Preparing for the Future: One on One with Dave Doherty, Digi-Key’s Chief Operating Officer

Preparing for the Future: One on One with Dave Doherty, Digi-Key’s Chief Operating Officer

Digi-Key has always been a bit of an outlier in the electronics distribution lineup. Headquartered in Thief River Falls, population 8,600, located in northern Minnesota, the company is far from the hustle and bustle of urban life. In the wintertime, temperatures plunge below zero. And employees help each other get their cars started at the end of the working day, regardless of their position on the org chart.

The 48-year-old privately held “catalog” company that caters to small orders from engineers and developers has been a consistent high performer in the industry for many years as measured across a variety of metrics including revenue growth, customer service, product availability and speed of service.

In this year’s SourceToday ranking of the top 50 distributors, Digi-Key ranked fifth in revenue behind the four big broad-line distributors Arrow, Avnet, WPG Holdings and Future. The company also posted a strong 36% topline growth rate in 2018, which was the second-highest growth rate among the top 50 distributors.

The company’s biggest challenge today is to grow capacity to keep pace with demand while not compromising customer service. In recent years, Digi-Key has taken a piecemeal approach to managing growth by adding office and warehouse space in both Thief River Falls and Fargo, North Dakota, a two-hour drive from headquarters. Each location today is about 600,000 square feet, for a total warehouse and office space capacity of 1.2 million square feet.

But that’s about to change as the company readies for a major expansion in its hometown scheduled to go online in June 2021. “All our inventory spread over 135 miles will get consolidated back to Thief River Falls,” said Dave Doherty, Digi-Key’s president and chief operating officer.

Construction of the brand new one-million-square-foot structure that will become the future distribution center is complete, but Digi-Key needs the next two years to build out the interior. Once all the state-of-the-art warehousing equipment and technology is installed, Doherty estimates the total usable space of the new facility will be 2.2 million square feet, nearly double what the company has now.

The Digi-Key of the future

More warehouse space is only half of it. Digi-Key’s workforce is growing fast too. Last year, the company added about 300 net-new hires to its workforce of 4,000 and more hires are expected in the next few years. “We will continue to grow our employee base, but that growth will happen at a slower rate than in the past as automation starts to augment some of the work,” Doherty said. “Given the dominance by Digi-Key in the labor pool up here, that’s not necessarily a bad thing,” he added.

With more sophisticated automation and technology, the physical work will shift from repetitive, tactical tasks to higher-value technical skills. Doherty believes that one of the company’s advantages to making this transition is the long tenure of the average employee. The company plans to leverage the institutional know-how, expertise and dedication of its workforce to “build the Digi-Key of the future,” he said.

Such a statement could be dismissed as marketing spin from any other company. But Digi-Key actually walks the talk. Earlier this month (July 17), Forbes magazine, in partnership with Statista, named Digi-Key one of the best employers by state. The survey was based on the employees’ willingness to recommend their employer to friends and family. High praise indeed.

Digital Innovation

Digi-Key is always looking for ways to improve process efficiency and take the drudgery out of the work. For example, employees are encouraged to eliminate or reduce the number of steps in a particular process or program a piece of equipment to perform the steps. “If we can build the automation and gain the efficiency leveraging our scale, it provides a better service for the customer and more effective use of our employees,” said Doherty.

A case in point is the number of miles employees walk inside the current warehouse picking parts. The new state-of-the-art facility is being designed, so parts are remotely picked and placed on conveyors and intelligently routed to the employees instead of the employees going out and looking for the parts.

To consistently pick the right part requires a variety of technologies, including a sophisticated visual system. Digi-Key is taking advantage of the employees who are expert at that function and bringing them into the quality department. There they are helping define the type of equipment required and select and certify the equipment that does the visual inspections that they were doing manually. Their job functions require new skills in artificial intelligence, software and engineering.

“It’s the old adage: people were doing those mundane tasks. Today, people are training the equipment to do the same mundane tasks,” Doherty said.

Not surprisingly, Digi-Key’s IT department is the fastest-growing department in the company. But it is not about hiring an army of data scientists and other top-flight technical experts. Instead, Digi-Key plans to hire a few AI experts that work closely with the business process experts. “It’s the combination of people that know systems and people that know the work. When you bring those people together, you get optimal results,” said Doherty.

This is nothing new. Digi-Key has been a digital pioneer for decades. In 1996, it was among the first distributors to post information on the world wide web, and not long after introduced e-commerce. While the company is still referred to as a catalog distributor, it hasn’t produced a physical catalog since 2011.

Today’s digital advancements have the same objective, just with a different set of technologies, such as voice assistants and using photos of parts supplied by customers to speed up the ordering process. “Being on the digital frontier means continuing to be pushed and to be recognized as a digital innovator. It’s not digital transformation; it’s an ongoing journey,” said Doherty.

Market opportunities

Because Digi-Key’s customers are predominantly engineers, developers and makers, the company is on the front lines of the digital transformation occurring in many industries around the world. And the fact that its customer interface is predominantly web-based and digital means the pace of new market penetration can be fast while the cost is modest. In fact, Digi-Key’s costs are primarily advertising spend, not bricks and mortar.

“The number of countries we ship to every year continues to astonish us,” Doherty said. “The barriers to innovate have come down so far that innovation can occur spontaneously and happen anywhere.” Today’s high-growth markets for the company include India, Malaysia, South Africa, and Vietnam, Doherty said.

Digi-Key is taking advantage of these budding relationships with its IoT Studio, a cross-platform integrated development environment (IDE) designed to simplify the process of getting engineers and developers quickly to the proof-of-concept (POC) stage of their product. The IoT Studio enables customers to accelerate the product development process, which is crucial in today’s highly competitive world of rapid market disruption. Once they have the POC, the next step is to export the design to a more sophisticated IDE and proceed toward productization, with the help of Digi-Key.

Staying the course

Coming off a very strong upcycle spanning the last couple of years, Digi-Key is holding its course. Electronics distribution is a cyclical business, what goes up, invariably comes down at some point. And 2019 is projected to be a more modest growth year than 2018 as lead times are coming back, product is more available and trade issues persist.

But the fundamentals are sound, according to Doherty. “We are not making any significant changes in our business strategy. We are too bullish on the future to think this is any different than the 13 cycles that came before,” he said.

The one threat that most worries Digi-Key’s COO is cybersecurity. “We’ve been in the digital world for a long time and been exposed to a lot of cyberthreats. So, it’s a fast-growing area in IT for us and we invest to stay on the forefront,” Doherty said.

What’s the top cybersecurity concern for Digi-Key? “Customer protection,” he said.

That response shouldn’t surprise anyone.