Sales returns are an unavoidable part of doing business. Whether items are damaged, shipped incorrectly, or simply no longer needed, organizations must have a controlled and auditable way to manage returns. In Dynamics 365 Supply Chain Management (D365 SCM), this control is achieved through a structured return process and, most importantly, through return types, known in the system as Disposition Codes.
This article provides a brief overview of the return process to orient the reader, followed by a deeper dive into each return type and what it means operationally and financially.
A Brief Overview of the Sales Return Process
In D365 SCM, a sales return is managed through a Return Order. The return order acts as a formal authorization between the company and the customer and determines how returned products are handled logistically and financially.
At a high level, the process includes: Return Order Creation A return order is created after a customer requests to return an item. This document authorizes the return but does not yet determine whether the item will be credited, replaced, or scrapped. Arrival and Inspection If the return involves a physical product, items arrive at the warehouse for inspection. During this stage, items may be quarantined for quality control or validation against the return order. Disposition Decision After inspection, a disposition decision is made. This is where the return type (Disposition Code) becomes critical, as it defines what happens next to both the product and the customer relationship. Financial and Inventory Processing Based on the selected disposition, D365 automatically drives inventory movements, credits, scrapping, and replacement orders.
While the process itself is straightforward, the business outcome of a return is determined almost entirely by the chosen Disposition Code.
What Are Disposition Codes?
Disposition Codes represent the return types in D365 SCM. Each disposition code is tied to a specific action that the system performs once the returned goods are registered. Unlike Return Reason Codes—which capture why the customer made the return—Disposition Codes control what actually happens to the item and the customer financially.
Out of the box, each disposition code must be associated with one of several predefined actions. These actions are described below.
The Core Return Types (Disposition Actions)
Credit
The Credit return type is one of the most commonly used scenarios.
With this disposition:
- The customer physically returns the item.
- The item is received back into inventory, assuming it passes inspection.
- A credit note is issued to the customer. This option is typically used when returned goods are still in resalable condition. Operationally, inventory levels increase, and financially, customer receivables are reduced through a posted credit.
Credit Only
The Credit Only return type is a financial return without a physical product movement.
With this disposition:
- The customer does not return the item.
- The customer still receives a credit note.
- No inventory transaction occurs.
This return type is often used for low‑value items, shipping errors where return freight would be uneconomical, or customer goodwill scenarios. Microsoft explicitly recognizes this as a distinct return process that skips warehouse handling entirely.
Replace and Credit
The Replace and Credit return type combines customer service recovery with replacement fulfillment.
With this disposition:
- The customer returns the item.
- The item is returned to inventory.
- The customer receives a credit and is shipped a replacement item.
This approach is typically used when the customer is entitled to a refund while also requiring a replacement, such as in pricing disputes combined with fulfillment issues. Both inventory and financial postings occur, making this one of the more complex return types to manage.
Replace and Scrap
The Replace and Scrap return type is commonly used in warranty or defective product scenarios.
With this disposition:
- The customer returns the item.
- The returned item is scrapped because it cannot be reused or repaired.
- A replacement product is shipped to the customer.
- No credit is issued to the customer.
From a business perspective, the company absorbs the cost of both the scrap and the replacement, but the customer experience is preserved. This scenario is frequently described in the Dynamics community as “Scrap and Replace” and is widely used for defective items under warranty.
Scrap
The Scrap return type is straightforward and focused on eliminating unusable inventory.
With this disposition:
- The customer returns the item.
- The item is scrapped upon receipt.
- The customer receives a credit.
This return type is used when goods are damaged, expired, or otherwise unsuitable for resale. Inventory value is reduced and recorded as scrap expense, while the customer’s balance is adjusted via credit.
Return to Customer
The Return to Customer disposition represents a rejected return.
With this disposition:
- The customer returns the item.
- After inspection, the return is denied.
- The item is shipped back to the customer.
- No credit or replacement is issued.
This return type is typically used when items do not meet return policy criteria or show signs of customer misuse. While inventory may temporarily be affected during inspection, there is no long‑term financial impact.
Why Disposition Codes Matter
Disposition Codes are more than a configuration detail—they directly control:
- Inventory valuation
- Scrap recognition
- Customer credits
- Replacement shipments
- Financial postings and audit trails
Choosing the correct return type ensures that customer satisfaction, cost control, and financial accuracy remain aligned.
They are configured in Sales & Marketing > Setup > Returns > Disposition Codes, where each code must be mapped to one of the system‑defined actions.
Final Thoughts
A well‑designed returns process in Dynamics 365 Supply Chain Management depends heavily on understanding and correctly using disposition codes. While the mechanics of creating and receiving return orders are important, it is the return type decision that ultimately determines how effectively your organization balances customer experience with operational and financial control.
If returns play a significant role in your business, investing time in properly defining disposition codes, and aligning them with real‑world scenarios, is essential.