Digi-Key Corp. has in recent years reported impressive sales growth of two to three times the industry average, making the electronics component distributor one of the best performing companies in its sector. It’s not slowing down. For 2015, the company projects another double-digit sales expansion, buoyed by surging adoption of its services globally by engineers, growing interests from purchasing professionals and the addition of new supplier lines in fast-growing segments of the industry.
For 2015, Digi-Key sees sales growing in the 11 to 15 percent range, based on current projection for overall electronics components distribution market growth of 4 to 5 percent. Whatever the industry does, “we’ll beat by 2 to 3 times. That’s our historical performance,” said Dave Doherty, executive VP, operations, at Digi-Key, in a recent interview.
Within the industry, Digi-Key’s performance has been lauded even by competitors who marvel at its ability to sustain current growth rate even as they admit it has done a good job of “connecting with design engineers as well as the strength of its online offerings,” according to an executive at one of the top distributors in North America.
Certainly, behind Digi-Key’s amazing success is a ferocious focus on serving the design engineering community with a wide range of products and services, a wide and expanding supplier and components roster, a powerful and industry-beating web presence and its vaunted strategy of stocking and shipping parts from a single location to customers worldwide. Additionally, the company has in recent years expanded offerings to provide production volume parts to customers seeking value-added procurement and supply chain management services.
“We have customers that now need services for small production runs where the volume begins to get higher and are now looking for other services to schedule the order or to share the MRP,” Doherty said in an interview conducted before the company announced 2014 results. “We’ve added feet on the ground and they are providing customer service, inside sales, and other value added services to extend our breath of service locally beyond just the internet.”
With 2014 sales of $1.76 billion, up 11 percent from the prior year, Digi-Key is still not anywhere near the massive sales of industry giants Arrow Electronics and Avnet Inc. However, the company has put a visible dent on the top players’ grip on the design engineering community and is even beginning to get them concerned with its foray into value-added bulk components purchasing contracts at low-volume and high-mix OEMs. While Digi-Key executives maintain the company will remain focused on design engineers, it is apparent customers are pulling the company deeper into supply chain management and volume procurement activities.
How is Digi-Key managing all of the various challenges associated with serving a diverse and fast-growing customer base, including partners in Europe, North America and China that demand a wider range of services? First, it is adding more employees in key regions, especially in Europe and China, where it is using the new hires to complement and broaden web services. Additionally, Digi-Key continues to add niche suppliers to its product lines, beefing up its offerings in such fast-growing segments of the electronics industry as the Internet of Things and embedded applications, both of which helped drive its growth in 2014. (See: Digi-Key 2014 Sales Jump on Surging IoT Demand).
Digi-Key executives insist the company will maintain its core operating model of serving primarily engineers and shipping from its head office in Thief River Falls, Minn., though. That strategy has worked well and although the company once considered changing this and continues to respond to some customers’ requirement for volume production parts, it has stuck with the model of shipping directly from one location because it still offers the greatest advantage for suppliers and customers, Doherty said.
In an interview with Electronics Purchasing Strategies editor-in-chief Bolaji Ojo, the Digi-Key executive commented on the company’s growth strategy, expectations for the year ahead and complementary services being added to its operations. In this first of a 2-part series, we excerpt Doherty’s comments on what drove Digi-Key’s growth in 2014 and expansion plans for 2015 as well as how the company has been adding suppliers in key market segments. The second part of the series to be published early in February will feature comments on Digi-Key’s strategy in China and developing economies among other subjects.
EPS: Digi-Key had a great year in 2014. Your sales rose 11 percent year over year. What factors were behind it?
Doherty: We are very proud that we grew double-digit in every major region of the world. We’ve added in the last two and a half years thousands of SKUs to our website and we’ve made the content of parts searchable so the customers can find them easily. We’ve had a two-pronged strategy. The first is that we are getting better known but I think there’s still a lot of headroom for us to grow. I just mentioned the new products and suppliers we’ve added in the last two years. We try to keep up with the latest trends between the Internet of Things, RF, wireless and other products that are driving growth at niche suppliers.
