Digi-Key's Mark Larson: Reaching equilibrium

Suzanne Deffree -- EDN, May 18, 2010

Mark Larson, president of distributor Digi-Key Corp, recently spoke with EDN about balancing 2010 supply and demand, the returning North American market, and maintaining a traditional components catalog as online sales increase. What follows are excerpts of that conversation.


EDN: How has life changed post the 2009 economy?
Larson: We are seeing sales running up about 65% compared to this time last year. At this time last year we were kind of in the depths of the recession, at least at Dig-Key. This is a much more pleasant situation. That doesn't mean that there are no problems, but they are pleasant problems. Situations like scrambling to hire people so we can handle the increased business flow. We are scrambling a little bit more for inventory. But it's a much better set of problems than we had last year.

EDN: The SIA recently reported that it does not expect supply/demand inventory issues in the near term. You just noted scrambling for inventories. How does inventory look from your standpoint?
Larson: What we've seen in inventory is that the upturn started roughly in the mid-September timeframe. Sales on a daily basis continued to increase at a fairly sharp rate. Many of the suppliers, both on the semi side and the passive side, were not so sure that they wanted to bring on production capacity that had been mothballed in the downturn because [of concerns that] this was a blip up or, as had been suggested by some economists, was a W-shaped recovery. That was being held to by a lot of manufacturers. Their hesitancy to bring on additional production and accept what we viewed as the realities of the market meant that there was fairly tight supply in some key product groups. Semiconductors were certainly one of these groups. Now the manufacturers have either addressed the capacity issues or are in the process of addressing the capacity issues.
Even in the semiconductor community, it was not universal that we were experiencing incredibly long lead times and de facto allocation [during the downturn]. One manufacturer might have things under control, another might be facing some problems. A lot of it depended on what industries they were aligned with. I do think capacity is coming on and I do expect an equilibrium to be reach. Broadly speaking, I don't see inventory as a problem.  

EDN: Are there any geographic regions that are offering greater opportunity right now?
Larson: For Digi-Key, North America has come back really strong, but our sales in Europe and in Asia, particularly Greater China, are absolutely through the roof. It amazes us because we have no physical presence outside of the US. We have no employees outside of the US. Everything is shipped from our single product distribution center in the US.

EDN: What do you think helped bring North America back?
Larson: That's a question that has a fair amount of mystery around it. It's one of those things that caused the manufactures to be so hesitant in bringing production back on. I think everybody looks for some type of [sign].They say, ‘it's driven by this industry' or ‘it's driven by that industry' and what actually happened was the market in North America has come back in a very broad sense. My guess is that the single biggest factor in the return and resurgence of the North American market has been the loosening of credit. The tens of thousands, maybe several hundreds of thousands of customers that we deal with and that the industry deals with were very constrained in a very real sense by the lack of adequate financing.
That coupled with a certain mentality. When the market first turned down in 2008, it was such a shock that I don't think anybody could have imagined that the wheels could come off a market that quickly and severely. It left a lot of customers and manufacturers in shock and took a while for things to happen. Maybe if nothing had been done, it would just take a few months for everyone to sort through things and realize that there would be light at the end of the recession, that there would be light at the end of the tunnel. It was a sharp downturn, and incredible shock, and then a gradual belief that things would return to normalcy.  

EDN: How is Digi-Key's online strategy progressing and how is it contributing to the company's sales outside the United States?
Larson: In North America, if you took all of the activity on the Web to all of the major search engines like Google and Yahoo and so on, 38% of the people who are searching for electronic components end up going to DigiKey.com. On a world basis, we haven't achieved anywhere near that dominance, but if you were to take our business in Japan, or China, or Europe, you would see that 95% of that business comes via the Web.

EDN: How does Digi-Key balance its online strategy with its traditional catalog strategy? Engineers love that catalog.
Larson: They do. It's a difficult thing to balance. Some engineers love that catalog and some feel it's almost a sacrilege because it's not green. The challenge we face is learning who are the ones that like the catalog and who are the ones that don't like the catalog, then making everyone happy. The balance between use of catalog and online is sometimes a function of the market we are in. For example, in Japan they are very green and would rather go online. It's a challenge and transition we are working through.