Mark Larson’s annual presentation at the Electronics Distribution Show in Las Vegas has always been a standing-room only event because the Digi-Key Corp. top executive is reputed for always delivering critical and blunt but highly valuable assessments of current industry conditions. This year was no different. Larson highlighted the dramatic changes that have taken place in the electronics industry over the last 30 years – just like Las Vegas where the event was held – but insisted the future of the market remains bright although problems lurk, as usual. Digi-Key, he asserted, will remain one of its brightest stars.
Today’s Digi-Key isn’t the same company Larson teamed up with his high school friend to nurture more than 40 years ago. First, it’s no longer a catalog distributor but one of the biggest online vendors in the industry that boasts the kind of massive page views many news site, including this one, would love to have. Second, Digi-Key itself is changing, just like the industry it serves, but the company is being careful with the image it projects about that evolution because it wants to continue serving the core design engineers that helped accelerate its growth.
Larson’s latest EDS presentation clearly showed Digi-Key is paying closer attention to volume component distribution but the company isn’t diving deep into this pool, preferring instead to segment the customer base and serve only one part of it as an extension of what it already does so well for design engineers. Larson noted Digi-Key is altering and evolving its operational system to address the total electronics landscape with a plan centered on “prototype-to-production,” referring to the company’s efforts to meet growing demand for complementary services from a wide range of customers, especially in the small to-mid-tier contract electronics manufacturing market.
Traditionally, small to medium-tier companies have always been amongst the most avid users of Digi-Key services. Engineers at these firms have over years built a relationship based on “deep trust” with the company, so it’s understandable that they would want to extend the engagement deeper into the supply chain and into the sourcing of production components, according to Sarah Blix, head of the production business at Digi-Key.
“The customers we work with on the production business (PB) are mainly tiers 2 to 4 contract manufacturers who know that we are not inventory averse,” said Blix in an interview at the company’s head office in Thief River Falls, Minn. “They know us, they trust us and they know we can support them with competitive pricing.”
The services Digi-Key’s PB division offers customers goes beyond regular component procurement or even mere inventory stocking, however. Most are small companies with limited resources for supply chain management, bill-of-materials (BOM) management or even the personnel that are experts in tying forecasts to inventory procurement as closely as possible for their margin-sensitive operations. Digi-Key steps in for this type of customers with some basic services such as logistics management and kitting, which help to reduce manufacturing touch and drive production efficiencies.
There are more specialized services available to such companies, too. Over the years, Digi-Key has expanded its supply chain management services and expertise and now offers BOM, forecast monitoring and management, supplier support and inventory tracking. All of these services complement the design engineering functions and ensures hitch-free manufacturing operations. For Digi-Key’s component supplier partners, the extension and growth of the company’s production volume business has been a boon because it helps in assuring that the specific parts designed into a product by the engineer actually goes through to production and doesn’t get swapped out later in the procurement process.
“We are partners working with the customers and the suppliers to support them and ensure they don’t have inventory excess,” Blix said. “The tools we have built into the system like BOM and forecast management for the sophisticated customers and the wide breadth of our component offerings make it a compelling case for the customers.”
High-Mix, Low Volume
Digi-Key’s production volume business isn’t for all customers, though, and company executives are quick to point out that it’s a complementary service rather than one meant to turn the company into a huge volume components distributor. In addition to primarily servicing only the small to medium-size electronics manufacturing services (EMS) providers, Digi-Key also draws the line at what it describes as high-mix and low-volume manufacturing support services. Component purchases initiated by PB’s customers are unlikely to run into the tens of millions or hundreds of millions of dollars, company executive.
What this means is that Digi-Key is unlikely to take on competitors such as Avnet, Arrow, WPG or Future Electronics in the supply of components to customers who run billions of dollars in procurement purchases. Rather, PB specializes in serving customers whose production volume are a fraction of what the bigger distributors might go after. As a result, Digi-Key continues to pull in specialized suppliers whose products go into low volume electronic and electrical equipment like lighting, medical and industrial, according to Tony Harris, chief marketing officer at the company.
“We are adding unique and boutique suppliers in areas that help broaden our offerings to support the engineers,” Harris said. “This helps position us in the production business in the space of high-mix, low-volume manufacturing. Our movement to production business has therefore been natural because we support engineers — many of who are moving into production too.”
That strategy isn’t likely to change even as Digi-Key eyes further expansion globally and especially in China. The company’s website attracts customers from all over the world and many of them order components online which Digi-Key continues to ship from its head office. Over the decades, Digi-Key has honed its delivery system so finely that many of the orders received are delivered to the customer within a span of 24 hours worldwide.
To facilitate this the company has partnered with the major logistics services providers and installed an efficient order management system in its 600,000 sq. ft. warehouse in Thief River Falls complemented with a massive 3-mile long conveyor belt system that helps assure the distribution of thousands of boxes every day; a total of 3.3 million packages were shipped by Digi-Key globally in 2013. It helps that one of the top logistics companies used by Digi-Key has employees permanently stationed at the company’s facility.
While it prides itself on the efficiency of shipping from one single location to customers globally, Digi-Key has also established sales and technical support offices in key parts of the world. It has service centers in China, Japan, South Korea and in multiple centers in Europe, including Munich, London and the Netherlands. It even has a service and sales team in Israel to support the nation’s growing design engineering community and is expected to add more such facilities in other Asian locations in the near future.
Perhaps one of the company’s core strengths is the customer service center, a division led by 20-year Digi-Key veteran Kim Gilbert, and which runs 24/7, handling more than one million transaction per year. Gilbert’s unit is critical to the company’s operation since many of the customers who call or interact with customer service employees online have come to expect a high level of support from Digi-Key. In fact, working at the division requires rigorous training and the typical employee is not a fresh staffer but someone who has extensive understanding of the company’s operations.
“I think of our division as the pain relief center,” Gilbert said. “We are available 24/7, we pride ourselves on answering every phone call at the first ring, we empathize with the customer and, no matter what, we’ll find a solution to their problem because we know that a line-down situation is costly.”
This is the second in a series of reports on Digi-Key. 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.