Digi-Key Takes Unique Approach to Grow

By John Hall

May 01, 2014 at 6:34 AM

For roughly two seconds in “Miracle,” the beloved Disney film about the U.S. Olympic hockey team’s journey to Lake Placid, the Thief River Falls Airport appears in several frames during a scene depicting the team’s flight delayed after a moose wandered onto the runway. 

If you weren’t from Thief River Falls (population 8,500), home of the Arctic Cat and Steiger Tractor, or worked for the region’s biggest employer, Digi-Key, you likely missed that.

Just like you may have missed the Digi-Key parts box sitting on a lab table in a recent episode of “Myth Busters,” the popular cable show where engineer-actors refute or confirm bizarre oddities of nature or science using a dizzying array of gadgets and high-tech.

While the company may not be on the lips of most in the general public, it certainly is among any company that relies on Digi-Key’s million-plus electronics parts SKUs (Stock Keeping Unit).

Very few companies could get away with being a global (and growing) electronics distribution superpower out of a single rural Minnesota warehouse. Even fewer would be able to convince logistics giants UPS and FedEx to open dedicated aircraft hubs in a tiny, two-runway general aviation airport to serve just one customer. 

But Digi-Key succeeded in that, and today stands as a heartening reminder that American entrepreneurism is alive and well.

The Back Story

The origins of Digi-Key are in part a serendipitous over-estimation of demand.

As a young electrical engineer on track to earn a Ph.D. nearly five decades ago, founder Ronald Stordahl identified an unmet need for automation among ham radio enthusiasts. Stordahl leveraged the growing affordability of solid state technology to replace conventional vacuum tubes and conceived a “Digi-Keyer.”

Sales of the innovative kits were modest but failed to consume all of the initial components stock. Stordahl realized he needed to recoup the investment he’d made after amassing an inventory of parts that couldn’t be returned. In 1972, with the assumption that there were others like himself who would value the ability to acquire components in less than standard manufacturer pack quantity, he began selling the individual components, first marketing them to hobbyists in the upper Midwest with a crude mimeographed catalog and shipping them by hand through the sleepy town’s tiny post office.

Whatever miscalculation Stordahl may have made with the Digi-Keyer, he more than compensated with a steely resolve to provide his fellow electronic “geeks” with the best customer service possible. On that premise, he convinced childhood friend Mark Larson to form Digi-Key. The two continue leading the company today with Stordahl and Larson as CEO and President, respectively.

Today, Digi-Key is a giant among electronics parts distributors, ranking fifth in sales in North America and sixth globally in sales. It’s also one of the fastest growing such companies in the world.

 IMG_1681.JPGThe breadth of the company’s parts catalog is staggering – everything from tiny resistors, connectors, capacitors, resistors and relay switches to integrated circuits and power supplies. Its suppliers are among the world’s blue chip component manufacturers representing the automotive, communications (including wireless), energy/renewable energy, industrial, medical equipment, transportation, military/aerospace, and research and development industries.

Equally impressive is its long and growing list of industry accolades. For 21 consecutive years, North American engineers rated Digi-Key highest in overall performance in EE Times’ annual survey. In 2010, Digi-Key grabbed a host of “best in class” honors for delivery, product breadth, customer service and others in electronics market researcher Bishop and Associates’ survey. Last year, Digi-Key was recognized as the number-one electronics distribution partner by UBM Tech and Hearst. 

From ‘Prototype to Production’

Unlike much larger distributors, Digi-Key has carved and built upon its niche serving individual hobbyists and engineers. “Our core value proposition is providing the widest breadth of product available for immediate delivery,” explains Dave Doherty, Executive Vice President of Operations who joined the company seven years ago. “We’ll ship down to almost one unit of anything. Much of our inbound deliveries come in quantities of anywhere from 2,500 up to 18,000 units and we’re breaking that down and putting it in custom packs. So we’ve become very, very good at dealing with the high-mix, low-volume customer. If you want to go to Costco and buy in bulk, there are distributors that cater to that. We’re a mega superstore that will ship very small quantities.”

That’s not to say its customers haven’t gotten bigger and bigger over the years. Today, the company now relishes its expanding role in supplying production quantities for OEMs and contract manufacturers, and has a presence in nearly two dozen major global markets.

