with the
Material sent on a
concerned person. If not to be received, should be
5 returnable basis not Section 4 ---
written-off and charged to the P&L account. Refer
received back
Material Disposal process
The difference in the
number of by-
Reconciliation will be done with the ERP Qty.
products sent by the
6 (Production Order) and agreed on differences, if any to Section 9 ---
Production Dept. and
be approved by the PPC.
received at the
Stores
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

Annexure-2

Reporting Catalogue & Calendar

Reference
Responsible
Sr# Report Name Objective Reporting Frequency to Format,
Person
if any
Monthly,
Delay in before 7th of
GRN prepared after two days of Inv.
1 preparation of PPC- HOD the ---
receipt of the Materials Manager
GRN succeeding
month

Delay in issues Item details and delay in issues along Inv.

2 PPC- HOD Same as above ---
of materials with reasons Manager

Number of days of stocks of raw

PPC-
Stock Analysis materials / finished goods Inv.
4 HOD/ Same as above ---
Report comparison with standards and Manager
Finance
comparison of previous 3 months

PPC-
Stock Variance Deviation in Inventory as per ERP Inv. As per the PV
5 HOD/ ---
Report Records and Physical Count Manager schedule
Finance
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

Annexure-3

Item Master - Critical Parameters

Inventory Levels

Stock Level used in Inventory Control System Formulas

The lowest level to which stocks should normally be

allowed to fall, and is held as a buffer stock to be Min = Reorder Level – (average
Minimum Level
made available in situations of non-delivery by a usage in average delivery period)
supplier

The highest level to which stock should normally be

Max = Reorder Level + Re-Order
allowed to rise, otherwise too much working capital
Maximum level Qty - (minimum usage in minimum
is tied up, thus sacrificing liquidity, and there is a risk
delivery period)
of loss through deterioration and obsolescence

This is the level at which order would normally be

Re-Order = maximum usage *
Re-Order Level raised. It takes into account the maximum usage in
maximum delivery period
the maximum delivery period

Safety stock is the stock held by a company more Safety Stock = (maximum daily
Safety Level than its requirement for the lead time. Companies usage – average daily usage) *
hold safety stock to guard against stock-out. Lead Time

This is the quantity that is most economical to order

Economic Order
as it minimizes the costs of ordering and the carrying EOQ = (2AP/S)^2
Quantity
costs

Other Critical Parameters

It is the cost incurred at the time
It is the time that elapses between the placing of an Ordering
Lead time of ordering the item and securing
order and receiving the goods ordered Cost
its supply.

The cost incurred for holding the

Classifying Inventory as per the principle of ALFREDO Carrying volume of inventory and measured
ABC Classification
PARETO for selective control. Cost as a percentage of the unit cost of
an item.
It is the method of controlling
Inventory Valuation is an important and very
Perpetual inventory lists at regular intervals
Inv. Valuation dynamic aspect as it affects the Cost of Goods Sold in
Cost of receipt and issue to facilitate
the Company’s Income.
regular checking.
A: Annual demand in Units
P: Cost of placing an Order
S: Carrying cost of One Unit for a
year
 Standard Operating Procedure
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Annexure-4
 Standard Operating Procedure
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Inventory Management SOP 1 Rev.#

Inventory Classification
ABC Classification

Consumption Value
Class A Item (Close day 80%
by day) Percentage of Items
20%

Classification of Consumption Value

Inventories (As per Class B Item (Regular 15%
VILFREDO PARETO Review) Percentage of Items
Principles) 30%

Consumption Value
Class C Item 5%
(Infrequent Review) Percentage of Items
50%

ABC Classification Process Workflow

List down items and Amend the

Intimate to HOD for
arrange them in Classification as per
Approval
descending order direction

Determine Inventory Determine Inventory

Approve/Reject the
Levels for each Items required
Classification
Inventory Item Perpetual Control

Classify the Items in

Apply ABC Apply Classification in
ABC Categories as per
Classification ERP
Manual classification