It’s amazing to me that there are forecasts about how the industry is going to consolidate because of how expensive it is to produce products and build fabs but with wafer fabs sprouting up from TSMC, UMC and others, we’ve seen the reverse. We’ve seen the flourishing of small, innovative and very nimble suppliers reacting to market needs in technology niche areas more quickly than some of the traditional suppliers and we’ve tried to keep pace to help our customers by validating, searching those suppliers out and getting their technologies on our website.
EPS: Are you making any changes to the way Digi-Key operates, how you service customers, warehouse products and ship them? Do you have more boots on the ground in Europe or what else could be behind the surging sales growth?
Doherty: A couple of things. I’ll get to the boots on the ground part later because that’s part of the second prong of our strategy. But along the first one, we haven’t changed the fundamental model. All the shipments, all the inventories are coming from Thief River Falls, Minn., but we have worked with our partners to offer things like collecting back taxes so that we can make one seamless transaction for the customer. Like this, we look and feel more local to the customers. We’ve expanded in a number of countries in a seamless way so that a customer doesn’t get a package and then a bunch of paperwork to fill out. Logistically, that’s made us a lot more user-friendly in Europe.
Second, as you allude to, we continue to grow our physical presence. Our strategy is simple. We use the core model, use the web, to find and service the core customer with the technology and then use the local resources to continue to provide value-added services. We have customers that now need services for small production runs where the volume begins to get higher and are now looking for other services to schedule the order or to share the MRP. Those feet on the grounds are providing some customer service, inside sales, etc., to extend our breath of service locally beyond just the internet.
EPS: What is Digi-Key doing to support volume production at companies that are asking for such value added services?
Doherty: The definition of value-added services is broad. Here, out of Thief River Fall, we have the ability to break down and ship any quantity in any medium that the customer wants, different bar codes and different labels. We ship battery packs, we shrink wrap, we put cables on certain products, we program a wide variety of microcontrollers, silicon timing devices, etc. That’s the value-added services.
The local service is more in the supply chain where we can load customer-specific pricing so that when they come to the web if they are not a core customer but are involved in production volume they can engage with us through the MyDigi-Key account and all their specific conditions and terms are preloaded. Electronically, from an MRP perspective we interface with the customer in all the traditional ways in how we share information and how we can provide supply chain services for them. Our arrangement may not be as large or as complex as the big guys but the breadth of services is as wide as what the traditional distributors offer.
EPS: How is Digi-Key doing in other parts of the world?
Doherty: We’ve been growing at a double-digit rate in other parts of the world. In North America we are on a run rate to grow 11.3 percent in 2014, which we think is huge because Arrow and Avnet are beginning to release and share their regional numbers and it looks like they are going to report growth of about 5 percent. In Asia-Pacific, we are up 15.2 percent and the European numbers are up 26 percent. Worldwide that’s greater than 14 percent overall growth.
EPS: How do you stack up against the competition?
Doherty: We use Arrow and Avnet public release numbers as the benchmark for how the industry is doing because the information is available. We would be disappointed if we didn’t grow at 2 to 3 times of what the industry is doing. We are going 14 percent while the market would be growing closer to 5 to 6 percent. Going forward, our suppliers are asking us what they should forecast for Digi-Key in 2015. That’s a very difficult question to answer with such little backlog. What we ask them is “what do you think the market would do” and generally speaking for 2015 they are saying something similar to 2014, maybe single digit growth of 4 or 5 percent. Then we say, if that’s the case then we would expect that we would grow between 10 and 15 percent again. Two and two and a half time whatever the industry growth would be our target for 2015 and realistically that’s how we’ve been performing.
EPS: Does this projection in any way change your inventory strategy?
Doherty: No. If anything we continue to be more aggressive. We want customers as soon as they know they are going to have new products to come to us. Most of them already do this because they know we are very receptive to give them stocking order and put together a marking package. Many distributors have a strategy of – and it makes sense for them – “prove that this product will move and then we will stock it.” Digi-Key says “if you have products designed for a wider customer base let’s get them on our shelves and let’s establish and prove out that market.”