Company News

(Aug '17) The Digi-Key Difference

Tuesday, August 01, 2017

A little alternative history can help us tell this tale.

You’re Ray Kroc, it’s 1955, and you’ve just started selling McDonald’s hamburgers. Except -- and here is where our history veers way off course -- your burgers don’t sell very well. In fact, soon they’re not selling at all.

So instead, you start selling the buns, the pickles, the ketchup, the mustard and the beef. That works.

Boy, does it ever. Because a few decades later, you and your 3,500 workers now stock millions of different food items, and you ship grocery orders totaling $2 billion a year from your giant warehouse in Thief River Falls, Minn.

Substitute a hand-held radio accessory for hamburgers, electronic parts for foodstuffs and (most important) Ron Stordahl for Ray Kroc, and you’ve got a fair sense of the Digi-Key story.

Oh, and shorten the timeline, too. Because the Digi-Key story starts as recently as 1972, when Stordahl incorporated his business in Thief River Falls, and the staff selling his original “Digi-Keyer” accessory numbered only two. Including Stordahl.

Today …

Today, the Digi-Key Corp. is the world’s largest seller of electronic components that are available for immediate shipment. (Think of a Radio Shack store’s parts department on Jack and the Beanstalk-strength steroids.)

The company stocks chips, diodes and other electronic parts in its shopping-mall-sized warehouse. A sales team processes 16,000 orders a day, using a system that accommodates 10 languages and 16 currencies while sending parts to 170 countries.

But for all of that activity, a customer’s order still gets “picked and packed” in as little as 15 minutes. Some 99.6 percent of all orders get shipped for next-day delivery, Digi-Key reports.

The result has been exponential growth, as the nearby chart notes.

That’s why more than one out of three of the jobs in Pennington County, Minn., are located at Digi-Key. That’s why the company runs buses bringing in workers from Crookston, East Grand Forks and Bagley, Minn., the latter some 65 miles away.

And that’s why Digi-Key now has announced a $300 million expansion, one of the biggest in the region’s history.

Over the course of 10 years, Digi-Key will build an additional, even bigger warehouse and hire 1,000 more workers -- all in Thief River Falls.

Not bad for a town of 8,600, especially one that’s 20 miles from the nearest four-lane highway. But Thief River Falls’ remoteness is a big part of Digi-Key’s success.

Let’s go back to the beginning -- and this time, we won’t need an alternative. The real-life history is dramatic enough.

The Digi-Keyer

Back then, you didn’t have a choice. If you wanted to be a ham (or amateur) radio operator in the 1960s and ’70s, you had to learn Morse code.

Which meant you often had to teach yourself. Which meant the code you’d tap out or “key” would be sloppy, at least at first. After all, that’s where the ham label came from: Navy and other professional telegraphers derided amateur keyers as “ham-fisted.”

Enter Ron Stordahl, a University of Minnesota electrical engineering Ph.D. A lifelong tinkerer, Stordahl designed a digital keyer -- a circuit board that could not only smooth out the ham operator’s dits and dahs, “but make them machine perfect,” said Randall Restle, Digi-Key’s vice president of applications engineering.

From his hometown in Thief River Falls, Stordahl decided to sell the individual components and board to hobbyists for assembly.

The “Digi-Keyer Kit” was born.

Then a very few years later, it died.

The makers of radio transmitters liked digital keying so much, they built it into their own machines, Restle said. That rendered the Digi-Keyer Kit obsolete, and stranded Stordahl with shipping tubes full of leftover resistors, capacitors and other components.

All of Minnesota can be grateful for what happened next.

Because first, Stordahl decided to sell the components. And second, he decided to sell them individually, breaking the industry’s pattern of selling in bulk.

Forty-five years later, that strategy still powers the company, said Dave Doherty, Digi-Key’s president and COO.

In a nutshell, Digi-Key caters to design engineers. They’re the people who craft new technologies; and in doing so, they turn to Digi-Key for parts.

They do this for three big reasons: inventory, service and expertise.

Inventory

“A rough analogy is going to a liquor store that sells only cases of beer,” Doherty said.

“But some people want a six-pack or a 12-pack, or even a single beer.”

Digi-Key’s 800,000-square-foot warehouse, with its hundreds of rows of shelving and 2.6 miles of conveyor belts, caters to those who want the electronics equivalent of six-packs or single beers.

Some microchips are so small, they could be sprinkled out of a pepper shaker, Doherty said. But Digi-Key not only sells many such components individually, but also keeps 1.3 million unique products in stock.

That’s why, as Doherty puts it, “the model works best under one roof.” That’s also a key reason why the company chose to expand in Thief River Falls. This way, when a designer orders a laser diode driver, a thumbwheel potentiometer and a wireless attenuator, Digi-Key workers can bring together and pack up those parts within minutes.

The package flies out on a FedEx, UPS or DHL flight from the Thief River Falls airport within hours. And it gets to the customer’s hands the next day.

