Components Distribution Digital Bridge Builders: Bringing Technology to the User
CEO Dave Doherty provides exclusive insights into the business of an 11.8-Mio-components distributor, reveals why Digi-Key's corporate culture is both unique and critical to success, and explains why Amazon doesn't give him a headache.
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Although Digi-Key has not been entirely immune to the global electronics components shortage during the pandemic, the electronics distributor has been doing quite well. In the first quarter, Digi-Key achieved its highest-ever revenue of 267M $ in Europe, on a pace to exceed $1 billion USD for 2021. To date, customers can source 11.8 Mio products – from which 2.6. Mio is in stock - from 1.700 suppliers. Shortly, Digi-Key has launched a marketplace in the USA that will come to Europe in 2021. CEO Dave Doherty, who succeeded the company’s original president Mark Larson, has been responsible for the company strategy since 2015.
Dave, you grew up in Boston, one of the largest metropolitan regions in the USA, famous for Harvard and MIT. What do you love about your life in an 8,884 souls village?
I love Boston, especially as I am still a big sports fan. But on the east and west coast, life moves very quickly. You often do not take the time to know people. When we moved to Thief River Falls in 2008, my wife and I were first nervous, coming to a location somewhat remote and somewhat cold in the winter. It turned out that moving our children to a very rural area very quickly became the strength. They learned the traits and the values that we want them to take away as they become adults and leave the nest.
Before you joined Digi-Key in 2008, you lived a successful business life in Denver. To move to Minnesota 1,166 km away and change job was a big step. Why did you take it?
Before joining Digi-Key, I spent 13 years at a large public distributor. That time it was constantly intriguing to me that there was this company out there that I was tired of hearing from suppliers and customers: Why can't you be more like Digi-Key? Why can't you have more products in stock? Why can't I call and have an engineer pick up the phone and answer my question? You tell me you cannot send an FAE to visit me because I am too small. And I can remember saying to my wife one evening, this is like being on a debate team where I am responsible for presenting this side of the argument, why suppliers and customers should do business with our company. And I told her I would be very intrigued to represent the other side of that story, why you should engage with a company like Digi-Key. It has fascinated me then, and it even does to this day that whether you are an individual student trying to buy a small number of parts for a kid, or a project, or whether you're the lead engineer at a huge OEM, you get treated the same. At Digi-Key, it’s not how big you are. We just care how well we serve you.
When you started to work at Digi-Key – when did you first notice the different company culture and how would you describe it?
When I joined Digi-Key as a vice president, people wanted to know: Who is this new leader that came from the outside? In my first week, I sat in a large meeting, and they said, tell me about yourself. Right away, as kind of my Boston mentality is, I started telling them about my resume; I worked at this company, and then I did that, and they said, no, wait. We want to know, are you married? Do you have any children? And they wanted to learn many different things about me versus where my mind was wired. And I think that exemplifies it to me. Let us get to know you because I can't trust you unless I know who you are. Are you honest? Do you have integrity? Do you work hard?
Honesty, integrity – are those values part of Digi-Key's success?
People do not change their stripes from their personal to work life. At Digi-Key, we all work with each other at every level in the corporation to solve the day's challenge, whatever it takes. Everybody rallies together, watching our leadership at all levels, and even our owner going into the warehouse to pick and pack parts when that job needs to get done today. You have to be willing to roll up your sleeves, lead by example, do what it takes. Digi-Key is a culture that says we all matter. Two years ago, at Digi-Key, it was minus-58 degrees Celsius with the wind chill. Our last ship shift ends at 10:00 p.m., and we had 300 cars that did not start. The maintenance folks were all staying till 1:30, whatever it took to get every vehicle jumped to make sure that everybody got home safely.
In 2015, when you took over from Mark Larson, you had to manage the transition from a founder to a leadership model, which in principle turns a company upside down. Was this one of your biggest challenges?
We had to make a transition from a guy who knew everything about this company to a shared leadership model. When Mark started with a handful of employees and a small number of sales, he knew everything about the company, and all decisions rolled up to him. Mark was a visionary leader, and many companies are fortunate to start with that. When I joined, we were 900 million in sales. We had about a third of the folks that we have now. I told people that I did not come into this position to be the next Mark. The company has become too big, too complex. So, we had to invest more in the development of our people so that we all can take a sense of ownership and responsibility for the company’s success. It becomes like a mesh network where every leader knows that they are critically important to the company's success. But no single person will be a failure point to the company either.
You still supply the whole world from a small town in the north of the USA. Even for US-Americans, Thief River Falls seems to be in the middle of nowhere.