Along the way, Digi-Key has evolved into serving design engineers and the prototyping market, and is rapidly developing a reputation as a product innovator. It even trademarked a slogan, From Prototype to Production®. Through its online forums that encourage engineers to collaborate and share ideas as well as by offering one-on-one technical advice, Digi-Key has nurtured innumerable design and mechanical ideas into product improvements. 

By the Numbers

This is a story about numbers as much as anything else. To wit (and bear with us, the list is long): 

  • $1.6 billion: 2013 sales (up from $800,000 in 1976).
  • 4 million: Number of paper catalogs Digi-Key shipped out every year up to 2011.
  • 2.9 million: Orders processed in 2013.
  • 3 million: Number of searchable products in the company’s database.
  • 1 million: Number of individual SKUs the company stocks.
  • 900,000: Number of square feet comprising Digi-Key’s distribution center.
  • 540,000-plus: Digi-Key’s current individual customer base.
  • 300,000: Number of outbound shipments per month.
  • 25,000: Number of inbound shipments per month.
  • 24,000: Number of orders processed each day.
  • 8,573: Population of Thief River Falls, where Digi-Key is headquartered.
  • 2,900: Number of Digi-Key employees.
  • 750: Number of manufacturers around the world Digi-Key represents.
  • 400: Number of new employees Digi-Key needs by the end of this year.
  • 170: Countries the company currently ships to.
  • 99: Percentage of orders fulfilled the same day they are placed.
  • 95: Percentage of Internet orders outside of the U.S.
  • 86: Percentage of orders taken over the Internet.
  • 81: Number of unique websites the company manages.
  • 50: Percentage of the company’s products that are integrated circuits.
  • 45: Percentage of the company’s products sold outside of North America.
  • 42: Digi-Key’s age.
  • 15: Number of currencies Digi-Key currently accepts.
  • 10: Percentage company’s sales grew in 2013.
  • 12: Number of languages customer service operators must speak.
  • 6: Hours north of the only major metropolitan area in the state – Minneapolis.
  • 2: Hours south of Winnipeg, Canada.
  • 3.6: Number of seconds between each processed order.

But the most compelling number of all is 1: The number of chief executives and presidents Digi-Key has had since its founding in 1972, the number of tiny individual parts the company is willing to ship, and more important – the precise number of warehouses the company operates in the world.

Doherty explains. 

Dave_Doherty1.jpg“Our model is different. If you tracked the evolution of electronics distribution, the key was always local inventory. I worked for competitors with 42 sales offices and each sales office had their own warehouse in the back they supported customers locally from. Over the last few decades, those entities have been trying to consolidate warehouses and serve more customers from a common pool of inventory. Digi-Key started out doing that – one common pool of inventory – but is now starting to ask, ‘How do we reach a broader audience of customers?’” 

A big part of the answer came a few years back, when Digi-Key decided it needed a much closer relationship with the well-established logistics providers UPS and FedEx.

‘How Do We Grow?’

It began with an idea: Digi-Key’s sole distribution center is located in the upper northwest part of the state in an area as bucolic as it is remote. For years, it relied on UPS and FedEx to pick up and deliver product mostly by ground vehicles, which made the six-hour trip to Minneapolis for aircraft transfer to hubs in Louisville and Memphis, respectively.

Concurrently, Digi-Key and its customer base were growing.

Picture us along our growth cycle,” Doherty says. “If we’re not taking a model that puts inventory to your doorstep, how do we effectively get it there in the shortest amount of time? The most critical issue for us became this: What’s the latest the carrier has to pull off the docks here? That will dictate how long we can continue taking orders for customers.”

At the time, Digi-Key stopped processing orders at 4 p.m. to accommodate UPS and FedEx pickup hours. If it could continue processing orders longer, its sales would grow and increasing demands from customers for faster order-to-delivery times could be met. 

In time, a solution was found. Both carriers established special aircraft routes straight into Thief River Falls’ small general aviation airport – a feat that is as rare as it is novel.

Located just a five-minute drive from the plant, Thief River Falls Airport has two asphalt paved runways and resembles many rural airports with a small hangar for a few dozen private aircraft.

