Voices: Digi-Key: growing up, privately

-September 28, 2006

Engineer Ronald Stordahl, inventor of the Digi-Key electronic-telegraph key, founded Digi-Key in 1972. The company went on to become the sixth-largest catalog-electronic-component distributor. EDN recently interviewed Mark Larson, president and chief operating officer.

Is Digi-Key a public company? Can I buy Digi-Key stock?

Digi-Key is privately held by Ron Stordahl. If you figure out a way to buy Digi-Key stock, please let me know. I’d like to buy some.

Any thoughts about an IPO (initial public offering)?

Based on Ron's interest in holding Digi-Key privately and the fact that we have adequate resources to finance our growth initiatives, there is no interest at this time in an IPO or, for that matter, selling to a financial or strategic buyer.

I am comfortable with the many advantages that privately held companies enjoy over public companies. It enables us to serve our customers better. We’re more able to implement long-term strategies that significantly strengthen our product and service offerings.

Must you abide by Sarbanes-Oxley accounting regulations? Is Sarbanes-Oxley a good thing or is it a waste of resources?

Because Sarbanes-Oxley accounting regulations protect the investors in publicly held companies and we are privately held, we are not subject to its cumbersome regulations and high compliance costs.

Protecting investors in public companies is a good thing. Conceptually, that is what Sarbanes-Oxley is supposed to do. Aspects of Sarbanes-Oxley are good, but it is unwieldy and resource-intensive. It remains to be seen if it proves to be an effective tool in protecting investors from dishonest management.

But the existence of Sarbanes-Oxley is not why we are still a privately held company, and I am confident that we wouldn't consider it a showstopper if at some point in the future we determined that Digi-Key should become a public company.

I heard a rumor that some giant multinational offered to buy Digi-Key and you folks refused the offer since you were happy with the way things were and saw no benefit to a larger company's absorbing you. Is there any truth to that?

The story you heard is reasonably accurate. We are flattered by the fact that a number of competitors [strategic buyers] have approached Digi-Key over the years. A number of investment companies [financial buyers] have also approached us. But we continue as a privately held company. With the advantage of hindsight, we know we made the right decision. I expect that we will continue to be an acquisition target, given our success in redefining distribution as our strong growth in both customers and sales reflects.

Today, Digi-Key is a household word for engineers, whereas, 20 years ago, they might have never heard of it. What kind of growth has Digi-Key experienced over its lifetime in the tough catalog-electronics-distribution market? What accounts for your unusual success?

Things have changed rapidly over the last 34 years. When I began managing Digi-Key in 1976, we had sales of about $800,000. This year, our sales should be approximately $830 million. In 1976, we had 14 employees; today, we have more than 1700 employees. In 1976, we had about 1000 square feet of office and warehouse space; today, we have more than 600,000 square feet. In 1976, Digi-Key was probably one of the smallest of more that 600 electronic-component distributors in North America. We have grown to become the sixth-largest electronic-component distributor in North America and the ninth largest in the world.

My stock answer to why we have been so successful is "good management!" But, seriously, I think we have enjoyed "unusual success" because we have been unusually responsive to the needs of the design engineer as well as the purchaser of production quantities.

What did the original telegraph-key kit sell for in 1972?

It was priced at $13.

In the crash of 2000, Digi-Key saw only a 4% reduction in business and did not have to lay off any employees. Has your work force been stable?

Digi-Key was fortunate in the crash of 2000. When many distributors saw their sales plummet 25 to 40% or even more, our sales dropped only slightly. Our work force has been remarkably stable, with relatively low turnover. This fact has allowed us to invest in their training and strengthen their ability to service our customers. But, just as important as the low turnover is the strong work ethic, which is characteristic of the people in this area (Thief River Falls, MN). They work hard and take pride in their work.

Is your work labor-intensive?

Although I don't think of Digi-Key, specifically, or electronic distribution, generally, as particularly labor-intensive, having dedicated employees is critical to Digi-Key's success.

Modern Materials Handling named you Warehouse of the Month in 1992. Back then, I realized that Digi-Key had some of the most advanced and sophisticated materials-handling and inventory systems on earth. Has Digi-Key taken advantage of high-tech warehousing?

Digi-Key's product-distribution center is highly technology-based. Our goal is to ship all orders received before 8 pm Central Standard Time the same day that we receive them. To consistently achieve 99% or better success requires the thoughtful coupling of sophisticated computer-supervised material-transport systems with a work force that is highly focused on performance. We can process an order with more than 100 line items, from the time it is released until it is on our dock and ready for shipment, in a matter of minutes. This capability is critical in serving a customer base that needs and demands product quickly. Time is money; if we can save our customers time, we are saving them money.

Read more Voices

When the Internet boom hit in the late '90s, many people said that paper catalogs were obsolete and everything would take place online. Digi-Key was one of the few companies that used the Web to complement the catalog. Did you foresee how the Web and catalog could complement one another?