We strongly believe in the one warehouse model. It provides operating efficiencies that benefit the customer. It happens to be in the US. But it could be anywhere. It's a necessity to support the long tail. Our customers have told us they value more than anything in stock the breadth of product. We carry much inventory, but we would not be able to have all of the same parts in multiple warehouses. We can ship overnight in the US, to Europe or Asia in two days, sometimes maybe three if it is further away. Our customers tell us that it is okay because otherwise, I could never get as many products from one company as I could get from Digi-Key. Other sources have maybe the most popular parts nearby. But that's a different value proposition than what Digi-Key offers – more products in stock and available for immediate shipment from a single location.
Compared to distributors with different logistic concepts, what challenges does the one warehouse concept put on your company?
All companies have challenges. What makes its culture is how they react to those challenges. Many businesses today see the challenge of cutting costs. They put themselves on a cycle where they cut costs. But to cut costs, they cut services. And then they have to cut costs a little bit more because they've cut their services, and they get caught in this downward spiral. We have always been valuing at Digi-Key that first and foremost, you have to find ways to grow. One of our challenges is, how do you grow in a very rural area with a finite labor pool? How do you coach them up? How do you develop them? To me, that's a much more exciting challenge than I need to cut, and I need to visit three excellent employees and tell them that they must get laid off because we're going through another cost-cutting initiative. There are challenges around right-sizing companies, and there are challenges around navigating growth. Clearly, we are differentiated by the latter. It is way more exciting to me to take on the challenges that occur from continuous growth.
What impact does the general demand for automation have on your staff development?
We have wonderful people. But we need to equip them with the very best in tools, efficient process, and automation. So, we have adopted a lean Six Sigma approach that relies on a collaborative team effort to improve performance by systematically removing waste and reducing variation.
People think that bringing in automation is a code word for cutting headcount. We've done nothing but grow our headcount. But it needs to be done differently with the gray tenure of 30- or 40-years employees. We are migrating away from just valuing their hands to valuing their minds and their ideas. They are the folks that know how we can improve as a company, and we will provide the resources. You need to combine the knowledge of experienced employees with things like automation. You minimize the repetitive work and instead tap into those ideas into more of the strategic areas.
Digi-Key was the first distributor on the web. How will the digital journey continue?
Ultimately, we want to be a digital company. We continue to digitize (no pun intended) and very aggressively invest in tools that allow that digital journey to continue. The only way you continue to grow is to continue to listen to your customers. From our websites, we are getting signals every day. Every visit to our website is an opportunity to see where our customers are leaning towards. It is a considerable investment, but it is so critical to us because we have a very limited direct touch with customers. We don't do that to be invasive. Big data enables that because you don't invade the privacy of any one customer, but you aggregate. Still, you have to be very careful not to jeopardize the trust and integrity you have with the customer when you use some of their information to offer them value back. We listen very attentively, and we are very quick to react once we see those signals. For our suppliers, the same thing.
How have the engineer's requirements changed during the last years?
What has not changed for our customers is time to market, getting squeezed lower and lower. And so, they have told us, I used to come to Digi-Key to buy parts. Now I come to you to purchase solutions. If you have more highly integrated components or a starter board that already incorporates the GPS or IoT; that has the connectivity and computing on it, the sensors. We want all that on one board because my lifecycle may only be nine months before introducing my next product.
What also has not changed: We are a trusted source for technical information and high service levels. Our customers tell us that they go to the Digi-Key Web site to see if we are stocking it. What resonates to me is, there is a trust that we will validate new technologies, what is real versus what's vaporware. There are many parts out there. We aggressively decide that these are parts that the broadest base of customers in the world should want to look at and want to use. If we are stocking it, it's safe for them. If it’s at Digi-Key, it is real. The idea that they use us as a sounding board is humbling for us. If customers trust us, we earn that trust and deliver on that trust every day.
"Enabling the world's ideas" is your brand promise to the European engineers. What does it stand for?
When an engineer wakes up in the middle of the night with a brilliant idea, and he wants to start building and prototyping tomorrow, we are the source he will come to. We assist by providing the electronic components and technology to build all these wonderful products. We are not the engineer. But Digi-Key is here to support them and, of course, along with our suppliers to provide the technology. We play this humble role of being the behind-the-scenes enabler with pride. Very few people know the Digi-Key brand. But I have yet found a group of electrical engineers that don't know Digi-Key.
Digital companies like Amazon often expand their business models over time. Will Digi-Key's business models change in the future?
I think you have to be open to that because companies cannot be too steadfast. Today, we love the idea of being in the middle of having a group of suppliers that offer excellent technology to a group of customers that are utilizing technology in magnificent ways. But they need a bridge between them. Some companies are private labeling, so they want to start to look like the manufacturer to the customer. We are very comfortable saying that we may not be the recognized brand. People know brands like TI, Intel, Siemens, or Apple. But they rarely know the bridge between them. Today, we highly value the role of being a bridge. I think we will look for ways to be a more valuable bridge for our foreseeable future.
In 2021, Digi-Key will bring a marketplace to Europe. Maybe this is a first step?
