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Mark Larson talks Digi-Key, semiconductors, electronics components, distribution

VentureOutsource.com: How has the green, or clean, technology trend impacted business segments at Digi-Key?
Larson: Although ‘green’ and ‘clean’ are the buzzwords of today, the impact is slower than the publicity. I think it was Bill Gates who said, “We tend to overestimate the impact of technology in the next two years and tend to underestimate it in the next ten.”

I think ‘green’ and ‘clean’ are coming on strong in terms of new product and customer design-ins. But these trends are clearly in the early days.

 

VentureOutsource.com: What are your thoughts on the challenges the electronics industry faces pertaining to counterfeit components, inspection techniques and part authentication?
Larson: This is an area of critical concern for Digi-Key and the industry. The problem would be virtually nonexistent if customers would source all products directly from manufacturers or distributors that are authorized to sell for those manufacturers.

But, in an effort to obtain product under extremely tight market conditions with extended lead times, or in an effort to purchase product at below market pricing, customers sometimes purchase from other sources and take the very real risk of purchasing counterfeit parts.

The problem is compounded by the fact counterfeiting is becoming increasingly sophisticated and detection through inspection and other methods of part authentication is lagging.

My conclusion is that if a customer chooses to purchase from a source other than an authorized distributor or directly from the manufacturer, this problem will not be resolved in the short run.

 

VentureOutsource.com: With regard to counterfeit reporting; do you feel our industry is handling this correctly? What would you like to be seen done differently?
Larson: When you say the ‘industry,’ I assume this means the customers as well as the distributors and manufacturers. At this point in time, the customer has the power to avoid becoming the victim of counterfeit product by choosing not to purchase product from unauthorized channels.

I’m not saying this is always easy, but it is the solution. If I purchase a Rolex watch from a street vendor, I take a risk.

The purchaser of electronic components that buys product from a broker, non-franchised or independent distributor is taking a risk.

From the standpoint of manufacturers and authorized distributors, the goal must be to clearly get this message across. The National Electronic Distributors Association (www.nedassoc.org), which consists of many manufacturers and authorized distributors, has and is working to communicate the problem and the solution. (Disclosure: Mark Larson served on the board of directors and executive committee of the NEDA, and currently serves on the NEDA Education Foundation. Additionally, the NEDA and the Electronics Component Association recently announced a merger. The new organization will be named the Electronics Components Industry Association and is scheduled to commence operation January 2011)

 

VentureOutsource.com: With all of the environmental regulations these days, including substance restrictions and reporting requirements, how have the various parts management business processes changed the way you and your team manage Digi-Key? What are some ways such regulations have impacted Digi-Key relationships with component suppliers and semiconductor manufacturers?
Larson: To your point, life may be getting better, but it’s not getting any simpler. We have numerous staff dedicated to working with manufacturers to see that parts are properly classified for export control purposes, to see that part composition is clearly identified, to see that product is tracked and audit trails are accessible to the degree possible.

Digi-Key deals with most of the world-class manufacturers and they are typically responsive to our requests for data and support.

 

Area inside Digi-Key product distribution center showing parts arriving from receiving department to be placed into picking bin locations (foreground). Background conveyors show partially / filled customer orders traveling to packaging area where order consolidation takes place.

 

Some of the newer and smaller manufacturers with lesser resources have more difficulty in complying with our needs.

For us to serve a world market and maintain the confidence of our customers and meet governmental and agency requirements throughout the world, we have no choice and we must address these issues.

 

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VentureOutsource.com: Let’s talk growth and Digi-Key’s rapid rise. What are some of the factors that have contributed to the Company’s growth to date? Where is Digi-Key headed and how do you plan to get there?
Larson: Digi-Key’s rapid growth has been driven by success in three areas.

In 1997, Digi-Key introduced its first website. It was developed thoughtfully and customer feedback guided us through the process of what has become the top Website in our industry.

Our search engine is rated #1 in our industry and of all of the searches done on the Web in our competitive group Digi-Key receives 38% of the traffic. This has put us in a dominant position on the Web and has sales over the Web representing 75% of our total sales today.