 AIRPORT_SHOT.jpgRecently, a 20,000 square-foot hangar was built to provide a controlled environment for loading and housing freight aircraft, according to the airport’s website. Largely because of the volume, community officials realized a growing potential for the airport to facilitate economic expansion in the area, and in 2013, the city and county formed an airport authority to broaden the tax base and support future improvements.

Now that both carriers have specially designated daily flights in and out of Thief River Falls, Digi-Key is able to process orders up to 8 p.m. and provide overnight delivery anywhere in the country.

“It’s a unique approach,” Doherty says. “It’s not strong arming but rather building a shared vision based on the core competencies of your partners. More and more, we found both UPS and Fedex wanted to get creative in how we worked together. We discovered we both win if we keep the store open as long as possible and get product at a best case next day or at the very least, provide ground so we don’t lose that extra day of transport. 

The arrangement has been a positive all around. UPS and FedEx have been able to streamline their delivery and pickup operations and provide better service, and Digi-Key has realized exponential increases in sales; even opening a lot of new business in the Far East.

“As the cutoffs have been extended, we now have been able to get some pickup in Asia,” Doherty says. “For example, we’re starting to see business ramping up from Japan, where orders flow in early in their day in order to speed up deliveries on the back end.” With the 8 p.m. cutoff now, about a fourth of Digi-Key’s domestic orders now come from the California/West Coast markets, which can place their orders up to 6 p.m. there for next-day delivery.

The arrangement also has shown how an entrepreneurial approach to problem-solving can be the proverbial “win-win.”

“It shows how our companies can come together and at the end of the day, ask ‘What’s our inhibitor to growing this business at an even faster rate?” he adds. “And for the most part, it continually comes down to order cutoff time.”

How It Works

Processing more than 300,000 shipments per month out of one distribution center is a hefty task. An average of four SKUs are in every box. Digi-Key’s fulfillment rate is consistently over 95%. Within 20 minutes after pushing the “confirm” button on Digi-Key’s web order page, product is picked, packed and ready for shipping, says Doherty.

By 10 p.m., the aircraft wheels are retracting and both planes are en route to Louisville and Memphis. 

One of the most unique parts of the arrangement is the fact that Digi-Key opened floor space in its warehouse to allow the carriers to prepare and stage shipments. UPS and FedEx employees are onsite during the pick and pack process, scanning and loading packages. Most of the pre-sorting goes right into their bins by zip code, region or ship method.

“Necessity is the mother of invention,” says Doherty. “The necessity was to expand our hours in this location and UPS and FedEx would come to us and say, ‘If we can get a little of your floor space, if we can work with you and our system could separate the parts out in these types of configurations, this will allow us to do some of the work we’d normally do in some offsite staging area prior to coming to Louisville and Memphis.’ This eliminated their intermediate staging areas.”

With the ability to work side-by-side with Digi-Key employees in the staging area, a lot of “disconnects” have been eliminated. Chris Lauer, the company’s Director of Order Fulfillment, remembers it all too well from his days on the other side, when he worked the UPS trucks servicing Digi-Key.

“One of our challenges was with the splits,” he says. “We’d have 60 different destination hubs we could go to and I would expect my Digi-Key folks to work out these zip code ranges and memorize them and split to 100% accuracy. If a chart had expired or they missed a digit on the label, however, it would throw things into chaos.” UPS has automated the process now. 

Benefits for Procurement 

One of the big benefits Digi-Key has realized is gaining the leverage to consolidate shipments and gain efficiencies, according to Doherty.

“We’ve been getting more aggressive with aggregating the increased demand,” he says. “Our inventory model is fairly conservative. We want to have it in stock and available but we don’t operate in the just-in-time mode. We don’t have razor-thin supply chain timing. So we’re able to aggregate shipments coming in from China.” In addition, much of the company’s international shipping has been streamlined. For example, both carriers are able to do the brunt of customs-clearing paperwork on the plane, before the planes even land, he adds. 

Such efficiencies also allow Digi-Key greater flexibility in getting products in their customers’ hands quickly. For example, incoming part deliveries to Digi-Key up to 2 p.m. are able to be out the door the same day, according to Lauer.