Today we have two point seven million parts on the website. But we also can expand beyond this physical warehouse. We have products that do not make sense to stock in our warehouse. If it is coming from Germany and it's going to be a German customer, why not let it ship directly? That is why we have created a marketplace. It is ramping very quickly. We have added almost 300 suppliers in the first six months.
Big data delivers valuable customer input. Do the distributors hinder that process for OEMs, and will they look more into controlling those digital touchpoints themselves?
There will be continued stress on that. The safety for us is that no one customer is huge for Digi-Key. We have well-known large customers, e.g., in Germany, but they are buying in small or medium-sized quantities. We are not one of their top ten suppliers, and nor do we aspire to be. We feel very safe in that our suppliers need us as a bridge because they cannot cost-effectively reach six hundred thousand customers. That's what we can. And even if they could, the customers want a place where they can compare technology.
Digi-Key is a privately held company. How does this differentiate you from your competitors?
I think, the biggest differentiator is that we're customer-focused and not shareholder-focused. We are the only truly private company in the industry. Some are owned by private equity. But again, there is a set of shareholders that are expecting a return. I worked at public companies; if you are not shareholder-focused in my role, I wouldn't be there very long. We have one owner, the founder of this company. We know we need to be profitable to sustain our growth. But our founder's vision was always to have the highest quality company that added the most value to customers, not the most profitable or the fastest growing. Virtually all the profits that come back roll back into buying more products to invest in the future.
Is being privately held an advantage or a disadvantage during the pandemic?
Since the beginning of the pandemic, we have added more than a billion dollars of inventory. Even in May 2020, when the stock market hit some of its lowest points, we were busy finding more parts and investing in inventory. Most companies must react to those ups and downs of the stock market. We almost do not care about the cycles. We know there will be years we are less profitable than others, but we are not constantly worried about it. And inventory becomes the most significant factor. Inventory of public companies is viewed as a liability. Inventory for us is viewed as an asset.
How would you compare the cultures of public vs. non-public companies?
If you ask the people in Thief River Falls, deep down, they all believe that they are part owners of Digi-Key. And that does not exist anymore at companies. Companies are bad, or employees are less loyal, but they don't expect to work at the same place for decades. Here we do. We expect that we are going to offer people opportunities. And they, in turn, commit every ounce of their energy and ideas back to the company. I have never been to a place where you walk up and down the halls, and you see so many people greeting with a smiling face saying hello.
What disruptive trends could come up in the distribution market in the coming decade?
It is hard to project out 10 or 15 years. But we see a runway of continued value if we can continue to innovate and find ways. I don't think that our space will disappear, even with threats from companies like Amazon. Today the more prominent companies tend to move a box from one location to another. We take that box, and we open it up. We add so much value. Our ability to ship small, medium-sized quantities, I think, will continue to exist because engineers will continue to innovate. Even if some suppliers become bigger through acquisition, more companies will spin-off and start because some brilliant engineer of a component manufacturer decides he wants to do something differently. Big companies are notoriously slow, which will always create smaller companies. And it's going to take bridges like Digi-Key to connect all those small companies to customers.
Imagine 2031; you go to your office. What kind of company will Digi-Key be?
I think we will be much more recognized globally. Although our cultural roots will continue to be critical to Digi-Key, our culture and our operations will feel so normal anywhere globally to customers that they will know us on our website. Still, they will have no idea where we are headquartered, where we are located. We do not view us as an American company doing business in Germany, England, or Japan, but as a global company shipping from Thief River Falls. We want to make sure that the web is a universal neutralizer through language, support, etc. We ship to 170 plus countries, but today, it still feels like you are dealing with another company outside of your home country because there are still some duties, VAT and payment terms, and translation. All of that will have gone away, that there will be a truly global economy. In the future, we will offer infinitely even more solutions; people will buy at a higher level of integration.
And your personal vision for Digi-Key is...?
All in all, I want people to continue to see us as a disruptor. That is not easy to do. When you get bigger, you start to feel like you're more worried about not getting disrupted. But the only way to protect yourself is by continuing to try to disrupt and be an innovator. The key is that we're always moving forward. We strive to be a leader, not a follower.
At the beginning of our interview we talked about values. Do you have a personal role model?
Many former leaders. Mark, our company founder, would be right at the top of that list. Also, from my past company, there's a gentleman. What impressed me was, he didn't sacrifice his family for his career. Many people in the US end up in Silicon Valley, they want to make money, and they're on their third marriage. But this guy, I remember sitting with him at lunch, and over the course of the lunch, all three of his sons called him to check in with him. I thought what a wonderful role model he is that he's a successful businessperson, but he's also a very successful father and successful husband. And that was important to me that I wanted to make sure that you had that balance. Those are the values I want to guide me, and those are the values I want our company to reflect as well.