My supervisor keeps referring to check truncation as the process of not providing customers with their physical checks back with their statement. My understanding is that truncation is the process of replacing a original check with a substitute check. Am I missing somthing?

In a way, you are both correct. But, both definitions are a little to narrow (for lack of a better word)..

Check Truncation is the removal of the physical item from forward collection and to replace or send either the substitute check or the information related to the original check.

So, prior to Check 21 truncation happened in a couple of instances. With electronic check conversion, the check was truncated by the merchant and information collected from the original check was sent through the forward collection system. Or, as your supervisor was trying to say, your bank truncated the check prior to forwarding a statement to your customer and it was replaced with either an image and information collected from the original check, or just the information collected from the check.

But now under Check 21 truncation can happen at any point in between. Your definition is applicable, but at the point of trunction, the original check does not always have to be replaced by a substitute check. An electronic image and information collected from the original check would also apply.

Hope that helps! If I have narrowed my definition too much, I'm sure someone else will chime in too!

This is my understanding of check truncation

Check truncation is the process of removing original checks from the processing system by converting original checks into electronic images. Check 21 allows truncated checks to be re-converted back into paper form, or substitute checks. Essentially, substitute checks are paper reproduction of the original that contains an image of the front and back of the original check and be processed just like the original check.

You forgot to mention that checks may be truncated (from the customers point of view) via two disctictly different methods. Check 21, which is basically image exchange and can be accomplished by anyone in the clearing chain and by ARC or Accounts Receivable Conversion which converts the customers payment from paper to an ACH transaction and can only be done by the payee or his agent.
Check 21 items remain under Reg J while checks "converted" under ARC will fall into the realm of Reg E

The Paying Bank may also truncate checks and not return to customers in their statement. This has often been referred to as Safekeeping but it, too, is a form of truncation.