We have an employee who is employed with us but he also provides a service that is outside of his normal job duties as well as he provides inventory for us which we purchase on a purchase order through him. Is it wrong that we general both a W2 and a 1099-MISC box 7 for this individual? Would we be penalized for this?

The inventory purchase is probably OK.

But the test for someone being a contractor versus employee isn't about doing services "outside normal job duties."