We intuitively believed that the catalog and the Internet would work best in tandem. But, not being particularly trusting of intuition, we tested serving customers with and without catalog support. To our amazement, our intuition was correct. We also test to determine the optimum catalog frequency.

Lately, the search functions in the Digi-Key Web site are so good that I will find a part on the Web, and then see what page in the catalog the part is on to view other parts in the same family. I often prefer leafing through my paper catalog versus the Web site.

Many of our customers share your preference for the Digi-Key catalog in certain circumstances. I don't foresee the Digi-Key catalog as ever going away. We currently print more than 5 million catalogs a year.

Do manufacturers now realize that having their line in Digi-Key is not a tactical sales decision but a critical strategic-marketing decision?

Many manufacturers have come to the conclusion that Digi-Key is more that just a sales channel for them. They know that, for many design engineers, we are the critical resource—the "one stop"—that offers the greatest breadth and broadest selection of board-level components for off-the-shelf delivery.

Studies show that most design engineers recognize that dealing with Digi-Key gives them the lowest total cost of acquisition. What do you think?

Many design engineers find it more cost-effective to purchase from Digi-Key than from suppliers, where they must endure a time-consuming interrogation to qualify for "free" samples. They know that their time is worth more than the samples and that they can easily cost-justify buying from Digi-Key.

Digi-Key handles National Semiconductor's sample program. Would you offer that service to other manufacturers? I also know that National Semi patched Digi-Key into its Ariba ordering system and now uses an internal ordering system that still hooks into Digi-Key. Do you offer this service only to big companies?

Digi-Key works with many suppliers and many customers on many unique initiatives and in many unique ways and makes every attempt to accommodate their specific needs and wants. Digi-Key typically evaluates the pros and cons of each initiative or suggested operational modification and makes a decision on that basis.

What is the philosophy behind your Web site?

Digi-Key's Web site is the product of evolution and discipline. We introduced it in 1997, and it is going through constant change. But the underlying philosophy to keep it simple has endured and continues to endure since its inception, and it takes discipline. A number of Digi-Key specialists are now working to create the ultimate searchable database. Customer suggestions have driven the site as it exists today. Some suggestions are in the form of complaints, and some are slightly more constructive.

United Parcel Service and Federal Express run special trucks and planes from Digi-Key to their hubs. Has that Minnesota weather ever caused the company to miss a shipment?

Surprisingly, weather rarely impacts logistics, even in Minnesota. My guess is that overall service from our product-distribution center in Minnesota, because of the strength of its operations, meets or exceeds that of the best in the industry, regardless of geographic location.

You are about to conquer Europe and Asia in the same way that you did America. Will you outsource your order-taking to India? How do you deal with all the European barriers to entry, such as customs and duty fees?

Digi-Key's international-sales initiative is growing rapidly. We are now comfortable with our decision to ship all orders from Minnesota but will continue to evaluate this decision on a regular basis, as we do all aspects of our operation. We have no plans to outsource any support to India and have never seriously considered it.

Customs and duties to Europe and Asia are typically low or nonexistent, and we don't see them as barriers to Digi-Key's success in either region. We currently offer our catalogs and Web sites for Europe in English, German, and French, with additional language translations to follow. We also offer live local support in Europe in several languages, with additional languages to follow.

The situation is similar in Asia, where we currently offer our catalog in traditional Chinese, simplified Chinese, Korean, and Japanese and also offer live local support in the key languages of Asia.

Have the ROHS [reduction-of-hazardous-substances] regulations caused you any grief?

Digi-Key embraced ROHS early and is currently the leader in terms of breadth of ROHS-compliant products available for off-the-shelf delivery. Today, we stock nearly 140,000 unique ROHS components, far more than any of our competitors.

Digi-Key seems to enjoy hearing from customers. Is this customer involvement an accident, a manifestation of “Minnesota nice” that movie directors Joel and Ethan Coen talk about in Fargo, or did you make a conscious decision to engage customers, we lowly, unwashed engineers, in dialogue?

Independent industry surveys typically rate Digi-Key as the No. 1 distributor for responsiveness. We’re fortunate that Minnesota nice is innate for most of our employees, and the rest generally adopt it. Responsiveness to customers is integral to the Digi-Key culture; it’s in our DNA. Further, I believe responsiveness to customers is integral to Digi-Key’s success.

Speaking for all the harried, overworked, underappreciated design engineers, I want to sincerely thank you for all you have done to truly revolutionize the design process. Because Digi-Key makes it so easy to get parts the next morning, we are able to perfect the designs that we have started. Don’t change. Don’t mess up the Web site with marketing; don’t stop taking our calls 24 hours a day, six days a week; don’t stop actually stocking the things in the catalog; and don’t sell out to some conglomerate that will ruin the company.

Thank you and the hundreds of thousands of design engineers who, over the years, have helped make Digi-Key what it is today. I also appreciate your feedback and totally understand that you and all design engineers are not just Digi-Key customers. You are stake holders. You are driving our business. We owe our success to you and we will continue to listen.

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