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Should i create a custom report type directly in production or would i need to first create in sandbox and transport to production? What is the best practice?

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Your production org is your live Salesforce instance, and keeping it running like a champ is critical to your business and customers. So it is always suggested to implement first in the sandbox and do thorough testing and later deploy to the production instance. Check more details on Pitfalls of developing in production here.

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