Staying True to its Roots

For years, Digi-Key survived and thrived without the allure of overnight shipping. “Forty years ago, it was unheard of to have a regional distributor in Minnesota shipping to Boston or California,” says Doherty. “But slowly but surely, a company could find us and say they’d be willing to wait a few days for ground service just knowing we’d have the part they need and it’s on its way. Even if they had to wait three days ground, the fact that we had hundreds of parts they were looking for meant they didn’t have to go to multiple sources through different delivery vehicles with different POs.”

But a consumer-driven phenomenon fueled by e-commerce and the Internet changed all that. In 1995, the company went online with its first e-commerce website. A lot of folks held their breath in 2011, when it stopped printing and mailing its 4 million-plus paper catalogs. “We were the postman’s worst nightmare with our catalog getting thicker and heavier. It’s also impossible to represent the latest technologies with the rapid, regular introduction of new components,” says Doherty. “Mark [Larson] is known for taking bold, decisive actions and this gave us the ability to more quickly deliver new solutions to engineers.

“We embraced the Internet early on and now we take 80% of our orders, 95% outside the U.S., over the Internet,” he adds.” We come in on a Monday morning and we have a backlog of 3,500 orders overnight on the Internet waiting to get filled.”

Over time, Digi-Key’s customers have also embraced the new way of buying products online. 

For the longest time, our customers would say ‘I’ve dealt with Digi-Key for 30 years and love it but I couldn’t describe or paint a picture of one employee there because I’ve always interfaced with them in a virtual way’,” Doherty recalls. Even so, the folksy customer service approach Doherty likens to online retailers like Lands End and LL Bean continues providing a measure of comfortable familiarity. “That hasn’t changed even as our business has scaled,” he says. “Customers have a very intimate and excited relationship with Digi-Key but yet not as personal as you’d think. It’s not until recently we’ve modified that model to start engaging with larger customers in a more deliberate or local sales way.”

Fifteen years later, the Internet has actually enhanced the way Digi-Key sells and presents its products. “It’s gone on a different upward trajectory and there’s no looking back,” Doherty adds. “We learned that products can only be displayed in a fairly static way through catalogs. Given the complexity of the products we’re selling, customers want so much more rich detail and web technology allows us to provide that.”

Forty years ago, Digi-Key’s customers were primarily hobbyists looking for parts and the expectations for delivery were far more relaxed. But things are quite different now. “Many of our customers now rely on us to provide parts with very tight timelines that will allow them to hit a marketing window for a product launch,” he adds.

As 21st century Digi-Key is, its culture is still rooted in the days when Mr. Stordahl clung to his vast inventory of radio parts, knowing there would be demand for them years down the road.

Earlier in his career at other companies, Lauer recalls how “dead” or expiring stock was viewed as an albatross. His view changed after coming to Digi-Key. “All of a sudden, the dead stuff takes off and starts selling again,” he observes. “Conventional thinking or a MBA mindset would debate the merit based on floor space and ROWC but the reality is that we identified a customer need waiting to be met.” (Return on Working Capital)

Doherty says Digi-Key keeps older parts in stock because customers invariably find ways to re-purpose them. We find second and third generations of applications for products that are beyond what they were originally intended for,” he says. “We don’t prescribe or pretend to think what customers will use these components for, yet we try to define them really well so they can be located by our customers through parametric search engines. We let our customers’ creativity determine that. More and more, our customers will take products almost as a midlife kicker and re-introduce them to Digi-Key. They’re stable, they’re in a healthy portion of their lifecycle and they get re-introduced to the market.”

In the end, the company’s zeal to have broad and mass electronics parts selection is a key to its success. The point was not lost on management when it pondered ways to broaden its appeal several years ago. “Most companies logically look at their high runners and want to put them locally in front of customers,” Doherty says. “In some ways you could say we were iTunes™ before iPods™ or even Apple was invented. We never forgot that our founder being a hobbyist himself knew that customers want selection. It’s very hard to contain electrical engineers so we started at a very early time in our history trying to go broad in the products we offered. That started to necessitate a different model. And it supported this one location we operate out of today.”



Tags: purchasing electronics logistics Supply chain management Procurement sourcing distributor
Category: News Article

John Hall

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John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com


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