“A lot of these parts are made in China and get shipped to Thief River Falls, then we turn around and send them back to China,” said Chris Beeson, Digi-Key’s executive vice president of sales and supplier management.

“Who would think there’d be a business model in that? But it works, because of the nature of the business and the nature of electronics design.”

Service

And the nature of Digi-Key’s service, which the company takes great pride in, Beeson added.

In 2015, UBM Electronics surveyed engineers for their preferences about distribution firms. No. 1 for product availability, on-time delivery, ease of doing business, ample product information and a dozen other categories, including most preferred distributor overall: Digi-Key.

“I’m from the East Coast,” Doherty said. “I graduated out there as an engineer.

“And throughout my career, I’d heard of Digi-Key as almost this mystical, magical place, like Willie Wonka and the Chocolate Factory. It’s revered by its customers and suppliers.”

Doherty credits a number of factors for this, starting with Digi-Key’s Thief River Falls location. “It’s a differentiator for us,” he said.

“There is something about a harsh climate and a small rural community. People just bond together.”

Then there’s the influence of Stordahl – who still owns the company – and Mark Larson, Digi-Key’s longtime president before Doherty and a member of the Minnesota Business Hall of Fame.

Lots of managers talk about looking for and supporting the best workers. Stordahl and Larson mean it, Doherty said.

So for workers with no dependents, Digi-Key’s health plan is free. Workers who elect family coverage pay only $37 every two weeks.

And the company has never had a layoff. “There are times when frankly, we’ve had excess labor,” Doherty said. “But when you cut costs, you lose service, and when you lose service, you lose customers. … We’ve been able to outgrow the industry by about 2½ times in good times and bad for 20-plus years. I’d say that’s because of what we do, but even more, I think, it’s what we don’t do.”

Expertise  

Limor Fried, an MIT-trained electrical engineer and computer scientist, is the owner of Adafruit Industries, a New York-based company for electronics hobbyists. Here’s a little of what she said about Digi-Key’s vast website, during a recent YouTube conversation with Doherty:

“I go to the Digi-Key website almost every day. … What’s neat is that if you’re looking for, say, inductors, of course you’re going to be looking at inductance. But whoever designed the Digi-Key inductor search sub-algorithm was really obsessive, because you can do it by the Q (factor), the saturation current and the max current which are not the same, and then the package size and whether it’s shielded or it’s not shielded – there are, like, 20 different variables.

“And I’m sure you stock 200,000 different inductors!”

Regarding other aspects of the website, Fried uses the words “amazing,” “mind-blowing” and “life-changing.”

Understand, this isn’t exactly Google’s simple homepage with its friendly Doodles on it. Unless you’re friendly with solenoids, transformers and transducers, all of which and more are featured on the homepage of DigiKey.com.

But that’s the point, said Restle, the applications engineering VP, who manages a support staff at Digi-Key of between 100 and 200 engineers.

“It’s just that quality that engineers like.

“Remember, Digi-Key’s customers are the world’s electrical designers,” Restle continued. And by providing all of that detail about all those millions of parts, “the website is a tool in the process of electronics design.”

The future

You cannot overstate the importance of Digi-Key to both Thief River Falls and the region, said Nancy Vyskocil, president of the Northwest Minnesota Foundation in Bemidji, Minn. When you’ve got 3,300 people earning an average total compensation of $62,040 (including benefits) in a town of TRF’s size, the impact on grocery stores, hardware stores, the tax base and everything else is incalculable.

You also mustn’t understate the challenges, especially now that Digi-Key has announced its expansion.

For example, “day care is a huge, huge, huge consideration,” Vyskocil said. Think about it: When a local company is growing its workforce and hiring at more than $15 an hour plus benefits, where are child care centers going to find staff?

That’s going to take some “very creative thinking,” and the net result may have to be more money going to childcare work, “which is extremely important and undervalued in our society,” she said.

Housing is another big issue; but thanks to Thief River Falls’ planning and state of Minnesota incentives, progress is being made. “Thief River Falls is starting to show signs of turning around its housing shortage after dozens of new units came online last year,” the Grand Forks Herald reported in February.

But through all of this, area residents should keep three blessings in mind. The first is that “while we are looking for solutions, these are the best kind of problems to have,” Vyskocil said.

“These are definitely First World problems. Abundance is what is causing our scarcity, so we’re very lucky that way.”

Second, the 10-year timeline of Digi-Key’s expansion gives planners and lawmakers lots of time to respond.

And third, Digi-Key itself is a very “forward-looking” company, Vyskocil said. “We are so blessed to have a company like Digi-Key, which understands that its success depends on having some of these supports in place. … (Plus), they’re local. They want these to be good, local solutions because they live here. They’re invested in the community, so that’s a very good thing.”

‘Don’t change’

Let’s close with another word from a customer. He is Paul Rako, an engineer and writer for EDN News, an electronics-engineering website. And in a 2006 interview with Digi-Key’s then-President Mark Larson, Rako had this to say:

“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; and don’t sell out to some conglomerate that will ruin the company.”

Ray Kroc himself would be proud.