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

Larson says performance marketing is rapidly replacing relationship marketing. EMS providers and OEMs recognize committed inventory heavily buffered by uncommitted inventory. Semiconductor chips will continue to address increasingly specific needs of customers. Market forces putting severe competitive pressures on local distributors forcing re-analysis of business models.

Looking back to 1976, with just 14 employees and $800,000 in sales, Mark Larson assumed management of Digi-Key (www.digikey.com). Back then, no one could have predicted what would happen or that Digi-Key would one day find itself on a trajectory as one of the world’s fastest growing distributors of electronics components.

Fast-forward to 2010. As Company president, CFO and COO, sales at Digi-Key under Larson’s leadership are projected to grow to nearly $1,400,000,000 this year with employment figures nearing 2,200 employees.

No one can doubt Larson’s ingenuity. In his office, perched behind his desk, is a plaque that reads:

People can be divided into 3 basic groups:

• Those who make things happen
• Those who watch things happen
• Those who wonder what happened

Mark Larson has leveraged technology and, in a very real sense, redefined distribution for electronics components by successfully developing and implementing strategies that have uniquely positioned Digi-Key in the electronics distribution industry.

Today, Digi-Key derives more than 75% of its sales from the Internet, all from one 600,000 square-foot product distribution center located in Thief River Falls, Minnesota.

The power of this ‘redefinition of distribution’ is clearly substantiated by the performance of Digi-Key relative to its peers. In North America, this performance has resulted in the Company’s rise from being the 20th to becoming the 4th largest electronics components distributor in six years.

Worldwide, Digi-Key has risen from becoming the 11th largest to the 8th largest distributor in the past several years.

What’s remarkable about Digi-Key is the Company’s growth has all been organic, without any acquisitions.

VentureOutsource.com talks with Mark Larson about his Company’s rise and plans for the future. Read what Larson says about why Digi-Key has not regionalized like other electronics components distributors; how Digi-Key has leveraged technology, the wonders of performance marketing, counterfeit components, semiconductor industry trends, and more.

Transcripts from that discussion follow…

VentureOutsource.com: Can you tell our readers what important leadership lessons you’ve learned?
Larson: The single most important leadership lesson I have learned is the importance of thoughtfully developing, communicating and implementing a corporate vision. In the earliest days of Digi-Key, we had a very small number of employees and this process occurred almost without trying.

As we have grown, employee functions have become more narrowly defined. This is good to the extent that they are able to become more focused and develop a deeper knowledge of their area of responsibility. However, it can inhibit their ability to understand the business in a broader sense. As a consequence, it’s critical that we now formally communicate the corporate vision and provide the rationale and goals in sufficient detail so we are all on the same page.

VentureOutsource.com: How has your leadership style changed over the years?
Larson: As COO of Digi-Key for the past 34-years, I would like to think that my leadership style has changed, or at least become slightly more polished.

The biggest driver of any change has been the growth of the business and the need to delegate both responsibility and authority.

This business has never been a one-man show, and that is even more true today.

But, in the early years my involvement was deeper in all areas of the company and on that basis I logically made many more decisions.

We now have a strong and cohesive management team with expertise in many areas far beyond my own and they are pushing us forward and working to implement programs that will strengthen Digi-Key in terms of both operations and marketing.

My style has changed to become more of a facilitator and much less of an implementer in helping the team members achieve their goals.

I admit it’s been challenging to avoid micromanaging some of these initiatives, but I do my best.

VentureOutsource.com: What’s the basic message you have for all of your employees?
Larson: Although it may sound trite, in its simplest form my message to Digi-Key employees is that we are here to serve our customers and that our goal is not to be the biggest electronics components distributor in the world, but to be the best electronics components distributor in the world.

Of course, I silently hold the belief that if customers see us as the best we might ultimately become the biggest.

VentureOutsource.com: Can you please share with our readers some of the contributing factors you feel why a single-source location strategy has worked well for Digi-Key and still makes sense compared to regional expansion strategies being executed by your competitors?
Larson: Electronic components typically have a relatively high value-to-weight ratio that allows them to be shipped cost-effectively from country-to-country and region-to-region throughout the world. Free trade agreements exist in almost all major markets, which further facilitate worldwide sourcing.

