One of the most significant recent developments for global distributor Digi-Key Corp. has been the expansion from a traditional low-volume high-mix (catalog) order model into the small production and prototype business. The two models are very different and traditionally don’t sit side-by-side in broadline distribution organizations. Electronics Purchasing Strategies managing editor Barbara Jorgensen recently spoke with Dave Doherty, vice president of Global Supplier and Product Operations for Digi-Key, to find out how Digi-Key is managing this growing business.
EPS: How did Digi-Key’s customer base influence the expansion into the prototype/small production business?
Doherty: Our core business – the ‘catalog' or high service business — is based on having a wide breadth of inventory with immediate availability. Having inventory in stock is a given at Digi-Key and that model has served us well. We see [small and midsize production orders] as a natural adjunct to the core model. If you have a high level of available inventory as well as inventory depth, quick-run production fulfillment isn’t that far a stretch.
Our customer base – like most customers – experience unpredictability in demand. However, these companies don’t fit into the traditional [high-volume] distribution model. But it fits the prototype [production] model, and we found we can effectively service that from our available inventory pool.
At [Digi-Key] we never undertake anything that we try to force on our customers. All the customer is looking for is a source of authorized products. But they also look for a company that is easy to do business with. So we provide a system where customers can hit a ‘buy’ button with no hassles; and now they have a short production run. They tell us: "It was so easy to manage the first transaction; if I need 1,000 pieces can you have them ready?" In turn, they are willing to give us visibility into their demand patterns . We can handle that [transaction] with the tools we already have in place.
EPS: But the pricing model for small orders is different than from volume. How do you manage that?
Doherty: I would say pricing is never the No. 1 issue in this segment. There are other factors that customers weight equally. One is a breadth of product available; the ability to deliver it immediately; and pricing is in the public domain. We know the cost to cut one capacitor off of a reel, and the cost of the transaction is far outweighed by other factors.
We set prices for lots of 10, 100, 1,000 and our pricing is supported by the manufacturer. We provide the information upfront. Engineers also like that they can see the pricing because they may have target pricing for their end products. So we use a standard pricing infrastructure and if a [customer] request goes beyond what is usual, we work with the supplier. In every unique situation our suppliers work with us. The only difference [in the production model] is the frequency in which we order and restock products [from suppliers.]
EPS: Still, suppliers manage volume inventory differently than small orders – there is a lot of forecasting involved. Isn’t the catalog business more stable than volume?
Doherty: If you look at business cycles over the years we are either in a trough or an upturn. Even though volume distributors do a good job – they manage forecasts and carefully measure their return on inventory – we manage chaos. We have a wide breadth of inventory always in stock. So during down market cycles we don’t have [personnel or inventory] cutbacks. If you look at [Digi-Key’s] growth over the years you will see that it is up and to the right with no regard industry business cycles. We had the same growth rate in 2009 and 2010 [during the recession]. When there is a recession, two thing happen in the customer base: customers try to design their way out [of the downturn] or we see startup activity increase [fueled by individuals that have left their employers]. So the activity we see is counterintuitive to industry cycles.
EPS: How about in EMS?
Doherty: EMS companies look to us to fill shortages. We have our inventory availability on the Web. So they come to us when they need [inventory] flexibility. At the same time, when you are supplying production-level quantities you have to sharpen your game. If we see allocation or restriction in the supply base we make sure we are protected even more so than in the past -- meaning we make sure we have inventory. When you are in the production space the customer is counting on you and they expect you to have products.
EPS: That can be risky though--you may end up with excess.
Doherty: If you believe that diversity is your best friend, just look at our customer base. We can count on our normal core business to burn up any inventory excess. The more traditional [volume] players work on managing returns and stock rotation: we manage our own excess. We allow our traditional customer to help us burn down [excess] inventory.
Digi-Key has also been expanding globally, so in the second part of this interview EPS and Doherty will discuss business on the international front.