Beating The Recession Online - Interview With Mark Larson

During a brief visit to the UK, probably on the look out for new franchises, Digi-Key’s president Mark Larson took the opportunity to answer a few questions on the future of his company as a globally virtual distributor. During a brief visit to the UK, probably on the look out for new franchises, Digi-Key’s president Mark Larson took the opportunity to answer a few questions on the future of his company as a globally virtual distributor. EE Times Europe: What is the current volume of components in your product distribution centre and how long does it typically take to turn this inventory over? Mark Larson: We have over 400,000 different parts in our catalogue, 95 percent of which are on our shelves. Availability is what sets us apart from other distributors. This enables us to ensure a very high fill-rate, being able to ship most parts immediately upon order request. While the likes of Arrow or Avnet may turn over their inventory about six to eight times a year, Digi-Key would typically see its inventory turn over twice a year. EE Times Europe: Does this mean more risk taking? Larson: Maintaining inventory is the price to pay, but on the upside, this gives us a greater chance to meet customer demand. In the long run, this is our capability to respond quickly to orders that rallies our customers. Stocking all our parts in one product distribution centre – a 55,741 square meters facility in Thief River Falls, Minnesota – may seem counter-intuitive at times when most distributors spread globally opening many local offices and despatch centres. But logistics is not as an orderly business as it seems, at least not in the best academic way. Very often, we have bought products from suppliers in Japan, or China, had them shipped to our warehouse in the US only to ship them back to Asia again. But overall it still proves more efficient for us and addresses some of the supply chain imperfections. With this approach, we want to be seen as a one-stop distributor, where engineers can source immediately all the parts they need for their project. Very often, this all-in-one shopping experience reduces overall time and shipping costs too, compensating for the low-volume pricing. EE Times Europe: When signing a franchise, how do you secure best service and delivery on products such as memory when production can be so volatile? Larson: Fortunately with most suppliers, lead times are predictable. When we take a franchise order, we only announce the products once they are on our shelves. Then we project the rate of sales and place orders on replenishment. The longer the lead time, the further ahead we must make projections, taking a greater risk on inventory. This is where distribution becomes an art. Digi-Key’s single strongest advantage is to be able to keep momentum and average out demand fluctuations across a wide range of products. The variety and the big number of parts play in our favour. Because we operate from one central location, we can stock any product to be delivered to any region of the world, without the limitations of having to justify local inventory. This means any engineer anywhere on the globe has access to all our products. EE Times Europe: At a time when factories are closing down and consumer demand has been through a dramatic plunge, and in such a competitive environment that is the electronics industry, are there still gaps to fill in the market? Larson: We are still a relatively small factor in Europe and our customer base has plenty of margin to grow there. Digi-Key only started to address the UK market five years ago. Especially with the increased internationalization, engineers are more and more comfortable buying online without necessarily looking for local distributors. They want more choice and grouped items shipping costs often work out better for them. Digi-Key is large enough to build relationships with hundreds of suppliers and get better purchase deals, even without targeting volume production fulfilments. EE Times Europe: What is your expected overall growth for 2009? Larson: Our sales only started to be impacted by the market downturn in October 2008, until then our revenues had remained pretty much the same as in 2007. Then we experienced a decline through November and December 2008. By January 2009, we had reached a plateau about 20 percent below our 2007 figures. August and September 2009 have already seen some recovery compared to 2008 and revenues in October 2009 were 12 percent better than in October 2007/2008. So if this trend continues, by the end of 2009 we could conclude the year only 10 percent down compared to 2008. What is interesting is that between January and June, the number of our customers grew up by 8 percent. When looking at 2010, this growing customer base could support higher sales in 2010, maybe 10 percent over 2007 which was a good year. EE Times Europe: In 2008, you boasted 10 millions order requests, amounting to over 2 million processed orders (on average 5 parts per order). Do you know how often users pre-order just to get a quote? Larson: At this stage we don’t have much visibility on this. This would require all users to register and many are reluctant to become visible especially when they are shopping around and comparing prices. We had 14,000 unique visitors last year. We would want to entice them to register and offer them more services, like informing them of any changes in the supplies, or highlighting new products similar to what they have ordered in the past. We touch here the whole question of privacy versus added service, each customer has different tolerances and we want to give them the options that are consistent with their comfort level. EE Times Europe: The power of Internet comes from the fact that you can aggregate thousands of small orders without much effort. You boasted that 75 percent of Digi-Key’s business was secured online. Would 100 percent Internet processed orders be the ultimate goal in cutting costs and is there a roadblock to that? Larson: 100 percent online sales would be the ultimate cost cutting scenario, but unanswered questions is the limiting factor on the web. Many engineers prefer to have some assistance when buying a new component they are not familiar with, so they would typically be tied up with one of our engineers to discuss their needs. Between 12 and 15 of our engineers are available to offer design-in help, while another 120 of our engineers can share their component knowledge over the phone or by email. Our top ten customers place recurrent or large orders on the web. EE Times Europe: On the Digi-Key homepage, a big advert flashes 30,000 new products added over the last 3 months, that’s an average of 500 parts per business day. Do you provide some sort of line-update accounts to your suppliers? Larson: Typically in a franchise deal, we have open acquisition orders. If a supplier announces, say 20 new products, we provide templates framing the parts’ specifications and export restrictions. The addition of new components on our online catalogue is nearly done automatically. EE Times Europe: Your spectrum of distribution is very wide encompassing, though the majority of parts are either commodity or low-cost. How do you draw a line between what should be added to your inventory and is it based on unit pricing or product support constraints? Larson: We view our business as selling board-level components and we believe we can add just any component to our lines unless it is extremely niche or specific. Test and measurement is a small exception and is not at the core of our business. So in this sector, we look at relatively basic or less expensive equipment that we can support well remotely. Non-component sales only represent 7 percent of our business, compared to maybe 50 to 60 percent for some of the bigger distributors. EE Times Europe: On top of its online catalogues, Digi-Key’s website offers an array of educational and entertaining features enticing customers to learn more about its product lines. The social networking site towergeeks.org dedicated to promoting the use of freescale’s Tower System is a creative way to encourage experimentation. Do you plan to develop more of these satellite websites? Larson: Obviously the web is very important for us. Going online is what propelled Digi-Key’s virtual presence worldwide, moving us from the local US market where we started. There is a lot more enthusiasm to use social websites nowadays, and most large companies are experimenting with this, trying to tap into new marketing strategies. Some of the satellite websites we have run were very successful despite being very focused. Some others only drew marginal interest or participation, yet all these websites require a certain level of commitment and maintenance. Content needs to be refreshed regularly, this is on the fringe with publishing. It is still not clear to what extent these sites are actually fomenting new designs and driving sales, or instead become distracting and drive the engineers away from what they came to look for in the first place. We have to look at the whole and ask ourselves what will be the best use we can make of the Internet as it evolves. We are still in experimental mode.