Design engineers love Digi-Key Corp. Study after study by industry consultants have consistently affirmed it as the component distributor many engineers often turn to first for prototype purchases. It’s a relationship nurtured over Digi-Key’s more-than-40 -year existence and nothing on the horizon will change this “unwavering commitment and dedication to engineers,” according to senior executives of the company.
Ron Stordahl, Digi-Key’s founder and owner, started the company decades ago – and ran it initially out of the trunk of his car and later from his parents’ warehouse – to supply components to engineers in individually packaged lots. High school buddy Mark Larson was pulled in to help manage the business as it expanded rapidly in the 1970s but the focus on engineering needs hasn’t changed much since then. Together, the duo have built a $1.6 billion revenue enterprise that over the years has consistently performed above the industry sales growth average by targeting its services primarily at the same core group of design engineers.
Yet the Thief River Falls, MN-based company sees some need to modify and evolve its operations in response to changing market conditions. For example, as more production and design activities have shifted to developing parts of the world, including China and Eastern Europe, Digi-Key has found itself reviewing its business model to ensure it can continue to support customers wherever they operate. Executives undertook an internal discussion of its model of shipping products from one single location and concluded it is a strength even in today’s globalized market.
“The market has some common needs and this won’t change no matter the location,” said Dave Doherty, newly promoted to executive vice president, operations, at Digi-Key. “A surprisingly large number of our components already ship all over the world and the sophistication of the supply chain means it doesn’t matter anymore where the products are shipped. Some buyers find that products sent from Thief River Falls in Minnesota get to them in Asia well before orders placed with local suppliers.”
“We believe we can stay true to our model for a very long time,” added Chris Beeson, executive VP, sales and supplier development at Digi-Key, during an interview. “We entered the international market in a virtual [online] way because the aggregation of our inventory in one place has worked for us. To facilitate conversations with customers and suppliers locally we’ve added resource centers in Europe and Asia-Pacific and in many cases our partners consider us as even more local than the competition.”
The next topic was easier to untangle. Long known as a catalog distributor, Digi-Key jettisoned that model three years ago, dumping its mammoth catalogs and moving all its product information and technical support online. The company supported this push with initiatives that made technical information and other resources available to the core engineering base at the touch of a button. The result has been astounding. Not only did customers drive this change but they’ve also avidly embraced it and helped to make the company’s website one of the top-rated pages on the web, according to Tony Harris, chief marketing officer.
Digi-Key’s website recorded more than 68 million visits in 2013 and notched over 800 million page views, incredible stats for a non-news site. As a result, about 86 percent of Digi-Key’s sales are derived from e-commerce transactions. Today, Digi-Key design engineer customers are heavily supported with a wide range of web-based offerings, including the interactive website www.eewiki.net and technical online chats complemented with the traditional customer service person on the phone.
“We embraced e-commerce early and discontinued the catalog because customers asked for it,” Harris said. “This has allowed us to grow rapidly and we are constantly looking at ways to keep on serving the customers online. We’ve enhanced the functionalities of the website to give them the same information they were getting in the catalogs and even more. Our goal is to be everywhere the engineer is and if that’s online or in the air we’ll be there.”
Hybrid Business Model
The next major move – and perhaps the more controversial – has been the development of a hybrid business model that has seen Digi-Key significantly expand its services to customers seeking to purchase larger volumes of components for production purposes. While that business has always existed at Digi-Key it has expanded sharply in recent years, surging over the last 10 years to $634.7 million in 2013 from $111 million in 2003.
This rapid growth of the production business sparked some concerns in the industry that Digi-Key might be relegating its engineering support services to second-place, a notion the company has forcefully rejected. The increase in production business started when some customers began clamoring for Digi-Key to extend the same kind of support they enjoy in design engineering to the purchasing, procurement and manufacturing segments of their businesses, executives noted.
“The foundation of the business makes for an old story, but it’s still a very relevant one: Our No. 1 concern is engineering and we aim to be the first choice of engineers at the time of design,” Beeson said. “That hasn’t changed.”
This dedication to engineers is a message Digi-Key is at pains to emphasize nowadays following the company’s runaway success in the small-volume production business. While its design engineering support operation is growing well above industry average, the production business – PB as it is referred to by the company – is racing ahead at an even faster clip. Company-wide revenue jumped nearly 10 percent in 2013 to $1.56 billion from $1.42 billion with international sales shooting contributing a chunk of the growth.
Still, production volume orders have continued to increase. A chart of the PB unit’s sales performance shown by Larson, Digi-Key’s president, in May at the annual Electronics Distribution Show confirmed it’s a fast-growing business for the company. In 2013, PB sales rose to $634.7 million, up 19 percent, from $533 million in 2012, representing more than one-third of the company’s overall revenue for the year. The division is set to grow at an even faster clip this year. In the first quarter PB revenue improved to $182.4 million, up 23 percent, from $147.8 million in the first quarter of 2013.
The demand for volume production services is likely to keep rising, pulling Digi-Key in deeper into the purchasing camp, a fact acknowledged by Doherty and other company executives. To ensure the company doesn’t lose its focus, Digi-Key has set certain objectives and conditions for engaging with customers interested in production-level component shipment. The company said many of the orders are being initiated by the same design engineers it already has relationships with, making it difficult to turn down their requests.
“We got pulled into the production business by engineering customers,” Doherty said. “We keep inching in, being pulled in by the customers but our message remains simple. Inventory for design engineers is still our biggest value proposition. We just have to be careful not to get the message mixed up.”
This is the first in a series of articles on Digi-Key. In the next report, to be published later this week, we will examine the company’s strategy for keeping its focus on design engineers even as it responds to growing customer demand for production-level support services. In coming weeks we will report on the company’s continuing growth strategy, its engineering support offerings, evolving hybrid business model and interviews with key executives reflecting on Digi-Key’s commitment to customers and suppliers.