Additionally, UPS and FedEX deliver quickly…worldwide.  We can deliver product almost anywhere in the world within two to three days.

Digi-Key is unique among major distributors because all orders processed are shipped from our sole product distribution center in the United States. This means we can stock inventory based on the aggregate usage from all regions in the world rather than stock based on the more limited sales activity in any single region.

This allows us to economically justify stocking the broadest range of board level components in the world.

We can also justify stocking in great depth. This strongly plays to the advantage of Digi-Key customers for both engineering and production needs. Validation of this concept is our exponential sales growth in Europe, Asia and the world.

VentureOutsource.com: What are some of the different types of challenges you are seeing in electronics supply chain distribution models in today’s environment?
Larson: The rapid upturn in demand has revealed the greatest weakness in the highly focused supply chain distribution models.

The fact is that industry and world economic conditions are difficult and impossible to predict.

In a perfect world, Mark, an EMS provider or OEM would establish production schedules and never revise them. In that type of world, the supply chain distribution model is the perfect solution.

In the real world, production schedules must change to meet changing demands of a specific product or adjust to rapidly changing industry or world economic conditions.

Supply chain distribution must be a significant component of its business and it is growing rapidly. The reason it is growing rapidly is that EMS providers and OEMs recognize that the committed inventory that supports Digi-Key’s supply chain business is heavily buffered by uncommitted inventory that is available for immediate off-the-shelf delivery.

This means that if there is an unanticipated increase in demand, we are typically far more capable of quickly adjusting to increased quantities on production schedules and meeting the needs of the customer than traditional distributors.

The fact that Digi-Key is growing twice as fast as traditional distributors confirms the industry need for a distributor that is not purely focused on inventory turns and ROI.

VentureOutsource.com: Looking at traditional supplier / distributor relationships and management techniques, how do you see these relationships and management techniques changing as the distribution industry undergoes further changes?
Larson: I believe the single biggest change that is occurring in electronic component distribution, and most other industries, is the rise of performance marketing at the expense of relationship marketing.

Relationship marketing implies that a purchase is based on interpersonal or business relationships.

In the real world, although relationships alone are not typically the sole factor in making a business decision, they have often had a strong impact on purchasing decisions and would skew a decision to the disadvantage of the purchaser.

This was understandable since in the past a professional purchaser or buyer of components for production quantities was formerly forced to rely on a distributor sales representative for product availability; pricing, lead-times, possible substitutions and tracking shipments.

This dependency is broken today.

Digi-Key’s Website gives the purchaser instant access to this information and far more. Many customers have elected to control their own production schedules by utilizing a customized version of Digi-Key’s virtual in-house store.

In addition, we process millions of quotes a year for volume purchasers. For purchasers of production quantities that require or desire a single point of contact, our volume business division representatives are prepared to work with them on both daily sourcing issues as well as scheduled releases.

Performance marketing is rapidly replacing relationship marketing. The distributor that consistently performs is the one that earns the business.

VentureOutsource.com: What are some purchasing trends Digi-Key is seeing develop with regards to components and semiconductors?
Larson: A dominant trend that continues to gain momentum is worldwide sourcing of components by EMS providers, OEMs and engineers.

Historically, world markets have been served independently with a distributor locating warehouses in many countries and regions throughout the world. It was, and is, inefficient but in the past was necessitated by the limitations of communication and logistics.

Today, however, communication is instant. And in terms of getting the product from point A to point B in the world, logistics can consistently and cost effectively move product in a matter of several days.

It’s a new world, a new way of doing business.

VentureOutsource.com: Looking out five years, how do you see progressions with technology impacting the semiconductor business? How might these changes impact Digi-Key’s business?
Larson: It is probable that the functionality of semiconductor chips will continue to address increasingly specific needs of a given customer. On this basis, the customer will be able to choose from an increasingly wider selection of product and select a device that is truly solution-specific.

This proliferation of product will require a distributor with an extremely broad and deep reach into the design community. Digi-Key is clearly the dominant player in this respect.

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.

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.

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.

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.