Managing Customer Returns and RMAs

  • Written By: Dr. Scott Hamilton
  • Published: March 4 2009

Returned material is a significant issue in some manufacturing and distribution companies. Each step in the returned material authorization (RMA) process typically involves variations, and the compounding effect of these variations in a multistep process can quickly lead to extremely complex business processes and enterprise resource planning (ERP) system functionality. A key issue is whether standard ERP functionality can be simple, yet robust enough to handle common variations. A related issue is whether the simple model can be easily customized to handle unique variations. This two-part article reviews the common and unique variations in RMA processing, and the Microsoft Dynamics AX solution approach to managing RMAs. It contains some of the information in Dr. Hamilton’s new book Managing Your Supply Chain Using Microsoft Dynamics AX 2009.

Returned material generally requires an authorization, termed returned material authorization (RMA) or returned goods authorization (RGA). In a simple situation, for example, the customer wants to return a defective product and obtain a credit. The company creates an RMA and provides the RMA number to the customer, who returns the item. The company subsequently records receipt for the returned item and creates a credit note for the customer. Variations to this simple example may involve a replacement item, or the repair of the returned item. Additional variations in handling RMAs can quickly lead to complex business processes and to more complex ERP software functionality. Artificially complex functionality makes an ERP system more difficult to understand and implement.

Identifying RMA variations in a given company provides a starting point for determining what needs to be simplified and what needs to be modeled in an ERP system. Each step of the RMA business process represents a source of variation, and interrelationships among steps mean that the variations have a compounding effect on complexity. These steps include the authorization itself; the return receipt and receipt disposition; the replacement, repair or installation services for the returned item; and the related accounting transactions for these activities. Figure 1 summarizes these major sources of RMA variations, along with illustrative cases for each source, and provides an organizing focus for further explanation.

DR Scott Hamilton
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The simple RMA situation involves a basic variation for several steps shown in Figure 1. That is, the company's authorization applies to an existing customer and item, and the company receives the full return quantity, dispositions it as scrap, does not send a replacement, and provides a full credit amount for the returned item. The additional variations for each step include the following:

  • Variations in Authorizations. The RMA is ideally requested by an existing customer for an existing item. It may not need an actual return, because the item is impossible to return or is not worth returning because of its damaged condition. The customer may not request a replacement. An RMA typically involves a return reason code to support analyses of return patterns and potential quality problems.

    Additional complexity arises when the RMA is requested for an item (or customer) which does not yet exist within the database. For example, the item may represent a custom product without a unique item identifier. The RMA may need to be issued for a specific serial number or for the component of an end-item. The customer may need to be sent special packaging materials for returning the item. Or there may be a validity period for sending the returned item. Other complexities include the need for information about the original order, such as the item's original sales price or cost. This information may not be accessible, because either the company did not sell the product or the older information was not loaded when the firm migrated to a new ERP system.

  • Variations in Return Receipts. The receipt of returned material ideally matches the item and quantity that was authorized in the RMA. There may be no need for a receipt, because the RMA did not require a return. Additional complexity arises when the received material does not match the authorized item number (or serial number) in the RMA, the material arrives with no RMA reference, or the material arrives after the validity period. The receipt of partial quantities can create difficulties in recognizing RMA closure. As a result, the received material may require a separate inspection step, and the recording of test results against predefined tests.

  • Variations in Receipt Dispositions. The received material may scrapped or placed into stock, or require additional steps to repair it, strip it down for parts, or return it to the originating vendor. Alternatively, it may need to be sent back to the customer. These alternatives impact available inventory for planning calculation purposes. The receipt disposition may also affect accounting transactions, such as determining whether a credit should be issued for the returned material. The disposition codes assigned to the received material can be used to support the analyses of return patterns and potential quality problems.

  • Variations in Replacement. The customer may request immediate replacement or no replacement as part of the RMA or the replacement decision may occur after inspecting the returned item. The replacement may be the same item number (in new or refurbished condition), a different item number, or a predefined alternate item. A new custom product may need to be built as a replacement, which requires the configuration of the custom product. The replacement may involve a loaner, the direct delivery from a vendor, or the shipment of components (rather than the end-item). In some cases, the customer must be advised about the replacement or repair options, and the cost of each option, before a decision can be made.

  • Variations in Repair. The returned item may need to be repaired, and sent back to the customer. More complex repairs may require a strip down of the end-item, rebuilding or replacing components, and the final assembly of the repaired end-item. In some cases, the repair activities must be conducted at the customer site.

  • Variations in Installation Service. Some situations require the installation of the replacement item (or repaired item) at the customer site.

  • Variations in Internal Work. Examples of internal work include refurbishing a returned item in order to place it into stock or stripping down the returned item in order to place valuable components into stock. These internal work activities may be modeled with a production order, where the same item number (for the returned item) is defined as a component.

  • Variations in Accounting. There are several categories of accounting variations that relate to the return; the replacement or repair; and installation services, as shown in Figure 1. A credit may be issued for the returned material, such as a full credit based on the original price or the current price or a partial credit that might reflect the item's condition. The credit amount may also need to reflect a restocking fee or other miscellaneous charges. The cost of the returned item can be valued at the original cost or the current cost.

    When an RMA involves a replacement, the charges may reflect the nature of the replacement item. For example, the charges could reflect the sales price (or the price difference) for a different item or alternate item or a loaner. Freight or other miscellaneous charges may apply to the replacement.

    When an RMA involves a repair, the charges often reflect the costs of material and labor to repair the item. Other miscellaneous charges may apply, such as an inspection fee.

    When an RMA involves installation services at the customer site, the charges often reflect the hourly rates for service technicians and associated travel expenses.

  • Other Issues. In a multicompany environment, the customer for an RMA may represent a sister company, or the vendor sending a direct delivery replacement may represent a sister company. Warranties may affect the credit for returned material or the charges for replacement or repair. In some cases, the customer may have a service agreement for maintaining or repairing products, and for performing these services on site or at a repair facility.

The combinations of RMA variations within a company can result in very complex business processes. For firms using an ERP software package, the key issue is whether the package can handle the needed variations while still providing simple straightforward solution approaches. The second part of this article, which will appear in the next newsletter, will describe how one ERP software package—Microsoft Dynamics AX—supports customer returns and RMAs with a simple yet robust solution approach.

About the Author

DR Scott HamiltonScott Hamilton consults and teaches globally on SCM and ERP issues. He authored Maximizing Your ERP System and previous books on Dynamics AX and NAV. Scott has won the rarely given Microsoft MVP Award for Dynamics AX, and Microsoft's Excellence in Innovation Award. He can be reached at

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