A second area of growth has been our international sales.

In 2002 we had sales outside of North America of about $ 11-million. We expect sales outside North America of $440 million this year.  This has been strongly supported by our Web strength and strong localized marketing programs around the world.

The third area driving our growth is Digi-Key’s volume business division.

Although we have enjoyed a strong, and once again, dominant, position in serving the engineering community since our earliest days we are also positioned to pursue billions of dollars in production business. This initiative started a number of years ago and we have developed a strong and unique infrastructure. Our volume business is showing amazing growth.

As for Digi-Key’s future growth, it is interesting to contemplate.

After growing at a compound annual rate of more than 20% for many years along came 2009.

Although our sales in 2009 fell only 6%, which is half the rate of decline experienced by most of our competitors, sales did in fact drop.

Now we’re in 2010 and sales are going through the roof. Sales for the first four months of the year are up more than 65%. Sales outside North America are up more than 100%. We are projecting our sales for 2010 to reach $1.4 billion, up from $ 927 million in 2009.

We are realistically headed toward a record year that programmatically resets our next sales goal to $2 billion, since we like to keep everything in round numbers.

How do we get there?

The key is to perform for our customers.

We have to have the inventory they need available when they need it and at a fair price. If any problems or issues arise, they have to be quickly and fairly resolved. The principles are fairly simple.

 

Packaging area inside Digi-Key product distribution center. At left, employees in picking area retrieve parts. At right, packaging of customer orders takes place.

 

The execution is a bit more complex but the fact is that we are doing it every day of the week for hundreds of thousands of customers worldwide.

Independent third-party industry surveys of purchasers consistently rank Digi-Key as the top distributor in terms of whom purchasers prefer to do business with. This ranking is the result of performance.

It’s not an accident that Digi-Key’s sales for production needs ranging from NPI to small and medium production runs is one of the most rapidly growing parts of our business. We are consistently meeting or exceeding the expectations of our customers.

 

VentureOutsource.com: Which segments of your business are growing the fastest and what do you attribute to the success of these business segments?
Larson: Clearly the fastest growing segment of our business is sales to customers outside North America…to Europe and Asia.

The biggest factor driving these sales is our breadth of product line.

The fact is, local distributors have severe limitations in terms of justifying stocking a range of product anywhere near our range and the customers are seeing this as a true Digi-Key differentiator.

 

VentureOutsource.com: What industry changes / forecasts do you see on the horizon?
Larson: Market forces are putting severe competitive pressures on local distributors. These pressures are forcing local distributors re-analyze their position in the market and often re-position to survive.

I see the world of electronics distribution moving along a path where there will eventually be a finite number of broad-line distributors serving worldwide markets with local distributors more often specialized or differentiated by having unique service offerings.

 

VentureOutsource.com: Can you please share with our readers some of Digi-Key’s biggest challenges you see that lay ahead?
Larson: Growth is always a challenge. Rapid growth demands anticipating the needs of an expanded infrastructure.

We have a good sense of what our customers want and how their needs and demands are changing, but defining the best solution to meet these needs is not easy.

Digi-Key is not following a path that already exists.

We are making a new path and the result is new age distribution.

How do we most efficiently and effectively leverage technology? How do we fully capitalize on economies of scale? How do we most effectively localize Digi-Key around the word?  There are a lot of questions to answer, but I’m confident we’re up to the challenge.

 

VentureOutsource.com: What changes would you still like to see take place internal Digi-Key?
Larson: It’s difficult to be too specific without exposing our competition to initiatives that are in process at this time.

In a general sense, the changes I would like to see would further allow the customer to integrate seamlessly with Digi-Key. We are working to anticipate their needs, and we are doing some exciting things. Many changes are system-based and resource intensive.

 

VentureOutsource.com: Thank you for your time, Mark. Is there anything else you’d like to share with our readers?
Larson: We have developed a business model that is unique to the industry and, as a result, brings some unique advantages to the customer. It takes time to prove our value.

We must win one customer at a time. It’s a process. We have grown rapidly and continue to gain momentum.

I still consider Digi-Key in a pre-takeoff stage.




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