Digi-Key Evolves From Prototype to Production

Listening to the customer doesn't just mean responding to a complaint or following up a sale with a confirmation email. In some cases, it means restructuring or adding to an established business model.

The longtime catalogue distributor Digi-Key Corp. faced such a challenge about 10 years ago, when some customers wanted it to manage their production business.

"We discovered there was a gap between the traditional fulfillment business model and catalog distribution," Chris Beeson, Digi-Key's vice president of global sales and business development, told us.

After receiving immediate fulfillment and delivery during the design phase, our customers suddenly had to deal with a different distributor, 14-week lead times, and hard-to-find products. They wanted to stick with us through production. So we looked at the production business and found, if we were going to play in this space, we would have to alter our business model.

Catalogue distributors operate under a very specific business model. They fulfill low-volume, high-mix engineering orders immediately from in-house stock. Their component prices are fixed, and shipments go directly to the end user or designer. Production orders are different. They rely on forecasts and factor in inventory that hasn't been built yet. They are subject to volume price negotiations, and they may be shipped to locations all over the world. Catalogue and production models rarely exist profitably under the same roof.

Digi-Key, a $1.5 billion global distributor that had published a paper catalogue for 40 years, wanted to provide production support without diluting the catalogue model. "We understand how to manage the engineering culture and how to speak their language," Beeson said. "Because we understand engineers' needs, we believed we could scale our core business attributes -- wide product selection, stable pricing, and fast delivery -- to support production."

The electronics distribution business, like retail, has been changing. Customers are moving toward self-service business. "It's happening in everything from banking to holiday shopping -- customers want to do things themselves." ATMs and Amazon.com are examples of successful DIY businesses. At the same time, support has to be available if and when customers need it.

One of the first things Digi-Key looked at was technical and sales support; it carries more than 2 million products from 650 suppliers. As a result of its paper catalogue, Digi-Key already had a wealth of engineering information that it had moved online. "We had to determine how much additional support our production customers would need," Beeson said. In volume distribution, this usually means outside salespeople, salaried field applications engineers who visit customer sites, and complex logistics services. Digi-Key decided to enhance its online and 24/7 support services with interactive communications, videos, and product demonstrations. It made centralized FAEs available 24/7 over the phone or through live chat to supplement online component specs and other information-rich content.

The company also looked at accounts it could support without a lot of additional infrastructure. Digi-Key manages all its transactions through a single facility in Thief River Falls, Minn. It initially identified a handful of Tier 3 and 4 manufacturers in North America with low-volume, high-mix production requirements. "We already have a model rich with SKUs and an ability to quickly turn orders," Beeson said. "Moving into low-volume production was not a stretch."

That handful of original production customers has been steadily growing. Digi-Key's production business now accounts for half its North American revenue. As a standalone business, Beeson said, the production business would be one of the top 10 North American distributors. But the company is very selective about adding to its production accounts. "There has to be an alignment between Digi-Key and the customer. We aren’t going broad-brush into production."

Digi-Key now sees itself as a hybrid "prototype-to-production" distributor, according to Beeson. "We feel comfortable with our foundation as a catalogue distributor with a production business that has been proven since about 2000," he said. "We've also found that, if you can provide the customer with what they want, you don't have to put a label on your business model."